By Onome Amuge.
Nigeria, among many other emerging markets and developing economies, have the potential to increase their tax-to-GDP ratios to provide critical government services by as much as 9 percentage points, through better tax design and stronger public institutions.
The International Monetary Fund (IMF), stated this in a recent report “Countries Can Tap Tax Potential to Finance Development Goals”, where it indicated that emerging economies need $3 trillion annually through 2030 to finance their development goals and the climate transition.
This, the report observed, amounts to about 7 percent of these countries’ combined 2022 gross domestic product and poses a formidable challenge, particularly for low-income ones.
The IMF contends that the ability of emerging economies to identify and utilise their potential would also contribute to financial development and private sector entrepreneurship.It also stated that easier financing, together with efficient and well-targeted spending to strengthen social safety nets, would go a long way toward delivering sustainable development.
According to the major financial agency of the United Nations,the average tax-to-GDP ratio in emerging markets and developing economies has increased by about 3.5 percentage points to five percentage points since the early 1990s, driven primarily by taxes on consumption such as value-added and excise taxes.
The report identified some countries that have been remarkably successful in raising revenue, including Albania, Argentina, Armenia, Brazil, Colombia, and Georgia,all of which mobilised more than 5 percentage points of GDP.
However, it pointed out that much of this increase occurred before the 2008 global financial crisis, suggesting that progress has been difficult and fragile in the face of recent shocks.
“Moreover, progress on raising revenue since the early 1990s has varied widely across countries. Half of emerging market economies and two-thirds of low-income countries had a tax-to-GDP ratio in 2020 that was lower than 15 percent— a tipping point above which growth has been found to accelerate.
And resource-rich countries have typically generated less tax revenue, as some governments reduced taxes as a result of higher revenue from natural resources,” the report noted.
The IMF stressed that countries have considerable room to collect more revenue based on their tax potential which is the maximum a country can collect given its economic structure and institutions. It added that low-income countries could raise their tax-to-GDP ratio by as much as 6.7 percentage points on average by harnessing their tax potential.
The report also noted that improving public institutions by low-income countries, including reducing corruption to the level of those in emerging market economies would result in an additional 2.3-point increase. It noted further that emerging market economies can raise their tax-to-GDP ratio by 5 percentage points on average, while improving their institutions to the average of advanced economies could raise an additional 2 to 3 points.
The IMF said governments will need to take a holistic and institution-based approach that focuses on leveraging core domestic tax policies In order to build tax capacity.
To this effect, the global lender highlighted some recommendations to policy makers in emerging economies.
Policymakers were advised to improve the design and administration of core domestic taxes including value-added taxes, excises, personal income taxes, and corporate income taxes.
“VAT revenue in low-income countries, for instance, could be doubled by limiting preferential treatments and improving compliance without increasing standard tax rates. And the widespread adoption of digital technologies would result in higher revenue collection and narrow compliance gaps,”the report stated..
The IMF also called for implementation of bold reform plans and focus on broadening the tax base through the rationalisation of tax expenditures, more neutral taxation of capital income, and better use of property taxes.
Policymakers were also encouraged to improve the institutions that govern the tax system and manage tax reform based on the fact that they need evidence to convince the public of the gains and show progress in policy implementation over time.
This,according to the IMF, requires adequate staffing to forecast and analyze the impact of tax policies on the economy, greater professionalization of public officials working on tax design and implementation, better use of digital technologies to strengthen compliance, and transparency in how policy and administration are translated into legislation.