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Tax revenue should represent at least 20 percent of the GDP in developing countries including Ethiopia, raising it from the current representation of less than 15 percent of the GDP.
This was said at a panel discussion co- hosted by the IMF and the World Bank Group on Tuesday, Jul 14, titled “Domestic Revenue Mobilization: Realizing the Potential,” to address questions of taxation and domestic revenue policies, particularly in developing nations.
World Bank President Dr. Jim Yong Kim, US Treasury Secretary Jack Lew, IMF Deputy Managing Director Min Zhu and African Development Bank President Donald Kaberuka shared their views and concerns related to domestic resource mobilization and urged developing nations to reinforce their tax systems.
“Having a tax system that works is at the core of good governance,” Secretary Lew noted.
The panelists agreed that a simple, functional and fair tax system is necessary for sustainable development. They noted their concern that tax revenue represents less than 15 percent of GDP in too many developing nations including Ethiopia, and stressed the need to raise that figure to at least 20percent.
Min Zhu noted, “Sustainable development needs sustainable finance … Half of developing countries’ tax revenue is under 15 percent. This is too low.”
Donald Kaberuka further explained that an effective tax system can help eliminate corruption, noting, “You can almost equate one-to-one a country with a good tax system and a clean government … Citizens want to see how the money is spent.”
Kaberuka emphasized the need to foster a culture of honoring taxes and of holding governments accountable for how they allocate tax revenue.
In terms of attracting Foreign Direct Investment (FDI), the African Development Bank President highlighted that competition for FDI is a struggle that many developing nations face.
“Here is our problem: We are looking for investment. Here is the dilemma: We are competing for it,” he explained.
In response to Dutch Minister for Foreign Trade and Development Cooperation Lilianne Ploumen’s concern that, in some cases, “the local market woman pays more in taxes through VAT than the multinational next door,” Kaberuka emphasized, “international businesses need to pay fair taxes.”
On his part, the US Secretary of Treasury announced that the US is prepared to double its base resources for Treasury’s Office of Technical Assistance by 2020, assisting developing nations to build effective revenue and expenditure systems.