Strengthening Local Taxation Through Decentralized Development Cooperation

This research report provides an overview of existing practices and lessons learned from decentralized development cooperation support to subnational taxation initiatives in low and middle income countries. The focus is on programmes funded by local government donors from a selection of Western European countries: Belgium, the Netherlands, Germany and France. Three main working areas of donor support are identified: (1) improving tax policy and design, (2) strengthening the tax administration, and (3) encouraging constructive state-society engagement around taxes. Based on a review of the literature and case study analysis, potential mechanisms that can support and expand local taxation are identified for each of these working areas. The support modalities and the instruments used by donors are also critically assessed. The results of this study suggest a need to broaden the focus of donor support in order to include all three working areas where possible, avoiding a too limited focus on only strengthening the tax administration. Furthermore, locally elected politicians seem central to the success or failure of taxation efforts, so they should ideally be targeted in donor support programmes. It is also important for donors to deepen their understanding of the particularities of subnational taxation in the partner country and the partner local government. As to the support modalities used by donors, such as peer-to-peer exchange, financial support or a programmatic approach, they all have pros and cons so the choice should be made according to the goals of the programme. Using a mix of modalities could equally be an interesting approach. Finally, donors should strengthen their monitoring and evaluation systems in order to get a clearer idea on ‘what works’ in relation to donor funded support programmes for local taxation.