ICTD Presentation to World Bank Workshop

1. Political Economy, Governance & Future Tax Reform Mick Moore & Wilson Prichard International Center for Tax and Development

2. Background: Where are we now? • Tax reform take place on a near-continuous basis. • There have been quite substantial changes in tax systems across the developing world, despite the political challenges of reform • The international community has played a central role in advancing this general prescription.

3. Why Political Economy? • De facto realities have changed far less than written policy and formal institutional structures, reflected in: • Persistent administrative challenges • Persistently attitudes and values, and slow shift to cooperative modes of collection (Bird and Vazquez-Caro 2011) • The reason seems to be that tax reform is politically difficult, driving a wedge between formal changes and the reality of practice. This reflects two broad factors: • Tax reform is likely to confront strong vested interests, primarily among elites • Mobilizing political support for tax reform has been very difficult, owing in part to mistrust.

4. Tax and Governance • The importance of politics has been reinforced by growing evidence that tax reform can be a spur to broader governance gains. • Two possibilities are particularly relevant to prospective reformers: • State Capacity Effects • Responsiveness and Accountability Effects

5. Where to now? From Ideas to Practice • Easier to highlight the importance of politics than to translate into lessons for reform. • There are no simple ‘answers’; process and context are important • We proceed in two parts: • Reflections on how can we think strategically about political economy and what it means for practice. • Thoughts about what is on the reform horizon, and how the context for reform is changing.

6. Core Components of PE analysis PE analysis aims to understand the political forces shaping the prospect for reform. We can useful think about support or opposition to reform in relation to key group of actors… …While also taking account of the fact that the incentives and interests of different actors are shaped: • By their institutional environment • In relation to each other

7. Actors, Institutions and Support for Reform Balance of Political Support for Reform Institutions Political Leadership Economic Elites Tax Administration and Public Service Broad Base of Taxpayers

8. Static vs. Dynamic Analysis • PE analysis is very good at explaining why things are they are the way that they are, but less good at predicting sudden change • The history of economic reform is, though, punctuated by such sudden changes • Because interests are often defined in relation to one another, it is possible for sets of interests to realign relatively quickly and unexpectedly

9. Illustrations from Bangladesh Entrenched resistance to reform at every level…. • Reciprocal ties between business and government • Influential and militant small enterprises • Influential public service actors and unions opposed to reform • Strong patronage links between senior tax administration officials and the PMs office • Weakly engaged public ...Embedded in formal and informal institutions… • Relatively unified business associations • Close and harmonious links between business and political elites • Strong and politicized civil service unions • Very rigid civil service hiring rules

10. Bangladesh (cont’d) …But some space for reform at the margins… • Broadening of the tax net • Some degree of automation at senior levels • Some updating of disputes processes …Andevidence of potential shifts in the current political alignment… • Growing concern about fiscal deficits • An increasingly unstable political situation • Increasing use of the tax system for political ends • Extensive hiring of new tax administrators

11. What lessons can we draw? • Opportunism and patience…Search for windows of opportunity, making consistent offers of support, but acting only when local leadership is clearly in evidence. Tax reform is not, primarily, about the need for funding. • ‘Incentive compatible reform’…While comprehensive reform may be desirable, more modest reform may be possible without challenging major entrenched interests. Targeted institutional reform may contributing to shifting existing incentives and opening doors to future reform • Emphasize process, and efforts to mobilize potential supporters of reform • Emphasize horizontal equity, encourage transparency, support engagement

12. Tax and Governance : Risk of Oversimplification • The simple story: If you tax more, better governance will follow, or;if you rely less on natural resources, or aid, better governance will follow. • While this may be broadly true over the long term, it suggest too simplistic a policy prescription. Expanding highly coercive taxation, without public engagement, transparency or debate is unlikely to frequently yield broader gains. • Expanded or reformed taxation has the potential, under certain conditions, to spur processes of contestationand bargaining

13. The importance of process • Promoting a “governance-focused tax reform agenda” is largely about process – aimed at encouraging bargaining and engagement as any dramatic shift in general direction • Horizontal equity, transparency, consultation, support to civil society, institutional spaces for engagement • Processes linking tax and governance are neither linear nor predetermined, but about sparking negotiation: • Putting pressure on government to come to the table • Encouraging/empowering taxpayers to engage and make demands

14. Illustrations from Sierra Leone • Major decentralization after civil war, but local government remains new and relatively weak: • Low institutionalization and engagement • Tension with chieftaincy for authority • Recent initiatives to introduce property tax not only stand to raise revenue, but hold potential to spark debate about: • Role of local government • Citizen engagement • District-Chieftaincy relations • Central-Local relations • While tax is a spark to local contestation, the end point remains uncertain

15. Thus we extend the question… From: “How do you design a valuation, record keeping and administrative system for property tax in a low-income setting…” To: “…and do so in a way that is politically acceptable, builds political support and has the potential to spur productive engagement between key interest groups.”

16. Do governance goals also imply differing policy priorities? Does this suggest substantial differences in the formal content of reform priorities? Yes, but within bounds, and much remains to be learned… • Taxing small ‘informal’ businesses • Tax earmarking • Property taxation • Tax incentives and exemptions • Income taxation

17. Two common patterns of (closed) tax policymaking in low income countries • Transnational expert policymaking • Particularistic private interest policymaking

18. Some factors affecting current/future politics of tax policymaking (esp. Anglophone Africa) • Growing influence of (organised) private sector • Increasing presence of Big Four • (Autonomous) revenue authorities have more voice • Continued high dependence for revenue on CIT • Increasing focus on sub-national revenue raising • Spread of ‘trust-based’ taxing practices • Mobility of senior revenue staff • Mining taxes moving into public debates • Networks of national and transnational advocacy organisations have major influence on international policy agendas

19. Likely implications for politics of tax policy • More open and inclusive policymaking • Policymaking still transnational, but less ‘dependent’ • Closer relationships between tax agencies and private sector can have positive and negative effects • Current national-transnational alliances among advocacy organisations come under strain; more ‘anti-tax’ political organisation within developing countries?