Critics of development aid are quick to point out many reasons for why money from donor countries isn’t reaching the world’s poor. Unaccountable governments, misallocation of funds, and problems with local implementation can all deprive poor people of the assistance meant for them. If you believe that the goal of development should be to put itself out of business, this dilemma becomes even more troubling. How can those in the development world build societies that are self sufficient and not dependent on foreign assistance?
Well, there may be a surprising solution to the daunting task of lifting the world’s bottom billion out of poverty: reasonable and efficient taxes on businesses operating in poor countries.
I do not want to imply that countries should tax their poorest citizens and entrepreneurs to death. What I mean is that taxes, when applied with good governance, can build state revenues for education, infrastructure, and other services that will improve the living standards of populations.
By providing the services necessary for a productive society, states can help people gain the skills they need to improve their own lives. As people gain the skills and abilities to grow their livelihoods, some become entrepreneurs and begin a virtuous cycle of economic self-sufficiency without foreign development assistance. Eventually, those profitable enough in their ventures will contribute to state programs as well, furthering a cycle of stability and independence from foreign aid.
State services funded by taxes should not be considered “handouts.” That’s not to suggest a socialist or state-led development model. Rather, taxes can be thought of as a basis of a social contract between people and the state. People can pay their government to provide essential services, such as education, infrastructure maintenance, and rule of law. More than any indicator or pledge for future good governance, this social contract is the foundation of good governance, holding governments accountable to their own people.
Now, the task at hand is to figure out how states can effectively collect those taxes. Over the course of history, an entire toolbox of methods for evading taxes and hiding profits from tax authorities has emerged. If governments cannot figure out how to confront this challenge, they are missing out on billions of dollars in lost revenues – from both taxes as well as jobs and local income – for development.
Perhaps those working in development and foreign assistance could serve the world’s poor beyond contributing billions more in development assistance, by also changing the structures and institutions that allow tax evasion to occur. Financial transparency, not more regulations, would show governments where profits are really going and provide a basis for responsible and effective taxation and governance.
Published Date: September 28, 2010