Cash Paid, Tax Gained
A modest proposal to get more money into the hands of people in low-income countries and get more money into the government coffers.
Finding $20 in the pocket of an old jacket is one of life’s true joys. Finding $1,000, more than your annual income, on your mobile money account, can be life changing. Cash transfers have moved from a niche concept to a mainstream development tool over the last 20 years. GiveDirectly is probably the organization most commonly associated with cash transfers, but the reach of these programmes stretches well beyond just INGOs. Oportunidades started in 1997 in Mexico and the Bolsa Familiar programme in Brazil not much later in 2003. The World Food Programme increasingly gives cash instead of, well, food, and in Liberia, researchers have experimented with paying cash, along with other interventions, to reduce violence amongst high-risk young men.
The benefits of cash transfers are well established as can be seen here, here, and in numerous other studies. This post will not re-hash these arguments. Instead, we will discuss the possibility of building on the known advantages of cash transfers to address one of the issues highlighted by GPI in a recent post; governments of low-income countries do not collect enough tax.
Tax Them and They Will Come
In the literature the relationship between citizens and governments when people start paying taxes is called the ‘fiscal contract’. In brief, when citizens pay taxes, they expect improved public goods and services in return, and are more likely to hold their government accountable for service delivery. In many developed countries, where tax systems are well-established and governance structures are strong, there tends to be a strong link between taxation and demand for public services. For example, Spanish municipalities that have higher taxes publish more financial information and increase government transparency to a greater level than municipalities which have lower taxes.
Yet in many developing countries tax systems are often less formalised and governance structures are weaker. The fiscal contract can be less clear as misappropriation of tax revenues, overt corruption, and profligacy has diminished taxpayers’ support for governments’ tax efforts. When citizens perceive that their taxes are not being used appropriately due to corruption or inefficiency, they may be less likely to comply with taxes and may have less trust in the government to deliver services. This further diminishes the state’s ability to deliver services worthy of taxpayers’ money. But all is not lost; under the right conditions research suggests that introducing or formalizing taxation can increase citizens' demand for accountability and better public services.
Give Cash Freely, Tax A Little Back
GPI spies an opportunity for an adventurous bi-lateral donor; set up a Cash and Tax Back programme. In brief, this programme would be a traditional cash transfer scheme but with a tax system strengthening component tacked on. Give people some money, tax a little bit of it back to the government. The benefits of a cash transfer scheme are known; by adding a tax component the country’s tax infrastructure would be strengthened and some people moved along the road to formalisation. Currently the primary method of formalisation is a bit of hoping and a lot of waiting for people to get jobs in the formal sector. Unfortunately, the formal sector of many economies in low income countries is rarely growing fast enough to keep pace with a concurrent demographic boom. If we wait for formalisation to solve the problem, we’ll be waiting a long time.
The Cash and Tax Back programme would work as follows:
Start a cash transfer scheme to distribute cash to a target population or set up alongside an existing cash transfer scheme.
Concurrent to population enrollment in the transfer component, support the government of the country to tax back, say, 5% of the transfer from each recipient.
Make it clear that tax is being deducted and give some information about why.
As desired, some portion of the tax collected be diverted into a newly created account for the recipient (and now taxpayer) at one of the many burgeoning social security funds growing around Sub-Saharan Africa.
When the cash transfers end, so does the taxation.
While the transfers will end, the programme would have created a system for governments to tax their citizens’ income that will persist. Depending on the target population of the cash transfer component of the programme, the 5% taxed back will likely be the first income tax the citizen has ever paid. The first draft of a fiscal contract is underway.
The Cash and Tax programme is designed to give a citizen some money but also give them the experience of being a taxpayer without the cumbersome, and often impossible, task of finding a formal job. Depending on how ‘formal’ the donor or government wanted to make the programme, recipients could be obliged to open bank accounts to receive their transfers; something that can bring it’s own benefits. Remittances into social security funds will be seen as a short term cost to the payer but are beneficial long term investments. Just like these deductions from a real salary at a real job.
Cash transfer programme can have lasting impacts on the lives of people living in poverty. These programmes are widely used and well administered. But by adding on a tax element a Cash and Tax back programme can have a lasting impact on the country as a whole. This sort of programme can help build familiarity with the formal structures of modern states among communities who may not have had any reason to open a bank account or the luxury of imagining a retirement fund. The phrase ‘fiscal contract’ is unlikely to be particularly well known in the communities GPI envisages a Cash and Tax Back programme taking place. But the lived experience of a strong fiscal contract is needed.
Sustainable economic growth that delivers for those at the bottom of the pyramid and brings jobs and wealth to those in low income countries is of course the ultimate goal. But while we work towards achieving that, lets experiment with a little splash of the cash to help those living in poverty and build the systems to tax a little back to help the governments and citizens sign on the dotted line of their very own fiscal contract.