Hate paying taxes? Think again.

Hate Paying Taxes? Think Again.
By David A. Weiss, President and CEO of Global Communities  |  This article originally appeared in the Huffington Post.

In an age of strained budgets and increased scrutiny about the effectiveness of foreign aid, many donors are rightly looking to get the greatest possible impact for each dollar they spend. During his confirmation hearing, the newly appointed USAID Administrator, Mark Green, mentioned “domestic resource mobilization” as a way of helping to maximize return on investment. To most people outside global development, these three words might be something of a mystery, but they are an extremely important and effective way of funding public services; we are talking about tax.

“But in many parts of the world there are no effective local tax structures to help fund important services, creating a host of problems ranging from an inability to invest in local infrastructure to a lack of trust in local government which is unable to deliver important services.”

Taxation is an unpopular subject. In the west we mostly take for granted that our schools, roads, sanitation, clean water and other basic services will be funded by our local, state or council taxes. Our frustration is primarily when we do not feel we are getting value for money we spend on taxes. But in many parts of the world there are no effective local tax structures to help fund important services, creating a host of problems ranging from an inability to invest in local infrastructure to a lack of trust in local government which is unable to deliver important services. The challenges to developing an effective local tax system are many, from heavily centralized government to poor collection methods to simply not having addresses. More than half of the people on earth now live in urban areas, but half of them do not have addresses. Without an effective way to address properties or land parcels, it is difficult to serve and collect appropriate, fair taxes; and without taxes, local governments struggle to provide services. Ultimately, many local governments face a vicious circle of underfunded services leading to less trust, fewer collections and over-reliance on a centralized government which does not necessarily understand local needs.
But with a relatively small investment, incredible returns are possible. In El Salvador, USAID implemented a domestic resource mobilization program from 2005 to 2010 that cost $5 million. During those years, El Salvador raised an estimated $1.5 billion in additional funds, all without raising a single tax rate. In other words, for every dollar that was invested in the new system, coupled with trainings and community engagement, El Salvador raised an additional $300 it could invest in its citizen’s lives. Along with professionalization of tax collection and IT investments, one of the more important improvements was local taxpayer assistance centers that would help citizens understand the new system and receive help on their taxes.

As we have seen with this program and others like it, community engagement is critical to ensuring that domestic resource mobilization programs can work and have an impressive impact. My organization, Global Communities, learned this firsthand working with the Bill & Melinda Gates Foundation in Ghana to help the city of Sekondi-Takoradi cope with increasing urbanization and pressure on its public services. We understood that to help the local government manage with these stresses and develop sustainable institutions, there had to be trust between government and citizens. This trust is a two-way street: government has to be accountable to its citizens, and communities must understand the role of local governments.

To begin with, we helped the Sekondi-Takoradi Municipal Authority design a “Citizens Report Card,” providing residents with a way to provide feedback on municipal service delivery and express the community’s top priorities. This baseline information set the stage for short- and long-term plans, and it helped open the door for an improved working relationship between the local government and its citizens. One of the most important parts of the program involved providing street names and addresses. Through a combination of technology and community engagement, we worked with the municipal authority to provide addresses to 42,000 properties in 3,440 streets and alleys. These street names, chosen by the communities themselves, and property addresses provided an important step in creating a property tax system. Though there was some resistance at first, through extensive community engagement and a small grants program to kick-start service delivery, residents began to understand that the many advantages outweighed the negatives. These small projects helped earn the communities trust and brought them around to the fact that the taxation would deliver services according to their priorities.

The results of this work were impressive. Over the course of the program, Sekondi-Takoradi more than doubled the amount of money being collected by the local government, again without actually raising any tax rates. Now the government has a system of taxation in place, and residents both accept the necessity of paying these taxes and their role in holding government accountable for the services it expects them to provide.

Investments like these in domestic resource mobilization can have a huge return for developing countries. But as the example in Ghana shows, such projects require strong community engagement that builds trust and clearly demonstrates both the cost and benefit to citizens. We may not like paying taxes, but by enhancing capacity of government and a strong system of accountability, helping create local tax systems can be one of the best investments in development.