Tax Administration Reform – HFG

The Challenge

Many low- and middle-income countries are under increasing pressure to mobilize domestic resources for health as they face declines in development assistance for health alongside rising costs due to the double burden of communicable and non-communicable disease.

The Opportunity

One mechanism for countries to potentially mobilize additional domestic resources for health efforts is by generating greater tax revenues. However, generating additional tax revenue does not necessarily guarantee that it will result in increased government allocations to health.

It is important to gain a better understanding of whether and how tax reforms can be used as an effective mechanism to improve tax performance and generate additional domestic resources for health. This information may help inform low- and middle-income countries that are considering their options for mobilizing domestic resources for health, as well as donors who might be interested in learning about how best to support countries in taking a greater ownership over health financing.

Our Work

Through the Health Finance and Governance project, R4D led an analysis to examine:

  1. Whether increased tax revenue due to tax administration reform leads to increased spending for the health sector; and
  2. The conditions that facilitate greater allocations toward health spending.

The empirical analysis found that higher tax revenue (as a share of total revenue) alone is not associated with an increased allocation to health. However, the qualitative analysis found examples of where increased government resources, made available through tax administration improvements, benefited the health sector; but it also found examples of where other sectors benefited more than health. Therefore, the study concludes that tax reform efforts can increase total government revenue, but directing these revenues toward health requires additional enabling factors, particularly strong political priority for health. Thus, a tandem effort to improve tax systems along with advocacy to prioritize spending on health is more likely to result in greater government allocations to health.

To complement this analysis, R4D also produced a case study on Rwanda to highlight a country that successfully implemented tax administration reforms which, with the support of strong political commitment for health, helped contribute to increased government allocations to health.

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