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Tax and Development

Aid Modalities for Strengthening Tax Systems

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Tax revenues provide governments with funds to invest in development, relieve poverty, deliver public services and build the physical and social infrastructure for long-term growth. Moreover, there are mutually beneficial links between taxation and good governance. Tax and Development: Aid Modalities for Strengthening Tax Systems highlights how taxation can have a positive effect on the quality of governance and a government’s relationship with citizens and, in turn, how good governance can have a positive effect on compliance and revenue mobilisation.

How can international assistance providers, including OECD members, international and regional organisations, support the development of tax systems in developing countries? Tax and Development: Aid Modalities for Strengthening Tax Systems provides practical guidance for policy makers and practitioners based on the results of an extensive literature review, a survey of aid agency officials and six country case studies (Ghana, Guatemala, Liberia, Mali, Mozambique, and Tanzania). It examines the aid instruments that donors use to assist developing countries including general and sector budget support, basket financing, stand-alone bilateral aid and funding South-South organisations. The strengths and weaknesses of each modality for supporting tax systems are identified, and some 50 recommendations to support the development of effective, efficient and growth-oriented tax systems in developing countries are provided.

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Executive summary

After years of neglect, taxation is increasingly focusing the minds of aid agencies and prompting them to view it as a development assistance priority. Two factors prompt this newfound perception. The first is a groundswell of interest in mobilising domestic resources for sustainable fiscal management and an eventual exit from aid dependency. Second, there is growing awareness that the tax system is a central pillar of state building and good governance. It is against this background that the present study seeks to assess the role of various so-called aid “modalities” (or instruments) in supporting tax systems and recommends practical ways of improving such development assistance. The assessment draws on three sources: a review of the pertinent literature; a survey of aid agency officials; and six case studies that afford a ground-level view of how various modalities work in practice. Given the scope and complexity of the issues at stake, the aim here is not to propose comprehensive solutions, but to contribute to the international dialogue on aid for taxation.

English

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