Financing training in developing countries: The role of payroll taxes

Abstract

In most developing countries, the major programs of vocational training and manpower-skill development are financed from general government revenues. Increasingly, however, earmarked payroll taxes are employed to finance training. This paper summarizes international experience with these payroll taxes, drawing the distinction between the more traditional revenue raising schemes on the lines of the Latin American model and the newer levy-grant schemes. Drawing upon experience of payroll taxes in advanced economies it discusses the incidence of these taxes in developing countries and presents an economic rationale for their growing use, as part of a reverse social security scheme. It concludes that the desirability of using payroll taxes to finance training, compared to other alternatives available to developing country governments, is likely to be contingent upon the stage of a country's development.