Question

Based on what you have learned in this course about the various taxes, their advantages and their drawbacks, devise a tax system for a poor sub-Saharan country with no natural resources (oil & gas). In other words, what combination of taxes would you use to raise enough revenue to provide essential public services and yet not stall the country’s economic development? You must back up your choices with explanations.

Answer 1

1	First, the system must be perceived as fair. The solution here is well-known but hard to implement: it is to broaden the tax base.
2	There is a huge imbalance between the taxation of labor and capital income. Tax collection should be diversified to undertaxed sectors and regions. Property taxed should be appropriately used to boost government revenues but also to improve land management.
3	The cost of paying taxes is often higher than the tax itself as reflected by the poor ranking of most low-income countries in the “ease of paying taxes”
4	Public recognition to high tax payers can also incentivize payment. Of course, stronger and effective sanctions against tax evaders are inevitable
5	Countries should streamline numerous small taxes which impose a high burden on businesses. They must also reduce their use of tax exemption regimes. Only once the policy framework is simplified, will administrative measures be effective in reducing transaction costs.
6	Focus on transparency is very essential. Governments need to report tax collection comprehensively. A close articulation of the use of collected taxes is also critical. The private sector can play a role.
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