Taxing the Wealthy in Lower-Income Countries: Why It’s Important, and How to Do It

The world is experiencing multiple crises, including increasing global tension, skyrocketing debt levels, and climate change. Lower-income countries (LICs) are bearing the brunt of these crises. Their finances, both from domestic sources and international aid, are not growing sufficiently to meet their needs. Their expenditure requirements are higher than ever – improving services, expanding social protection, and promoting investment all add to the bill. This policy brief argues that one of the tools that LIC governments have at their disposal is particularly under-utilised – taxing the wealthy more effectively.

Key messages

1. Lower-income countries (LICs), including those on the African continent, can increase revenue from the wealthy in the short term by enforcing existing tax laws more effectively. This should also bring substantial gains to tax equity.
2. Most already have tax codes that provide for taxes that particularly bear on the wealthy, such as those on personal income from professional self-employment, property, rental income, capital gains, and inheritance or investment income.
3. Revenue from these tax handles, however, accounts for a much smaller proportion of national income in LICs than high-income countries (HICs), as they are enforced very weakly, if at all.
4. Plugging the personal income tax (PIT) gap, together with measures to make corporate income taxation (CIT) more progressive, would result in substantial gains in both revenue and tax equity.
5. High-profile international policy debates on taxation of the wealthy have tended to be of limited relevance to LICs due to a lack of context-specific evidence. Research emerging from Nigeria, Rwanda, Uganda, and Sierra Leone highlights specific administrative, legal, and political barriers to taxing the wealthy.
6. Problems, including insufficient data (or lack of data sharing), weak compliance strategies, and political interference with enforcement, are generally entrenched in all LICs.
7. African LICs have experimented with strategies to tax the wealthy effectively more than is appreciated. These include the creation of dedicated high net worth individual (HNWI) units, adoption of taxpayer clearance certificates, and the establishment of cooperative compliance frameworks.