Taxation is a crucial source of revenue for countries around the world and plays an important role in development efforts. In order to truly foster equitable growth in these contexts, policies must consider taxation alongside other funding sources and private sector development while also taking into account distributional effects.
To take stock of this important issue, UNU-WIDER and the Ministry for Foreign Affairs of Finland (MFA) organized a policy seminar in Helsinki this month to consider current knowledge on tax policies in developing countries and directions for the future. In attendance were representatives from the Finnish government as well as practitioners and researchers from local organizations and universities.
Satu Santala, Director General of the Department for Development Policy at MFA, opened the seminar by noting the increasing recognition globally that aid alone cannot solve the problem of development. For many developing countries, tax is a sustainable way of raising revenues to fund public services and basic infrastructure--it thus promotes development.
Research needs to inform policy
As UNU-WIDER Director Finn Tarp outlined in his presentation, the policy debate on taxation in developing countries has in recent years looked more closely at enhancing and reforming tax systems. The various goals of taxation, however, may conflict, sometimes facing trade-offs. For example, the tax system which is most effective at raising revenue may also have undesirable distributional implications. Proper economic analysis is required to better understand where the tax burden lies, as only solid research can demonstrate a particular tax's effects on the distribution of income.
Certain conditions are also required for taxation policies to be effective, including: a monetized economy, literacy and accounting skills, in addition to public acceptance and political will. Tarp underlined that pragmatism and country-specific knowledge is required in such policy-making, noting the ongoing need for economic analysis at the country level.
Tax research collaboration: the case of MFA
From a donor country perspective, MFA's Ambassador of Tax and Development Hanna Rinkineva spoke about Finland's current agenda, in particular its action programme on tax and development for 2016-19, which was launched earlier this year. Research is a core focus of the programme with one core objective being to use reliable country-specific research and analysis to...