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The Washington Consensus of the 1980s favoured privatisation, liberalisation and the adoption of a minimalist state under Structural Adjustment Programmes (SAPs) for fiscal consolidation. It advocated that the role of tax policy was revenue generation rather than directing economic activity, which was arguably the market’s role (Dom & Miller, 2018). This implied the need for simple broad-based taxes with preferably uniform and lower tax rates (Bird, 2013). This stance emphasised increased taxation of consumption, and foreshadowed a shift away from direct and trade taxes. This policy stance was consistent with developments in richer countries, World Bank and International Monetary Fund (IMF) recommendations to developing countries involving the replacement of higher direct tax rates with lower uniform rates, levied on broader tax bases, hence getting rid of multitudes of expensive tax inducements or exemptions in tax codes (Goode, 1993; as cited in Keen, 2012). Similarly, export taxes are problematic according to IMF as they negatively affect foreign exchange earnings.
Tax reform agenda in developing countries has broadened recently in content (Fjeldstad, 2014). Whereas earlier tax reform initiatives emphasized the elimination of trade taxes, their substitution with value-added tax (VAT) and reduction in direct tax rates; contemporary tax reform efforts however are concentrating increasingly on modernising tax administration (Bird, 2008; Vázquez-Caro & Bird, 2011). Bird (2014) outlines two quite different approaches to the administrative element of tax reforms. The first approach suggests that tax reformers should prioritise getting the tax structure right. The argument is, there is no need in administering bad taxes in the first place. Contrastingly, the second approach maintains that in reality what matters is administration regardless of the structure. This camp maintains that if policy results are to be changed, then administrative changes precede structure. In reality, most authors appear to be indifferent to these views considering it a false dichotomy: structure and administration are dependent dimensions suggesting that tax reforms require both (Fjeldstad, 2014). Therefore, while responding to how tax systems can be improved in developing countries to serve the common good, Fjeldstad (2013) maintains that developing countries require efforts to augment domestic revenues efficiency, effectiveness and equitability, and thereby contribute in developing tax systems that support economic growth and good governance. As articulated by Bird (2014), such an agenda would implicitly include concurrently strengthening of (i) tax policy design; (ii) tax administrative capacity; and (iii) tax governance, including elements of fairness, predictability, transparency and accountability.
VAT represents the most common and important tax reform in modern taxation aligning with the principle of neutrality, as it requires firms to pay tax on the portion of value added on their goods and services. Hence, VAT places imports and domestic production on the same footing, a testimony to its neutrality regarding production decisions. Experiences in Europe, where it was first implemented in the 1940s, confirm that VAT could replace trade taxes while simultaneously enabling trade. VAT has thus become the preferred consumption tax, which if properly designed and implemented, could significantly increase governments’ take on taxes (Dom & Miller, 2018). Like other consumption taxes, the VAT avoids the complexity of income tax accounting, as it does not distinguish between loan interest and principal or between capital gain and recovery of cost bases, no depreciation, amortization, or inventory accounting involved, as well as no application of realisation standards under Generally Accepted Accounting Principles (GAAP) (Viard, 2018).