When a revised income tax code was introduced in Mozambique in 2003, civil servants began to pay income tax on their salaries for the first time. Little changed initially except that the budget for civil service salaries increased in the national budget, and income tax revenues increased by the same value - it was bascially some arithmetical juggling with no overall impact. (It was a complicated administrative process, even if others nonetheless had to comply with it(!), and nobody wanted to see a decline in civil servant net-incomes). So what was the point?
Well, apart from putting civil servants in the same boat as other workers, potentially improving tax morale in the formal sector at least, the growing literature on taxation and accountability would suggest that it might also increase government accountability and strengthen the "social contract" - taxes paid for useful services provided lead to greater scrutiny of government performance, the story goes. (Actually, by extension of that logic one could argue that it might make civil servants work harder given that they are delivering some of those services!). Whether or not it worked, I'm not sure.
But the story relating taxation to the social contract and increasing government accountability is increasingly accepted in the development discourse. As a corollary, the absence of government reliance on tax revenues is thought to result in a less accountable government. This is part of the story thought to arise in resource-rich countries, and part of the "resource curse".
CGD recently published an innovative and thought-provoking proposal that might address these issues (discussion of the paper here). As their description puts it,
Under this proposal, a government would transfer some or all of the revenue from natural resource extraction to citizens in a universal, transparent, and regular payment. Having put this money in the hands of its citizens, the state would treat it like normal income and tax it accordingly—thus forcing the state to collect taxes and fueling public demand for the government to be transparent and accountable in its management of natural resource revenues and in the delivery of public services.While an attractive idea on paper, the authors recognise that there would be some practical difficulties. The first of these is the need for political will to distribute the funds. This may be tricky to find - the kind of government most willing to do this is probably least in need of tying its hands into such an arrangement in the first place. Nonetheless, there is a logic that by binding future governmnents into such an arrangement, the future can be better determined so maybe a reform-minded government would nonetheless be interested.
The second challenge cited is that redistribution schemes may open up opportunities for "leakages in the system" in a low capacity environment. Indeed. If civil service salaries lead to "ghost workers", the prospect of "ghost citizens" collecting their oil cash is not far-fetched. The third is that having taxation as part of redistribution of oil revenues induces transaction costs - some of the original pot of money is lost on administering the system in the first place. So this is not proposed as a fix-it solution for all circumstances by any means.
Nonetheless there are some additional questions. While the study refers to a range of successful cash transfer programs to replace subsidies, such as Iran, or Bolivia and Mongolia where natural resource rents are being used to finance pensions or other direct cash transfer schemes, this only really addresses the issue of whether or not cash transfers are useful, but not the feasibility of the taxation side.
So perhaps the main problem, also recognised by the authors, is that the tax system may not be sufficiently able to identify and therefore capture the increased incomes that result from the distributed cash. They state that it "should not be implemented in a country with extremely weak governance indicators and virtually non-existent tax systems." But even where tax systems are far from "non-existent", they also recognise there are "many questions [that] need to be answered such as the existing capacity of revenue administration and the tax culture in a country or which tax instruments (e.g., direct personal income tax, property taxes or some types of indirect taxes, such as the VAT, and user fees) should be used?"
These questions are certainly justified. Without widening the tax-base, only formal sector employees would be taxed on the additionally distributed cash with little impact on increasing government accountability as these people are already paying taxes. For the tax base to widen requires some improvements in tax administration and general tax policy. Although some would view investment in the tax system as inherently in the interest of a government with a long-term view (as in Besley and Persson's model), even with an additional investment of extra cash from the oil revenues here too, this is not guaranteed by any means.
And even if there is political will to adopt such a programme, taxing individuals at a very low-income is administratively burdensome, and in any case often not desirable. This is similar to the question of whether or not to tax micro-enterprises, where there is a tradeoff between bringing them into the tax net to increase their role in the fiscal contract, against the costs involved in doing so and the small amounts involved.
So might oil to cash raise more people to the income-level where it becomes worthwhile and administratively feasible to expend the extra effort to gather the tax revenues? Perhaps - and this may be the key question...
Or would it be possible to get some of the gains of the idea without relying on improvements in the tax system? In a footnote the authors suggest it might be possible by transferring the net amount with a note stating how much they have paid in taxes on paper. This less ambitious option takes us back to the Mozambican civil servants.
I'm not sure if anything changed in the minds of the the tax-compliant civil servants, if they really did work harder because they were now nominally paying taxes, nor whether or not it made government more accountable. While that might not bode well for this less ambitious option, the civil servants never actually receive additional cash either, so maybe cash is key here.
In any case, these are certainly interesting questions that are posed and how best to link taxation and governance of natural resources is receiving increasing attention. WIth their recent finds, the Mozambicans may also want to pay more attention...