CID Faculty Spotlight: Anders Jensen on Why Taxes are Vital to Development

Economist Anders Jensen has long been intrigued by differences in state capacity – the capability to provide public goods such as education and healthcare – and the role of public finance (notably taxes) in building and boosting capacity.

A native of Denmark, Jensen grew up in Copenhagen, France, and studied in the United Kingdom, places with high levels of public goods and services – access to which, he believes, all citizens of the world deserve.

“A meaningful degree of public goods [including] schools, at least partially subsidized healthcare, and social protection programs funded by a well-functioning tax system” are vital to people’s well-being, and to a country’s long-term economic development, he says. Simply put, taxes help drive growth. But the places that need it most collect the least.

The world’s poorest countries face a double bind: they collect little tax (around 10 percent of GDP compared to 35 percent in developed countries according to OECD data), and provide few services; the low quality of their services in turn leads to citizens’ distrust and unwillingness to pay taxes.

For the last decade, Jensen’s research has aimed to unravel this bind. His projects examine, on one hand, the big picture, laying out the structures and constraints underlying tax systems in lower-income countries worldwide; and, on the other, specific policy applications, working directly with local government practitioners to alleviate constraints.

Both types of projects point to the necessity of understanding a country’s unique development trajectory.

“We can’t rely on what we think we know about tax policy and its impacts from a developed country context,” says Jensen, who has seen data overturn conventional wisdom.

For instance, consumption taxes are generally considered regressive because poor households tend to spend more of their income on consumer goods such as food and clothes. The regressive effects would presumably be magnified in developing countries, where consumption taxes are typically the most important source of tax revenue.

Yet, in a recent study analyzing the shopping patterns of consumers in over 30 countries at different levels of development, Jensen found the opposite to be true. Because poor households frequent informal markets (street vendors, home producers, etc.) that evade or are exempt from tax, while rich consumers shop mostly in modern retail venues (supermarkets, large convenience stores) that levy tax, there is a marked redistributive effect.

Contrary to expectation, “consumption taxes in developing countries are de facto progressive: households in the top decile pay substantially more taxes than households in the bottom,” says Jensen.

This structural difference in consumption taxes also points to the potential of tax policy to help redistribute wealth and curb inequality, which is on the rise worldwide but remains highest in developing regions including sub-Saharan Africa, and parts of Central and South America.

Jensen believes technology may have an important role to play in improving tax capacity and combating inequality. In a first-of-its-kind project, Jensen and his co-authors examined the impact of new technologies on local tax collection capacity in Ghana.

“Property taxes represent the source of local funding with the highest revenue potential in the country,” he remarks. But in a census conducted across more than 200 local governments, the project team discovered that most locales were highly constrained in their ability to collect, in part due to outdated registries, and incomplete or imprecise property addresses that referenced a local landmark rather than a specific street.

Working directly with Ghana’s ministry of finance, a local government ministry, and a private technology firm based in Accra, they found that when supplied with GPS-enabled navigational tablets and revenue collection software, tax collectors delivered 27 percent more bills, and collected 103 percent more revenue than a control group that did not use the technology.

In the municipality studied, technology raised revenue in a cost-effective and equitable manner, leading officials to consider scaling it for use nationwide. But the use of new tech also had unintended side effects, such as an increase in bribes. Understanding both the upside and potential downside of transitioning taxpayers to a digital platform, and designing policies that minimize the downside are some of the projects on Jensen’s research agenda.

Much needs to be done, and much remains unknown, he says. What we do know, as he writes in the Ghana paper, is that “the inability to collect taxes is at the heart of why poor countries are as poor as they are.”