Tax and Accountability

The OECD is a unique forum where the governments of 30 democracies work together to address the economic, social and environmental challenges of globalisation. The OECD is also at the forefront of efforts to understand and to help governments respond to new developments and concerns, such as corporate governance, the information economy and the challenges of an ageing population.

The Organisation provides a setting where governments can compare policy experiences, seek answers to common problems, identify good practice and work to co-ordinate domestic and international policies. The OECD member countries are: Australia, Austria, Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States.

The Commission of the European Communities takes part in the work of the OECD. OECD Publishing disseminates widely the results of the Organisation's statistics gathering and research on economic, social and environmental issues, as well as the conventions, guidelines and standards agreed by its members. Also available in French under the title: Gouvernance, Fiscalite et Responsabilite ENJEUX ET PRATIQUES 2 GOVERNANCE, TAXATION AND ACCOUNTABILITY: ISSUES AND PRACTICES – © OECD 2008

FOREWORD Foreword It is axiomatic that taxation matters for development: for most countries taxation goes hand-inhand with economic growth and taxes have become the lifeblood for governments to deliver essential services and to make long-term investments in public goods. For decades, the OECD and other international organisations have worked intensively on technical aspects of tax policy with an increasingly global community of tax officials and practitioners from North and South.

Yet, surprisingly little attention has been paid to how taxation can underpin the way in which states in the developing world relate to their citizens and how better governance may come about from the way in which taxes are raised and tax systems are implemented. Recent research suggests that not only can the process of taxation generate capable administrations but tax can also be a key means to promote accountability.

The OECD/DAC Network on Governance (GOVNET) considered it essential to shed more light on the implications that taxation has for governance, and this paper on taxation and accountability gives the results of their findings. Governance, Taxation and Accountability: Issues and Practice provides an overview of the different streams of evidence linking tax policy and governance performance. It explains the need to develop a broad tax base as a means of enhancing the bargaining process between citizens and governments.

Finally, it argues that the mobilisation of citizens around taxation issues may be a good avenue to promote further engagement in other public policy matters. The paper also offers insights for the donor community. It warns of the dangers that long-term aid dependency may have on recipient countries’ incentives to raise taxes and to be accountable to their citizens. Donors are encouraged to take more proactive steps to support revenue raising activities in partner countries as a way of strengthening their capacity and to phase out external assistance in the medium term.

The publication outlines concrete success stories and offers valuable guidance on what partner countries can do to construct tax systems conducive to better governance. I am confident that this publication will help partner countries and donors to think through tax reforms that can yield tangible improvements for governance. Eckhard Deutscher Chair Development Assistance Committee GOVERNANCE, TAXATION AND ACCOUNTABILITY: ISSUES AND PRACTICES – © OECD 2008

3 ACKNOWLEDGEMENTS Acknowledgements This publication is the result of a collaborative effort by members of the DAC Network on Governance (GOVNET) and its Taxation and Accountability Task Team since the end of 2006. Within the OECD Ben Dickinson in the DAC Secretariat leads this work. We would like to express our appreciation to members of the GOVNET’s Taxation and Accountability Task Team for their inputs, collaboration and dedication to this work.

Particular thanks are due to Kevin Carroll (Chair of the Task Team) and Ben Dickinson who managed and provided guidance on this publication with support from Richard Parry (OECD CTPA) and Bathylle Missika and (OECD DAC Secretariat). We would also like to thank members of the Task Team for their commitment to this project: Joanna Athlin, Soren Davidsen, Max Everest-Phillips, Finsas Frode, Mirco Goudriaan, Luc Leruth, Miguel Angel Lombardo Chico, Eli Moen, Kathleen Moktan, Birger Nerre, Pascal Raess, Carlos Santiso, Richard Testa, Matthias Witt and Pablo Zoido.

In addition, we are very grateful to Sue Unsworth and Mick Moore from the UK Institute of Development Studies, Odd-Helge Fjelstad from the Christian Michelsen Institute, Christian von Soest from the German Institute of Global and Area Studies and David Booth from the UK Overseas Development Institute who helped conceptualize and fine tune this paper. In order to achieve its aims the OECD has set up a number of specialised committees. One of these is the Development Assistance Committee, whose members have agreed to secure an expansion of aggregate volume of resources made available to developing countries and to improve their effectiveness.

To this end, members periodically review together both the amount and the nature of their contributions to aid programmes, bilateral and multilateral, and consult each other on all other relevant aspects of their development assistance policies. The members of the Development Assistance Committee are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, the United Kingdom, the United States and the Commission of the European Communities.