Many people equate taxes with confusing forms, incomprehensible rules, and general feelings of frustration. Others fear potential audits or vent about the ways in which their governments spend tax revenues. People pay less attention to the positive side of taxation; namely, that the resulting revenues allow a government to provide critical goods and services to citizens.
Tax revenues support both large-scale investments in areas such as health, education, citizen security, and roads, as well as community-level goods and services, like public lighting and garbage collection. Of course, efforts to improve tax collection should go hand-in-hand with advancements in public financial management more broadly. That is, beyond simply collecting more taxes, governments should improve the way they handle and invest public resources. Low revenue collection and sub-par public financial management practices have serious implications for the everyday lives and operations of citizens and businesses.
For example, countries like El Salvador are facing crumbling public school infrastructure, a lack of basic medicines in public hospitals, and delayed tax refunds to businesses. Even in Brazil, a country with tax collection levels on par with the most developed countries in the world, recent protests have highlighted citizens’ discontent with the government’s management of public resources.
Along with promoting private investment, the ability of governments to collect and manage tax revenues is fundamental to reducing their reliance on foreign aid over the long term. As the Assistant Administrator for USAID’s Bureau for Latin America and the Caribbean, Mark Feierstein, noted in testimony earlier this year:
“The most important source of development funding for nearly any country is not USAID, or any other donor, but internally generated revenue. Absent sufficient host country funding, donors alone will not produce sustained prosperity and opportunity. That is why we are initiating new programs to help national and local governments raise revenue.”
Many readers may be surprised to find that, despite recent economic and social advances in the region, many Latin American and Caribbean countries seriously struggle to collect and manage public revenues.
Last year, two researchers from the Economic Commission for Latin America and the Caribbean (ECLAC) found that tax collection rates in Latin America averaged 18.4% of GDP, or roughly half the average of 34.8% for countries (including the United States) that belong to the Organisation for Economic Co-operation and Development (OECD) and 39.2% in the European Union. More shocking is that collection rates in Latin America are significantly lower than the 24.5% average that the researchers found in Sub-Saharan Africa. Meanwhile, the World Bank has noted that Latin American countries lag behind international standards in various aspects of public financial management, such as procurement, budget execution, and independent oversight of public expenditures.
Increasingly in recent years, the international community has emphasized the need for countries to improve the collection and management of tax revenues. USAID is providing leadership on these issues throughout the Americas. Our programs are working with national governments in countries like El Salvador and Jamaica to strengthen tax administration and public financial management.
USAID is a key contributor to the U.S. Government’s Domestic Finance for Development (DF4D) policy initiative that encourages countries throughout the world to increase revenue collection, improve budget transparency, and fight corruption. For example, we are challenging local governments at the municipal level in El Salvador and Honduras to increase revenue collection and improve the management of those resources. We will reward the highest performers with additional resources for key investments related to citizen security in their communities.
Today, USAID released a new publication entitled “Detailed Guidelines for Improved Tax Administration in Latin America and the Caribbean” that will enable tax administrations (i.e., the IRS equivalent in each country) to assess their own performance against leading practices in a variety of areas, including taxpayer registration, filing and payments, collections, and audit, among others. This tool will also help USAID staff and other donors engage with tax administrations on potential areas of technical assistance and prioritize interventions.
At USAID, we want to see all countries reach a level of development where they no longer require development assistance. Helping ensure that governments can mobilize domestic resources and invest them in their own development is a key step toward reaching that goal.
Learn more about USAID’s work in improving tax administration in Latin America and the Caribbean.