Taxes, public services, and the Addis Ababa conference

Yellow Pad
Jerik Cruz

Posted on September 08, 2015

The Third Financing for Development (FFD) Conference at Addis Ababa ended last July with a chiaroscuro of relief, strain, and disappointment. Even as the summit’s organizers hailed the outcomes to onerous negotiations as “ground-breaking,” others lamented a quagmire of “lost opportunities” -- if not a “retrogression” from earlier development financing obligations.

Yet amidst such polarization, one rare point of convergence in the new Addis Ababa Action Agenda has been its commitment to financing a new “social compact” of minimum living standards for all the world’s people.

In the agenda’s most widely-lauded feature, all 193 United Nations (UN) member states pledged to deliver nationally-appropriate universal welfare systems, involving universal public services in health, education, energy, water and sanitation, and social protection floors for the poor and vulnerable.

What is new and not new in the nascent Addis compact?

To begin with, commitments to ramping up resources for universal and inclusive services are hardly novel to FFD agendas. Paragraph 13 of the 2008 Doha Declaration on FFD, for instance, already contained similar pledges, though the present compact has benefitted considerably from recent UN work on social protection floors.

Instead, the Addis agenda’s new compact is distinguished by its redoubled engagement with domestic public resources -- specifically, taxation.

In paragraphs 12 and 22 of the Addis agenda, governments are primarily encouraged to first lay down “nationally-appropriate spending targets” for essential public services, which will be “supplemented” by “international assistance.” In this manner, the agenda suggests, “national ownership” and “fiscal sustainability” will be better assured for countries’ pursuit, not just of the Addis compact, but of broader sustainable development strategies.

This newfound prominence of taxation and domestic spending alludes to an emergent “tax turn” in the post-2015 FFD consensus: compared to the aid-emphasis of past financing discourses, it is now tax that functions as the new compact’s cornerstone.

Other new actions endorsed by the agenda for raising Southern tax takes, such as enhancing official development assistance (ODA) for tax capacity, and strengthening the UN Committee of Experts on International Cooperation in Tax Matters, all appear to confirm this new focus.

In itself, the Addis compact’s tax turn harbors certain advantages for effective FFD. A growing literature on aid, taxation and governance, for one, has amassed evidence that linking ODA to improved taxation will not only raise aid quality and fiscal stability, but also democratic accountability in development decision-making. Similarly, the attention to tax is made even more relevant by the fact that domestic public resources accounted for 77% of all global Millennium Development Goal-related spending in 2014, according to Government Spending Watch.

Yet given the Addis agenda’s overall fuzziness on implementation mechanisms, some risks could also lead to the compact’s realization being diluted in practice, especially in the poor nations with exceedingly-low tax capacity.

Much ink, certainly, has been spilled on the inability of the Addis Ababa conference to pave consensus for a new intergovernmental body on tax cooperation, which will restrict developing nations’ leeway for reducing illicit financial flows. Another visible threat is donor’s potential use of the tax turn as a pretext for failing to deliver on renewed ODA target-commitments of 0.7% of gross national income.

But perhaps the most overlooked problem is likely come from the very politics of extracting levies from citizens and corporations. Whereas FFD debates have tended to frame taxation as a largely technical affair, in reality political bargaining remains an intrinsic feature of any actually-existing tax regime, rendering efforts to transform tax systems as highly-contingent processes. The post-2015 FFD agenda might make pledges to “broadening the tax base” -- but such commitments are unlikely to materialize if existing social norms, relations between taxpayers and tax collectors, state capacities and the bargaining leverage of elites, are not aligned to facilitate improved fiscal performance in developing countries.

How can Southern governments then chart an FFD course that avoids the Scylla of neglecting taxation and the Charybdis of ill-advised tax politics?

Historically, one of the most effective options has been for states to enter into “tax bargains” with citizens for enhanced fiscal standing. Defined as a process of social contracting where populations willingly cede taxes to governments in exchange for services, citizen entitlements, and state accountability, greater attention to tax bargains and how they are institutionalized could set efforts to realize the Addis compact on more secure political footing.

Over the past four years, the UN Research Institute for Social Development (UNRISD) has been coordinating research into the politics of such bargains across the Global South.

In the course of examining cases of major tax regime shifts in several Sub-Saharan Africa and Latin American countries, several policy lessons on how to successfully achieve improved and sustainable revenue yields and services have become evident. Some of these are that:

• Universalism: anchoring tax increases on delivering citizen entitlements and universal public services not only diminishes resistance to tax reforms, but incentivizes citizen engagement in institution-building and governance.

• Culture of Taxation: minimizing exemptions to progressive and universal tax regimes, and firmly pursuing tax evaders, especially elites, is central to cultivating a culture of quasi-voluntary tax compliance and confidence in bargains.

• Transparency/Accountability: pro-active institutionalization of transparency/accountability mechanisms is key to signalling government trustworthiness in fiscal pacts and facilitating more collaborative state-citizen relations.

• Civil Society Organizations (CSOs)/Parliamentarian Mediation: parliamentarians and independent CSOs with acumen in constructive tax contestation are well-placed to serve as public-interest brokers of state-citizen tax bargains, and deserve sustained donor attention.

• Political Coalitions: the entry-into-power of forces committed to fiscally-sustainable compacts, supported by dense networks of CSOs/citizens groups and pro-equity elites, is crucial to cementing a favorable political climate in which credible state-citizen bargains can occur.

With all these features exhibited in the campaign to legislate and implement the Philippine Sin Tax Reform Act of 2012, tax, social policy and governance reformers, both in and out of the Philippine government, possess a wealth of assets and expertise to facilitate the emergence of new state-citizen tax bargains in the Philippines in the years to come.

Now that the rudiments of the post-2015 FFD consensus are in place, it will be work similar to theirs that will turn the Addis compact’s promise of universal welfare into reality for all the world’s people.

Jerik Cruz is working in UNRISD’s “Politics of Domestic Resource Mobilization” project in Geneva, Switzerland. He was previously a communications officer of Action for Economic Reforms.