CHAPTER THREE 3. CASE STUDIES OF TAX CULTURE LAG
6. TAX REFORM AND DEMOCRATIC ACCOUNTABILITY IN SUB- SAHARAN AFRICA
6.4. TAX AND ACCOUNTABILITY IN UGANDA, ZAMBIA AND TANZANIA To rephrase, our main concern in this paper is whether tax reforms have led to
responsiveness and democratic accountability has guided much of the aid policies on tax reforms in the 1990s. The question is whether it is possible to establish democratic accountability mechanisms by external pressure.
6.4. TAX AND ACCOUNTABILITY IN UGANDA, ZAMBIA AND TANZANIA
Lastly, external accountability mechanisms between governments and donors (multilateral and bilateral) play a crucial role in initiating and driving the reforms by creating incentives structures and placing conditions on the recipient
governments. External accountability relations between the governments and international donors may therefore affect domestic accountability relations.
6.4.1. THREE FORMS OF ACCOUNTABILITY
There are three forms of accountability:
1. With regard to the internal accountability of the tax system, we ask to what extent the reforms have succeeded in creating more efficient and trustworthy tax systems transparent systems capable of ensuring that tax money is not
embezzled, and that those who should pay tax do in fact pay.
2. We also ask whether the conditions are in place for taxation to have a positive effect on democratic accountability. Have reforms changed the nature of the tax system to the extent that taxes are being 'felt' by a majority of the population?
And, if so, has this triggered a response in the form of demands for greater accountability by the citizens? Do we find evidence of governments more willing?
to justify their decisions in public, and be constrained by institutions representing the public will?
3. Has external accountability aimed at strengthening domestic accountability?
structures through tax reforms succeeded, or has external accountability relations in fact hampered the development of domestic structures for democratic
accountability?
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6.4.2. THE INTERNAL ACCOUNTABILITY DIMENSION OF TAX REFORMS
If the tax collection apparatus is inefficient, incompetent and corrupt, this is a strong disincentive for potential taxpayers. As part of the economic restructuring process, the international donor community has emphasized administrative reforms through the establishment of independent revenue authorities. Inspired by the executive agency model, currently eight countries mainly in east and southern Africa have established semi-autonomous revenue authorities.
The new revenue authorities were perceived to have a positive effect on accountability relations: By placing the responsibility for revenue collection outside the civil service, the aim was to 'bypass' deficiencies in existing state institutions through higher salaries and more flexible procedures for hiring and firing employees.
In addition, the executive agency model was regarded as an effective mechanism to limit direct political intervention in day to day operations. The new executive revenue agencies established in Uganda (1991), Zambia (1994) and Tanzania (1996) should be regarded as semi-autonomous, as the employees are still public servants. The challenge facing the revenue authorities in all three cases was to increase the contribution of locally raised revenue to the domestic
budget from the very low levels prevailing in the 1980s and 1990s. It was also necessary to restructure taxes away from export taxes to a tax system that could facilitate private sector/export promoted growth. In all countries export taxes acted as a major disincentive for the agricultural sector and they were abolished in the early stages of reform.
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6.4.3. IMPROVED REACH THROUGH A WIDENING OF THE TAX NET?
The tax base was narrow in all three countries prior to the reforms. Success in widening it would be an important indicator of their success from an
accountability perspective. The record in all three countries is strikingly similar:
the reforms so far have focused on increasing collection through improving the compliance of existing and known taxpayers.
According to a recent evaluation study by the British Department of International Development (DFID) of tax reforms in a number of sub-Saharan African countries the failure to tax the informal sector and agriculture, and the continued tendency of granting tax exemptions to powerful businesses individuals with close political connections provide the main reasons why collection appears to have stagnated at a relatively low level (DFID 2001). Echoing this finding, tax reforms in Uganda, Tanzania and Zambia appear to have worked within a largely static tax policy framework. In all three countries, increases in revenue are largely due to enhanced collection compliance. In the case of Uganda, the growth in the
number of taxpayers does not reflect the rather broad and rapid economic growth recorded in recent years.
