Cheers to the Taxman

Why Taxes Are Better Than Aid

Customs tax receipts are piled up at the National Treasury in Bangui, Central African Republic, November 29, 2013. Joe Penney / Reuters

As Benjamin Franklin once said, “In this world nothing can be said to be certain, except death and taxes.” For a long time, though, in many developing countries, death was all too certain and taxes were not. These countries had few domestic resources to invest in the health, education, infrastructure, and agricultural projects needed to raise life expectancy, grow their economies, and end extreme poverty. Today, however, things are starting to change. By focusing on growing domestic revenues and achieving fiscal self-reliance, some of the same countries are reaching their development goals and improving their citizens’ quality of life.

El Salvador is a case in point. In 2004, the U.S. Agency for International Development (USAID) launched a project to broaden the tax base and increase tax collection, in part by modernizing El Salvador’s revenue service. Within five years, El Salvador’s Ministry of Finance had increased its tax revenue by 2.7 percent of GDP without increasing tax rates, earning an extra $660 million per year. And these funds are going to the right things. Since the late 1990s, El Salvador has doubled its per capita spending on health, education, and social services, with a $160 million increase in annual social spending alone. In that same period, the percent of the population living in extreme poverty dropped by nearly 25 percent.

USAID has helped the Republic of Georgia make similar inroads. In 2005, USAID invested $12 million in technical assistance to modernize and transform Georgia’s Customs and Tax Departments. Between 2005 and 2008, Georgia increased the number of registered taxpayers by 134 percent. That, in turn, boosted tax revenue by $4 billion, enabling Georgia to invest in the country’s health infrastructure and to double the government’s monthly cash transfers to the country’s poorest households.

A man walks past a wall graffiti in Nairobi, Kenya, March 24, 2012. The mural depicts a black-suited Kenyan legislator with a vulture's head, a caricature that represents the kind of greedy and corrupt lawmaker who taints Kenya's political class. Thomas Mukoya / Reuters


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