Opinion: 3 years since the launch of Addis Tax Initiative, what's been achieved?

Paying taxes on animal sales at the upgraded Haro Bake livestock market in Southern Ethiopia. Photo by: Kelley Lynch / USAID / CC BY-NC

The earliest known writing, in Babylonian cuneiform script circa 3,000 BC, was an itemization of goods for taxation. Fast forward a few thousand years and another tax document was signed — one that could have an enormous impact in the fight against poverty.  

As the world was agreeing to the Sustainable Development Goals in 2015, leaders also gathered to take on the thorny issue of how to finance the ambitions captured within them.

Alongside the calls for greater transparency in tax havens — think Panama Papers — and public registers for companies, the big idea came to be known as the “Addis Tax Initiative,” for Addis Ababa, the Ethiopian capital where it was signed. More than 55 signatories — comprising countries and international institutions — committed to catalyze significant increases in domestic revenue and to improve the transparency, fairness, effectiveness, and efficiency of tax systems.

This pledge included a doubling of aid for these efforts from just over $222 million in 2015 to almost $450 million by 2020. While only 0.3% of total official aid that $450 million investment has the potential to unlock billions of dollars for public investments needed in the poorest countries. It was also built on the theory that the social contract between citizen and state would be strengthened by the accountable use of domestic resources.

Are there signs it is working? And what more is needed?

The numbers don’t lie: Aid to Africa in 2015 was $43 billion, whereas local revenues were more than ten times that amount. While some low-income countries are heavily dependent on aid, for most in Africa, domestic resources are far more important. But they are still too low to fund the level of basic infrastructure and services needed to overcome extreme poverty, fight inequality, address climate change, and to secure sustained and inclusive economic growth or achieve the SDGs.

The African Development Bank says that African countries will both need to grow their economies and increase the ratio of taxes to GDP to 25 percent, up from 19.2 percent today, to finance Africa’s infrastructure and human development needs. However, there are dangers of taxing too much too quickly, as explored in this paper from Cathal Long and Mark Miller at the Overseas Development Institute, including impeding private investment, or risking regressive taxation hurting the poorest most.

At a time when donors want to see value for money and more self-reliance — and public commitments to foreign aid are coming under fire — increasing aid for tax looks like a particularly good deal. It reduces long-term aid dependency and strengthens state-citizen relations and accountability. This week, the U.K.’s International Development Secretary Penny Mordaunt, launched the U.K.’s largest-ever tax partnership program with the very country in which the Addis Tax Initiative was signed — Ethiopia. Yet only $222 million —  or 0.2 percent — of aid went to support taxation in 2015.

Consider how much easier it is to defend aid for vaccines or to fight hunger than to make the case for building the capacity of a largely unloved human — the tax collector. That’s why the commitment to double aid for taxation was a big deal and needs to be delivered.

Adding up Addis

A recent Oxfam report concludes that donors are not on track to fulfill this promise. ATI donors have self-reported an increase of 61 percent, but two large loans from France drive most of this change, and when excluding them Oxfam estimates an increase of only 5 percent. At the same time, aid for fiscal transparency decreased by more than this. The report also suggests that there may be underreporting because the projects are not counted properly by the reporting system used by donors. Importantly, a commitment to improving the equity of taxation is absent or unclear in most efforts.

In 2016, just 18 of 634 projects assessed contained clear goals on equity or fairness, and only 16 percent of aid for domestic resource mobilization was channeled to domestic stakeholders. This will need to increase to ensure country ownership. And in a particularly worrying trend, support for complementary sectors such as public financial management and anti-corruption declined by $203 million in Sub-Saharan Africa in 2016. The fact is, that the collection and availability of data on aid for tax systems is flawed, so that we don’t have the complete picture of what donors are providing, or what the impact of increased assistance delivered through Addis is having — or might have in years to come.

Adding to Addis: So, now what?

First and foremost, donors and partners must scale what works: According to OECD, the “Tax Inspectors Without Borders” program has so far generated $414 million in increased revenues, with a rate of return on investment of over $100 for every $1 invested. It also means that all major project evaluations should include an examination of if and how a given aid investment is impacting the government’s ability to take over financing in the medium-to-long-term, which is one of the aims of building capacity for effective tax administrations.

Second, it is critical for donor countries to fully meet their commitments. It is not only essential to accomplish the goals, but also to maintain good faith throughout the system. If you look at the anti-corruption reforms President Cyril Ramaphosa is promising in South Africa, or those of the Medium Term Revenue Strategy 2018-2022 in Papua New Guinea, reliable international support on aid and the transparency of tax systems are integral to their success.

Third, we must better understand the scale of the challenge and how we go about it fixing it. Needs assessments are useful, but must be accompanied by roadmaps to transform these into concrete outcomes. This starts with aligning donor support to country priorities and ensuring political commitment to reform tax systems. Producing a revenue strategy for the medium term is a first step in providing clarity on country goals. Consistently publishing existing assessments of the tax system such as tax administration diagnostic assessment tool, public expenditure, and financial accountability, and the international survey on revenue administration provides a commitment to the transparency needed for a harmonized understanding of challenges.

Finally, we must see aid for tax within a bigger picture: Aid for tax systems; open data on public financial management; and policy to ensure national tax strategies are both progressive and encourage responsible private investment. We also need aid to support civil society and infomediaries — the neutral third party organizations that gather this information — to use and digest data for public consumption.

Oxfam’s finding that aid for fiscal transparency went down more than aid for tax capacity went up is disturbing. Bringing together public accountability, improved open budgeting and expenditure will form a virtuous circle.

Ultimately, the battle for equality and against extreme poverty won’t be won in high-profile U.N. conferences. It will be the slow and sometimes mundane progress of country ownership, growing domestic resources and accountability. The policy makers, civil servants, and yes, the tax collectors, who build the infrastructure of the social contract, and with it the infrastructure of the country, will win the day.  Failing to meet the Addis commitments is to leave money, and critical progress, on the table; meeting them is to invest in the future.

Update, Sept. 4, 2018: This article has been updated to clarify that the Addis Tax Initiative was signed in Ethiopia and the “Tax Inspectors Without Borders” program has generated $414 million in increased revenues.

The views in this opinion piece do not necessarily reflect Devex's editorial views.

About the authors

  • Jamie Drummond

    Jamie Drummond is an advocacy entrepreneur who co-founded ONE with Bono and other activists. ONE is a global organization with over 9 million members campaigning against extreme poverty, for the transformation of developing economies, and the achievement of the Sustainable Development Goals. Jamie was the global strategist for Drop the Debt, helping to cancel $110 billion of mainly African debt. He is now working with a range of public, private, and civic sector partners to design a campaign strategy for an SDG super year of activism in 2020 to launch a decade of delivery for the Global Goals through to 2030.
  • Alex Thier

    Alex Thier is a senior democracy fellow at Freedom House and a senior adviser at Center for Strategic and International Studies. He was a senior official in the Obama administration and executive director of the Overseas Development Institute in London.