Successfully tackling tax issues requires enhanced detailed diagnostic work, dialogue, capacity development, and realistic assessments of the dynamics working against tax collection in countries. Unless program design considers addressing long-standing governance problems that impair tax collection, technical and institutional reform will have limited impact.
Across the board, there is a consensus amongst multilateral financial and development institutions on the importance of increasing tax revenue mobilization in emerging and developing economies to support the sustainable achievement of the 2030 Development Agenda. The 2011 Global Partnership for Development Effectiveness, the 2015 Financing for Development Conference and the “Billions to Trillions” initiative to transform development finance post-2015 have all helped focus attention on constraints to growth in low-income economies. Improving domestic resource mobilization is critical to compensate for declining flows of official development assistance.
A recent IEG review challenges the World Bank Group to scale up institutional efforts to support domestic resource mobilization, by moving away from what has, hitherto, been a piecemeal approach to a more strategic and holistic framework. To do this effectively and not repeat past mistakes, the World Bank Group would do well to draw on its previous experiences.
IEG’s review offers four key insights, from looking at the World Bank Group’s tax programs, between 2005 and 2015.
1. A holistic and realistic approach to program design is necessary to achieve sustainable outcomes.
The bulk of World Bank Group support to tax policy and administration reforms has been provided through development policy operations (DPOs), with investment projects accounting for a relatively small share of commitments. DPOs with tax components were mostly designed to increase revenue through tax administration reforms, and somewhat successfully enabled fiscal consolidation or the creation and maintenance of fiscal space. However, the support to tax policy measures tended to be much more limited, meaning that major issues in country tax systems related to revenue raising capacity, efficiency, and equity were left unaddressed.
Guatemala’s experience illustrates this pattern, where World Bank support helped increase tax collection from 8.2 percent of GDP in 1992 to an all-time high of 12.1 in 2007, but political opposition to comprehensive tax policy and vested interests to maintain the status quo were left unaddressed and the tax burden remained much lower than in countries with similar economic development.
Successfully tackling tax issues requires enhanced detailed diagnostic work, dialogue, capacity development, and realistic assessments of the dynamics working against tax collection in countries. Unless program design considers addressing long-standing governance problems that impair tax collection, technical and institutional reform will have limited impact. Government ownership is crucial for politically sensitive tax reforms, yet support may fluctuate during the life of a project due to changing conditions. For shorter-term results, focusing on measures that can be introduced under the executive can lead to some success. Moments of crisis represent opportunities to initiate tax reforms and build a wider-consensus on deeper reforms.
2. Enhance cross-institutional coordination and in-house analytical capacity
Much of the Bank’s work on tax policy and administration in the past has relied on IMF analytical resources, as the World Bank had insufficient capacity of its own. Overall, 70 percent of the Bank operations reviewed by IEG that had the objective of raising tax collection at the national level were implemented in parallel with an IMF program. Going forward, the World Bank may need in-house capacity to conduct its own analytical and diagnostic work, particularly where the IMF does not have a program (e.g. at the subnational level).
3. Synergies between World Bank lending tools are not fully exploited
The reform of tax policy and administration requires a combination of a shift in policy and time-consuming changes to the institutions tasked with implementing them. There is little evidence of substantial positive synergies between the World Bank’s development policy operations (DPO) and investment projects focused on tax reforms. In only three of the countries reviewed did IEG find any overlap. When there was an overlap, the investment project usually preceded the development policy operations. In no case did an investment project specifically support a DPO intervention. This limited experience points to several observations: an investment project preceding a DPO may inform the design of the tax component or support the implementation of the DPO series (Guatemala); potential synergies between the investment project and the DPO have not been fully exploited (Sao Tomé e Principe; and potential synergies have been mooted by the lack of government ownership (Pakistan).
4. Strengthen Monitoring & Evaluation
Data and institutional limitations, as well as inadequate monitoring frameworks to track results have hindered program success. Successful M&E practices in operations include reliance on strong government monitoring systems, alignment with government results and monitoring frameworks, and harmonizing with donors providing budget support. Closer monitoring, reporting, and evaluation of the impact of tax reforms would help identify what works and what doesn’t, including what is replicable and under which conditions.
Going Forward – A comprehensive and long-term engagement is required for success
While significant progress has been made to improve and strengthen tax administration, much less has been accomplished when it comes to the enhancing the efficiency and equity of country tax systems. Tax reforms are usually necessary, but not sufficient. Well-functioning government institutions are necessary and pervasive governance issues such as corruption must be addressed across the public sector. At the operational, country, and corporate levels, the Bank Group could consider a long-term and comprehensive approach that makes complementary use of different instruments, strengthened capacity, and coordination with partners to holistically address the wider causes that keep countries from improving their tax collection and from using these resources fairly to improve the lives of their citizens.