To illustrate: Since 1998 the Uganda Revenue Authority (URA) has been
instructed to implement a Presumptive Income Tax on informal sector enterprises with low turnover under IMF conditionality. However, the process has been met with little enthusiasm in the URA, as the collection is not regarded as cost- effective.
In addition taxing the informal sector is regarded as politically sensitive and the reform has been met with little enthusiasm in political circles and the press (Gray, Karuga and Ssemogerere 2001 Anene and Garyio 2000, Therkildsen 2002). Similarly, the accounts from Tanzania Revenue Authority (TRA) indicate
that more than 70 per cent of taxes collected are consumption taxes. The
regional distribution also points to a relatively limited tax net: close to 80 per cent of revenues come from the region of Dar es Salaam (Temu and Due 2000, Luoga 2001). In Zambia both the agricultural sector and the non-agricultural informal sector, which account for almost the entire labor force, remain outside the tax net. Recent tax reforms have sought to bring Zambian street vendors and Asian traders into the tax net.
However, as the Minister of Finance has continued to grant significant exemption to corporations and individual businessmen with political connections, most people perceive the attempts to tax parts of the informal economy as largely unfair. These concerns were illustrated in the 2001 election campaign as a number of party programs referred to unfair tax policies as a major concern (Gray, Shera and Condy 2001, Aarnes and Taylor 2002, Rakner and Svasand 2002).
A common trend noted in all three countries is an apparent lack of ability
and/or political willingness to apply the tax law with full force to informal operators perceived to be electoral important. The way VAT has been introduced helps explain the failure to widen the population base of the tax system. A uniform VAT (with major exemptions) has replaced business turnover taxes and sales tax in all three countries. However, as food commodities are zero-rated and most
agricultural inputs are exempted, VAT has not included many new groups into the tax net. The experiences with VAT in Zambia may serve as an illustration: With 11.000 registered VAT suppliers, of which 5.000 are active, a large part of the economy, and the bulk of the rural economy, largely fall outside the VAT net.
Thus, the tax reforms have so far only to a limited extent involved the forms of revenue considered to affect state-citizen relations.
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6.4.4. ASSESSING THE DEMOCRATIC ACCOUNTABILITY EFFECT
In the case of democratic accountability the principal is "the people" and the parties owing accountability are those entrusted with political power, in the case of taxation primarily the executive government, the legislative and the revenue authorities. For taxation to have a positive effect on democratic accountability, we need to assess whether the reforms have changed the nature of the tax system to the extent that taxes are being 'felt' by a majority of the population. If so, has this triggered a response in the form of demands for greater accountability by the citizens?
Do we find evidence of governments more willing to justify their decisions in public, and be constrained by institutions representing the public will?
6.4.5. EXTERNAL ACCOUNTABILITY
With aid increasingly being conditional and with tax reform part of the
conditionality agenda, aid and taxation may be positively related. But is this so?
Has external accountability aimed at strengthening domestic accountability structures through tax reforms succeeded, or has external accountability relations in fact hampered the development of domestic structures for democratic
accountability?
There are as we have seen - indications that it may not be so easy to introduce democratic accountability through externally imposed tax reforms.
The tax reforms carried out in Tanzania, Uganda and Zambia have to a large extent been formulated and imposed by the international donor community. In all three countries, the IMF has maintained a lead role in advising governments on
major issues of design of tax policies. To meet the targets set by the IMF and Ministry of Finance, the revenue authorities have focussed on increasing collection and compliance from existing taxpayers rather than attempting the more complicated task of widening the tax base. The long-term process of
building wide tax nets and cultures of voluntary compliance requires different and more time-consuming practices. According to the evaluation by DFID in 2001 some countries have concentrated exclusively on increased compliance by known (existing) tax payers at the expense of widening the tax net in order to meet IMF demands (DFID 2001: 52).
These processes are also politically more sensitive, as the resistance to taxing agriculture in Uganda and Zambia indicates. In the case of Uganda Therkildsen (2002: 28) argues that donors, and the Ugandan Ministry of Finance, by pushing for high revenue targets, have undermined the Uganda Revenue Authority's credibility in the eyes of the public, as the targets have been unrealistically high.