Tax and Expenditure Reforms in Africa: An Overview

Abstract

Taxation is recognised as being able to affect economic growth, poverty and inequality. In Africa, taxation is an instrument that can be used to promote development. Like other countries, African governments have undertaken tax reforms aimed at increasing tax revenues, but at the same time reducing trade taxes and high marginal tax rates. Reforms include introducing broad-based consumption taxes, simplified tax design and improved tax administration. Emerging ideas include the ‘optimal tax policy’, which states that all taxation distorts market incentives, and reforms should be driven by the aim of minimising these distortions. A challenging aspect of a ‘growth friendly’ tax reform agenda would be how to ensure that increasing taxation does not erode the small existing tax base by inducing further distortions. The three papers in this special edition look at tax reform in relation to investment, to tax evasion and economic growth and also to the equity and efficiency trade-offs. Tax reforms are found to be successful in modestly increasing GDP growth, while reducing poverty and inequality. These outcomes are driven by the positive impacts that expenditures on infrastructure, operations and maintenance have on total factor productivity. Improved legal and regulatory frameworks, coupled with transparent and accountable institutions in Africa, and well-developed social welfare expenditure architecture capable of recycling revenues back to poor individuals will help improve tax collection and development. Without these features, the tax reform agenda would likely have almost no impact on the African economies.