Transformation and the Tax Collector. How to Make Tax Reform Work for Sustainable Development

This blog is published as part of The Transformation Conversation: Blogs on the UNRISD Flagship Report 2016 and Agenda 2030. The series explores what it takes to design and implement innovative eco-social policies that will lead to transformative change and fulfil the potential of the 2030 Agenda for Sustainable Development. Together with the evidence, analysis and case studies in the UNRISD 2016 Flagship Report they are part of the global conversation on implementing of the SDGs.

Mobilizing sufficient financial resources to implement the UN’s Sustainable Development Goals is one of the key challenges countries and the international community face in the run-up to 2030. The estimates on the amounts needed to finance the 17 Goals and 169 Targets range from billions to trillions of additional funding. But the challenge is not only to increase the quantity of revenues—in order to finance the SDGs in a transformative way, the quality of financing policies needs to be improved, so they impact positively on production and employment, redistribution, social inclusion and gender equality, as well as sustainable use of natural resources.

One way of improving the transformative potential of financing policies is to mobilize more domestic resources, in particular tax and social contributions. The notion of a fiscal contract or a tax bargain between the state and people living, working and producing in a country is based on this quid-pro-quo of paying taxes to the government in exchange for social services and public goods. Creating fair and effective tax systems is a political process that involves contestation and bargaining about who pays and who benefits. Obstacles to increasing tax revenue and making tax systems more equitable are manifold, ranging from structural factors such as the size of the formal economy or of trade, to political factors such as opposition to reform by rich or well-organized taxpayer groups. International policies and the global monetary and financial architecture can present additional constraints: for example when international crises lead to recessions and adjustment policies in countries, which negatively affects tax revenue; or when policy conditionality attached to ODA or donor credits stipulates reforms such as trade liberalization and extension of VAT, leading to less public revenue from trade taxes and a shift of tax burden to consumers, which tends to make systems more regressive, with negative impacts on poorer consumers and women.

Fairer tax systems

However, several countries have managed to strengthen their tax capacity and make tax systems fairer: just taking examples from Latin America, countries such as Argentina and Chile have increased taxes levied on the corporate sector, whereas Uruguay has both boosted total tax revenues and shifted the burden from indirect to direct taxes, increasing their share from 17 to 35 percent of the total. These successful reforms can be explained by a number of factors which facilitated the creation of more transformative fiscal contracts:

• An enabling economic environment that produces growth and decent work, which makes it easier to compensate reform losers and to incorporate more people into progressive tax bargains;
• Greater state capacity, which includes both administrative and fiscal capacity, as well as the capacity to create a stable political consensus supporting and sustaining reforms;
• Transparent and inclusive tax bargains, where all relevant actors, including less powerful economic actors, civil society groups and parliaments, are part of the debate and have the capacity to influence reform proposals and to commit to the agreed reform outcomes; and
• Global bargains which support national bargains. This may take the form of financial resources like ODA, or technical assistance such as capacity building, or alternatively regulation, for example to prevent illicit financial flows, tax evasion and profit shifting by multinational companies.

In all reforms it was of crucial importance to establish a clear link between tax reforms and the government’s aim to expand social protection and social services to benefit a large part of the population. In the case of Chile, the expansion of pension coverage and more recent reforms of the education system are to be funded with additional revenues from these reforms, while in Uruguay the newly legislated National Care System was finally implemented when the financial resources were secured through a more efficient and equitable tax system.

While these reforms have been successful so far, will they be sustainable in the longer term? What are potential risk factors? And what other resources can be mobilized to fund the 2030 Agenda? Find out more in Chapter 6, Mobilizing Domestic Resources for Sustainable Development: Toward a Progressive Fiscal Contract, of the new UNRISD Flagship Report, available now!

ABOUT THE AUTHOR
Katja Hujo is Senior Research Coordinator at UNRISD.