Why are Aid Donors Frightened of Taxation? By Mick Moore Date: 24:04:2007

What aspects of domestic revenue-raising should aid donors be concerned about? Is the burden allocated fairly? Is revenue collected consensually and fairly, to strengthen citizenship? Is enough money raised? (a) To finance development (b) To replace aid in the long term (c) To avoid the perverse political consequences of the financial independence of governments from citizens

The effects on governance of state dependence on broad taxation IMMEDIATE EFFECTS A The state becomes focused on obtaining revenue by taxing citizens B The experience of being taxed engages citizens politically C As a result of A and B, states and citizens begin to bargain over revenues and exchange willing compliance by taxpayers for some institutionalised influence over the level and form of taxation and the uses of revenue (i.e. public policy). INTERMEDIATE EFFECTS and GOVERNANCE OUTCOMES (i) The state is motivated to promote citizen prosperity; therefore: More responsiveness (ii) The state is motivated to develop bureaucratic apparatuses and information sources to collect taxes effectively; therefore: More bureaucratic capability (i) (Some) taxpayers mobilise to resist tax demands and/or monitor the mode of taxation and the way the state uses tax revenue; therefore: More accountability (i) Taxes are more acceptable and predictable, and the taxation process more efficient; therefore: More responsiveness, political and bureaucratic capability (ii) Better public policy results from debate and negotiation; therefore: More responsiveness and political capability (iii) Wider and more professional scrutiny of how public money is spent; therefore: More accountability (iv) The legislature is strengthened relative to the executive; therefore: More accountability

How do we know that aid donors don’t take taxation seriously? Through hanging around their offices They don’t spend much money on this They avoid confronting the issue of large tax exemptions for aid activities

Why don’t aid donors take taxation and revenue seriously? There is little pressure to do so, except from the IMF They prefer to focus on expenditure - to protect themselves against allegations of corruption It is challenging; inability to achieve goals becomes clear It undermines the aid business itself in the long term. It does not appeal to aid’s tender-hearted supporters