Why 'tax is the only exit strategy from aid in the long term'

As foreign aid budgets continue to shrink, “tax is going to be the linchpin of development finance,” according to Giulia Mascagni, executive director of the International Centre for Tax and Development. While the decline in aid is concerning, aid was never going to be sufficient to fully finance the U.N. Sustainable Development Goals, she said during a Devex event on the sidelines of the Fourth International Conference on Financing for Development, or FfD4, in Sevilla, Spain. In fact, tax revenues overtook aid as the primary source of development financing nearly two decades ago, she said. “At the national level, any action on development is really largely … funded by governments from their own public revenue. So that is already happening,” she said. Taxation is about more than just generating revenue. Mascagni emphasized that strong domestic tax systems are vital for securing favorable borrowing terms, attracting private sector investment, and strengthening the social contract between governments and their citizens. Taxes are what pay for the public infrastructure and services that private investors want to see, she said. Effective taxation can also help address inequality, build trust in public institutions, and create the conditions for sustainable economic growth. “I would go as far as saying that it is really hard to imagine meaningful and sustainable progress on development in general without substantial improvements in revenue mobilization,” she said. Still, the road to stronger domestic resource mobilization is far from straightforward. Mascagni acknowledged that tax reform is inherently difficult. In many low-income countries, citizens are understandably reluctant to pay taxes when they don’t see improvements in public services, especially when much of the revenue is being used to service debt or fill gaps left by declining aid, she explained. One common mistake, Mascagni noted, has been governments’ focus on taxing the informal sector and small enterprises, which tends to exacerbate inequality while producing minimal revenue gains. Instead, countries should shift their focus to more effective and equitable tax strategies, such as taxing the wealthy and reducing inefficient tax incentives for large firms. Mascagni pointed to significant progress over the past decade, especially in digitizing tax systems and using data to drive policy. Where tax administrations previously operated with limited resources and manual systems, many now employ digital tools that have vastly improved efficiency and transparency. Looking ahead, Mascagni welcomed the inclusion of a commitment in the Sevilla conference outcome document to double aid for tax capacity-building. This is a smart investment, she said, emphasizing that tax is not a short-term replacement for aid, but “tax is the only exit strategy from aid in the long term.” She also stressed the importance of building administrative capacity — from staff numbers to digital skills — as a prerequisite for successful reforms, but warned that all this will take time. “We do know that increases in tax don’t happen quickly, so that is a bit of an illusion to think that you know tax is going to fill the gap left by aid, or that revenue mobilization can happen quickly,” she said. “History shows us that really a half percentage point increase in the tax-to-GDP ratio per year is already incredibly ambitious.”