American money

Where will all the money come from?

Where WILL the money come from? Vice President Harris, Treasury Secretary Yellen, and other world leaders will try to answer this vital question as they meet at a Paris Summit this month. They will discuss how to actually finance international efforts around addressing climate change, reducing inequality, and ending poverty and hunger.

However, just two days before, several thousand miles to the south, in Lusaka, Zambia, more than 50 governments and development partners will be convening to focus on the most significant source of development finance: domestic revenue mobilization (DRM).

The meeting is organized by The Addis Tax Initiative (ATI), a multi-stakeholder venture to promote DRM and galvanize support from aid donors. Launched in 2015, donor ATI members pledged to double assistance to DRM between 2015 and 2020. The initiative was reinvigorated during the pandemic, extending and deepening the commitments to DRM in a new ATI Declaration 2025.

As we’re at the mid-point of Agenda 2030 implementation, it’s a great time to review the aid to DRM balance sheet. Have donors boosted aid as promised? Has it complied with aid effectiveness principles, such as country ownership, transparency, and accountability? Has it supported progressive taxation, tax fairness, and gender justice? Has it helped create revenue streams for “inequality busting” spending on health, education, and social protection?

A new Oxfam paper, synthesizing 12 studies by Oxfam and its partners from Bangladesh, Haiti, Mali and Uganda during 2017-2022, provides answers to these questions and more.

Some answers to the questions

ATI’s donor members dramatically increased assistance to DRM, from $221 million in 2015 to $350 million in 2020. That’s a significant jump, though short of doubling aid.

Donors also sometimes sought to align aid with countries’ own development strategies and make use of country systems. Notably, a US Agency for International Development (USAID) project in Haiti contracted with a local software developer to create a fiscal management program for local governments. But this project seems more the exception than the rule.

Globally, in 2019, only 4.6% of aid to DRM went directly to partner governments and local actors, down from 16% in 2016. It’s vital to reverse this trend, and it can be done. In Uganda, the level was much higher between 2015 and 2018, but still only 41%.

There were few efforts to link DRM aid to transparency and accountability. In Uganda, just two of 39 projects supported citizen engagement on fiscal justice. The budget process remains opaque, and many Ugandans question the “return on investment” from their tax payments. In Haiti, most municipal governments have yet to instill a culture of citizen participation and transparency. Overall, aid resources for civil society policy involvement have declined.

Donors take a technocratic approach to supporting DRM–apolitical use of technology and technical expertise to increase revenues. For example, the World Bank’s 2015–2021 Value-Added Tax (VAT) Improvement Program in Bangladesh helped enhance electronic payment systems and spur 15.1% annual growth in receipts. In Uganda, aid to DRM more than doubled between 2015 and 2018, as donors supported an online payment system and improved tax officials’ skills. Revenues rose 70%.

But DRM is inherently political and has distributional consequences. More revenue to finance education, climate adaptation and health is great, but it matters who is paying that bill (and who is not). Avoiding tax politics means that if a partner country relies on VAT for the biggest share of its revenues, then aid to DRM will likely focus on VAT rather than facilitating greater reliance on direct and more progressive forms of DRM (such as taxes on wealth, individual and corporate income or property).

Relatedly, aid for DRM frequently fails to prioritize equity and progressive taxation. In Uganda, just one of 39 projects had equity goals. The proportion of all ATI-tracked projects with explicit equity goals was just 11.6% in 2019, but this is up from 4.6% in 2015. There are dozens of projects underway where donors and partner governments have already demonstrated how to prioritize progressive tax, but this needs to increase significantly. With new commitments to progressive taxation in the ATI Declaration 2025 and World Bank’s IDA20 indicator, the equity focus should be increasing over next couple of years. We hope the ATI’s latest report shows further progress.

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