Tax Reform or Governance Revolution?

By Andrew Wainer*

Photo Credit: Reuniones Anuales GBM / Flickr / Creative Commons

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.

Haiti: Not Back, Not Better

Photo by: Gonmi | Flickr | Creative Commons License

Photo by: Gonmi | Flickr | Creative Commons License

The third anniversary of the devastating earthquake in Haiti has passed with no sign of either serious reconstruction or progress toward improving democratic institutions.About three-quarters of the earthquake rubble has been removed, and several hundred thousand individuals have been moved to temporary shelters and some back into permanent housing. A light-industrial park in northern Haiti is providing jobs to some 1,300 workers. The U.S. Government alone has committed over $3.6 billion toward relief, recovery, and reconstruction, of which $2.5 billion has been disbursed as of September 30, 2012. Despite these billions, the infrastructure remains a shambles; the economy is weak; unemployment is around 40 percent; and the World Food Program estimates that 6.7 million people (out of a population of 10 million) are “food insecure.”

Progress in political affairs has also been slow, and incumbent leaders remain reluctant to commit to elections. The head of MINUSTAH, Chilean diplomat Mariano Fernández, last week reiterated calls for the Haitian government to hold legislative and local elections that were supposed to have been held a year ago. He said an agreement reached last month by President Michel Martelly and members of parliament to form a semi-permanent electoral council to stage elections for one-third of the 30-seat senate and local mayors was “an important first step.” The U.S. Assistant Secretary of State for Democracy, Human Rights and Labor, Michael Posner, also tried to emphasize the positive during a recent visit to Port-au-Prince, but noted “there is a lack of faith in the system, the sense that the rule of law is not respected, that institutions like the judiciary and the police and the prisons and the prosecutors are not doing the job adequately, and that the government isn’t living up to expectations.”

The Obama Administration’s pledge to “build back better” may have been slightly bold from the start, but one of the objectives – to use the crisis to drive some reforms in both the Haitian government and how international programs are implemented – was indeed within reach. The business-as-usual approach since the earthquake has led to the loss of a historic opportunity to move the country forward. While the Haitian political class continues to focus on its internecine struggles, the international community has funneled its vast funds to its own NGOs, most of which operate outside a master strategy and far from the political and bureaucratic authorities nominally in charge of overseeing and coordinating their programs. Real progress is unlikely until both local and outside players develop a shared vision for the future – hopefully before another natural disaster pushes the reset button again.