Trump Budget Includes Initiative That Will Help U.S. Foreign Assistance Work Itself Out of a Job

The president’s FY2019 budget request for the U.S. State Department and the U.S. Agency for International Development (USAID) falls short of the resources needed to respond to all the challenges we face in the world. The U.S. Congress will likely make constructive changes to the proposed budget, as they did last year. That said, contained within the budget request are several important but underappreciated policy initiatives that are worthy of congressional support. The budget request highlights a new USAID-led initiative on “domestic resource mobilization (DRM)”—a technical way of describing tax and other revenues collected by local governments. This is an important effort and one that is worthy of support. Simply put, investment in DRM will allow countries to be self-sufficient; if they have more of their own resources, then they will need less foreign aid. Moreover, this will help strengthen the bonds between governments and their citizens to create the social compact that is often lacking in developing countries. DRM is not about tax havens or a global tax. The work that USAID and other aid agencies do around tax collections is solely focused on helping governments collect taxes and do a better job of spending those monies.

The rule of thumb is that a functioning government in a developing country should raise taxes of about 20 percent of its gross domestic product (GDP). The three countries of the Northern Triangle (Honduras, El Salvador, and Guatemala) raise between 10 and 15 percent of their GDP in taxes. The Afghan government currently collects 10 percent of its GDP in taxes. As part of the donor conference in 2016 in Brussels, the Afghan government is seeking to raise that number to 14 percent. Tax collection advice is also not about any one tax approach (e.g., a value-added tax [VAT] or not), nor is it about going after the tiny base of law-abiding individual taxpayers or the small base of multinationals that pay. Rather it is often about getting the large universe of tax evaders to pay the legal taxes. If governments can cover the basic costs of education, health, or their military, then the United States and its allies can reduce the amount they spend on foreign aid to cover these areas.

These kinds of activities that fall under DRM are not new. The U.S. government has been working on these issues for at least 20 years at the request of countries that are seeking to raise their own money. Aid agencies have long sought to provide technical assistance and training to improve host governments’ revenue authorities. Beginning with the first UN Financing for Development Conference held in Monterrey in 2002, the international development community highlighted the important role DRM could play in closing the development finance gap. At the time of Monterrey, the ideas behind DRM were largely aspirational, but by 2015 DRM moved to the center of the Addis Ababa Financing for Development Conference. Why? The amount of domestic resources increased tremendously during this period. In sub-Saharan Africa, tax and government revenue increased from $100 billion annually in 2000 to nearly $500 billion in 2014; overall, developing countries saw total revenue collected increase to $3 trillion in 2014 from $1.6 trillion in 2005. Meanwhile, official development assistance (ODA) increased from around $80 billion in 2000 to just under $150 billion annually in 2014. The Organization for Economic Cooperation and Development (OECD) estimates that, on average, African governments can fund 70 percent of their operations through their own resources.

Despite the progress, tax collection and compliance remain a tremendous challenge in most developing countries. Tax systems are weak, and the overall tax-to-GDP ratio remains low: most low-income countries see ratios in the 10 to 15 percent range—well below the 34.4 percent average in high-income OECD countries. Compliance is low as citizens feel that paying taxes yields little in the way of services or that their money will simply be wasted through graft and corruption. In many countries, “only stupid people pay taxes, because ‘everyone knows’ that government is incompetent and corrupt.” Tax evasion is a form of protest against the government and its inability to deliver security or health or power or pick up the garbage or pay for teachers. Fixing taxes and bringing in more tax revenue has to be part of a larger (often renewed) social contract with citizens.

The United States has long been a leading provider of assistance for DRM reform projects, and these efforts have yielded success. In El Salvador, USAID has supported tax reform efforts since the end of the civil war in 1992, but with the support, the government launched a comprehensive effort to broaden the tax and increase collection in 2004. Through a $5 million investment by USAID, El Salvador’s government saw a $1.5 billion increase in taxes between 2005 and 2010—all without raising actual tax rates. Overall, El Salvador has seen its tax to GDP ratio increase to 15 percent, its overall poverty rate decrease, and an increase in spending by the government on health, education, and other social services. Elsewhere, countries who improved their tax collection were able to reduce their dependence on foreign aid to provide access to social services. In Rwanda, for example, the tax to GDP ratio increased by 6 percent between 2000 and 2014. This allowed the government to increase the amount it spent on public health: 53 percent of Rwanda’s public health budget was funded externally in 2008; by 2016 that number had shrunk to 38 percent. Tanzania, long viewed as a “donor darling,” saw aid as a percentage of its budget decrease from 28 percent in 2000 to 9 percent in 2015, with government revenue increasing. This happened even as the total dollar amount of aid remained relatively stable.

Importantly, DRM cannot occur in a vacuum: it must be part of a broader good governance reform agenda and must be paired with an effort to improve public financial management. Increased resources might simply be misspent or vanish due to corruption. Countries need to ensure that they can properly allocate resources, budget, and do so in a transparent and accountable manner. This will also guarantee that donors’ investments both in DRM and other aid-supported programs are not squandered. The authors of this commentary noted in their 2014 report, Taxes and Development that “reforming tax systems, increasing taxpayer participation, and generating greater revenue for the state is about tackling persistent governance challenges in developing countries.”

The authors have long advocated for the importance of DRM to meeting the developing world’s remaining challenges, and the proposed $75 million DRM initiative is a welcome step. As a long-time actor in this space, USAID—with support from the U.S. Treasury Department and the Millennium Challenge Corporation (MCC)—is well positioned to lead this effort. This forms a critical piece of Administrator Mark Green’s stated desire for USAID: to “work itself out of a job” through responsible strategic foreign assistance transitions. Although it would be easy to think that this is a simple way for the United States to steadily reduce its foreign assistance, it is important to remember that this will not happen overnight. It will require steady engagement for several years to move countries toward self-sustaining development. And indeed, this is not just about financial resources, it is about strengthening the bond between governments and their citizens through increased accountability, good governance, and the transparent delivery of basic social services.

Daniel F. Runde is the Schreyer Chair and director of the Project on Prosperity and Development at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Conor M. Savoy is a senior associate the Project on Prosperity and Development and director of policy and advocacy at the Global Innovation Fund.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2018 by the Center for Strategic and International Studies. All rights reserved.

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Daniel F. Runde
Senior Vice President; William A. Schreyer Chair; Director, Project on Prosperity and Development
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Conor M. Savoy
Senior Fellow, Project on Prosperity and Development