Africa rises, but taxes don’t follow: Who benefits?

May 7th, 2014

This piece originally appeared on the RightingFinance blog and has been re-published with permission. 

After a decade of high growth in sub-Saharan Africa, it is time to ask: who benefits? Certainly growth has been accompanied by some poverty reduction and some progress in health and education. But advances are inadequate compared to the wealth created. Worse still, income inequality is rising in too many countries.

new report by Tax Justice Network-Africa and Christian Aid investigates income inequality in eight sub-Saharan African countries and asks whether their tax systems are working to narrow the gap between rich and poor.

The report has many worrying findings. In Nigeria, in 1986, the richest 10 per cent were 1.7 times wealthier than the poorest 40 per cent. By 2010, they were 3 times richer – a 75 per cent increase in the concentration of income. In Zambia, income inequality is now at its highest level since data began to be collected, while South Africa still has one of the highest levels of inequality in the world – and it’s growing.

More worrying still, we know the figures, from official sources, are just the tip of the iceberg. Research has shown that both wealth and inequality are significantly underestimated, largely because of the huge amounts held offshore.

Taxes are the most potent weapon governments have to address inequality and thus fulfil their human rights obligations to tackle inequality and prevent discrimination in the generation and use of resources. All countries struggle to obtain revenue that is rightly theirs, not least as a result of offshore secrecy. But those in Africa struggle more than most. In the last decade, tax revenue in African countries rose by, on average, a paltry 1 per cent of Gross Domestic Product (GDP). Our research demonstrates how woefully ineffective governments there are in taxing income, wealth and property.

This is, in part, due to the staggeringly high illicit financial flows from the continent, which make the taxation of wealth a massive challenge. We now know that such flows drained US$1.2-1.3 trillion from Africa between 1980 and 2009 – much of it the result of global tax dodging. Not surprisingly African governments, with weak revenue authorities unable to confront complex tax dodging techniques, have resorted to lower hanging fruit: sales taxes that can more easily be implemented but which hit the poor the hardest.

Despite the challenges, there are reforms that governments can implement. For a start, the extensive tax breaks offered to companies must be curtailed. There is little evidence that they drive inward investment. Instead, they have led to a race to the bottom, depriving all governments of much-needed revenue.

Governments must also address shortcomings in personal income tax systems (PIT). Such taxes are mainly collected via the PAYE system, which means employed workers shoulder the burden, while the self-employed, often on higher incomes, may pay no tax at all.

Poor enforcement also means that high net worth individuals can easily evade tax. In South Africa this is happening on a grand scale, with only 2,000 high net worth individuals registered, out of potentially many thousands more.

While Tax Justice Network-Africa campaigns for these reforms at home, we are aware that African governments would still have a mountain to climb in terms of reducing the massive illicit financial flows. This is why we also call for global action to curb tax dodging.

Although there are talks on how to curb multinational tax dodging taking place among the G8, G20 and OECD – through the Base Erosion and Profit Shifting (BEPS) initiative – it is still far from certain whether developing countries will be included in, or benefit from, the changes being discussed.

There is also hope that the high level panel on illicit financial flows from Africa, chaired by former South African president Thabo Mbeki, will bring its influence to bear in pressing for change. African leaders speaking with a united African voice on these issues would have a huge impact.

The post-2015 development framework provides another opportunity. The successors to the Millennium Development Goals (MGDs) must, we believe, include a target to tackle inequality, as well as one aimed at developing progressive taxation systems. We also want to see targets set to curb illicit financial flows and prevent tax dodging.

Without such reforms, economic inequalities will only increase, stymying the prospects of real change, however buoyant the GDPs of African countries may appear.

Written by Alvin Mosioma

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