By Andrew Wainer*

Photo Credit: Reuniones Anuales GBM / Flickr / Creative Commons

Taxation to fund development is becoming central to U.S. foreign assistance policy, but it would be a mistake for USAID and other foreign assistance agencies to view tax reform solely through the technical lens of financing for development.  In September, USAID Assistant Administrator Alex Thier penned an article subtitled, “Why Taxes Are Better than Aid.”  This follows the announcement in July of the Addis Tax Initiative at the UN Financing for Development Conference, where the United States and other donors pledged to double the amount of technical assistance for taxation in developing nations.  By most accounts, the potential fiscal benefit of increasing taxation –“domestic resource mobilization” (DRM) in development parlance – is huge.  The World Bank and International Monetary Fund estimate that in 2012 DRM in emerging and developing nations generated a combined $7.7 trillion.  This dwarfs average annual foreign assistance outlays, which in recent years have averaged about $135 billion.  One of many examples cited by USAID is El Salvador, where a $660 million increase in annual tax revenues has been channeled to health, education, and social services, as well as other development programs.

The issues of fair and transparent taxation are often a secondary component in discussions of DRM but – as events in Guatemala and elsewhere demonstrate – can also generate revolutionary transformations in governance.   Even as U.S. agencies emphasize the technical side of DRM assistance, organizations that monitor taxation are sparking historic citizen revolutions through revelations of governmental tax corruption.

• The UN-sponsored International Commission against Impunity in Guatemala (CICIG) was created in 2006 to strengthen the rule of law through “investigation of crimes committed by members of illegal security forces and clandestine security structures.” But it was CICIG’s revelations of a customs tax corruption network that brought 100,000 Guatemalans into the street in a single day.  The protests led to the forced resignation and jailing of President Pérez Molina as well as a surge in citizen engagement unseen in the country’s modern history.

The intimate link between taxation and governance should be a central factor in how the U.S. government and others think about DRM.  As the OECD states, “The payment of tax and the structure of the tax system can deeply influence the relationship between government and its citizens.”  DRM should place a high premium on the governance impact of tax reform, where appropriate.  Tax reform not only increases government revenues, but as the case of Guatemala demonstrates, it can also strike at the heart of ossified structures of governance and can spark revolutionary changes in the relationship between citizens and states.   

November 12, 2015

* Andrew Wainer is the Director of Policy Research in the Public Policy and Advocacy Department of Save the Children USA.