- The UN Sustainable Development Goals will only be achieved through developing countries increasing their tax take on a sustainable basis.
- Tax policy must raise funds, and also encourage corporate and individual social investment, both through traditional investment and philanthropy. The aim is to pay for inclusive social development while also supporting economic growth to drive greater overall prosperity.
- There is no one-size-fits-all solution, and governments, business and indeed all stakeholders will need to cooperate to devise the best tax system, optimised for the socio-economic environment specific to individual countries.
- Public confidence in tax policy, especially through uncorrupted, transparent, fair and efficient distribution, can only be secured when integrity and values are as important as fiscal measures.
From 2000-2014, when the UN Millennium Development Goals (MDGs) held sway, official development funding increased 60 per cent from (US) $81 billion to $135 billion a year. Despite this, and even with the ascension of the UN Sustainable Development Goals (SDGs), the annual development investment gap is believed to be over $163 billion for low-income countries, with the global investment required to achieve all SDGs standing at $2.5 trillion each year. The sheer size of this gap, and the need to bridge funding aspirations from “billions to trillions”, has focused the efforts of traditional development actors, as well as business and governments, like never before.
However, sluggish growth in most major economies, and a failure of all but six OECD countries to meet the UN target of 0.7 per cent GDP for Overseas Development Assistance (ODA), means traditional development assistance will remain inadequate. Blended finance funds and facilities for SDG-aligned investment are often mooted as the panacea, but accounted for just $25.4 billion in assets in 2015. Undoubtedly blended finance is playing a role in delivering the SDGs, but it is not the solution some purport, meaning the investment gap must be plugged by other means.
Domestic revenues from low-income countries have greater potential for financing development than almost any other revenue source. In 2010, total tax revenues across Africa were 10 times greater than what the continent received in ODA. Despite this, tax revenues remain an under-utilised resource. On average, OECD countries collect 34 per cent of their GDP in tax while many low-income countries achieve only half of this.
Limited capacity, exacerbated by the need for accountable and inclusive institutions for all (part of the objective for SDG 16), make fair, ethical and effective tax collection a challenge for many developing economies. Weak institutions also create a breeding ground for aggressive tax avoidance, evasion and illicit financial flows (IFFs), all of which worsen the development investment gap, impeding the transition to sustainable development. Corruption also erodes confidence, making private integrity another vital component in underpinning public trust and securing positive tax contributions.
To argue taxation and strong institutions are part of the funding solution for the SDGs, although true, is a simplification of the issue. Tax, as part of a country’s wider responsible fiscal and monetary policy, consists of a complex interaction between funding public services and stimulating economic growth. The tax system should support business, which generates wealth and higher taxes. At the same time it must raise enough tax to pay for social welfare, without which business and society cannot flourish. A report to the G20 entitled Options for Low-income Countries’ Effective and Efficient Use of Tax Incentives for Investment highlights this tension between using incentives, like tax holidays, to create an investment-friendly, pro-business, regime while also balancing the need to secure revenues for public services.
Alongside structures for creating transparent and accountable governments, this places private firms – from farmers and micro-entrepreneurs to local manufacturing companies and multinational enterprises (MNEs) – at the centre of the development process. Businesses provide more than 90 per cent of jobs, goods and services needed to sustain life and improve living standards. They are also the main source of tax revenues, contributing to public funding for health, education and other services. It is the role of government, and its institutions, to create better tax collecting systems as well as processes to ensure revenues are spent on promoting equality, inclusiveness and meeting social needs.
The question is – how do you achieve this?
When talking about tax and development economics, institutions matter and good states are to be cherished. This is not to say that markets are a bad thing. On the contrary, the fall in the global poverty rate over the last three decades owes more to the opening up of markets and trade liberalisation than any other policy intervention. On their own, however, markets can fail to deliver the minimum social values of fairness, lawfulness and decent administration. Through fair taxation governments can work with the private sector to create a better world.
Moving from economic principles to operational behaviours will be a challenge, particularly given the need to establish international agreement. With just 0.1 per cent ($118 million) of total ODA dedicated to tax matters in 2012, the international community needs to do more to improve domestic capacity of tax systems in low-income countries. For example, in Kenya, revenue collection increased from $52 million in 2012 to $85 million in 2013 as a result of targeted transfer-pricing support.
There is no one-size-fits-all approach. You cannot teach good tax policy as if it were accounting. What works in one place may not work in another. Although we cannot define a universal measure for good tax policy, we know what bad looks like when we see it. This being the case, in ensuring that tax receipts help fund the SDGs, I believe policy-makers and business leaders need to work together on implementing a set of tax principles that ensure economic growth also promotes fairness and equality.
Having worked on development programmes, and sat on boards of a number of development agencies, I know that creating the systemic change needed to fund all 17 SDGs (let alone achieving them) will not happen by accident or good intention. It will require the tenacity of policy-makers and global cooperation to ensure that systems of government create stable and fair growth. This can be supported by the implementation of progressive and redistributive tax models, with business relishing its new role as a development actor.
Lord Michael Hastings, CBE, is Global Head of Citizenship at KPMG International