The political economy of revenue mobilization: Reform, resistance, and realignment

In 2022, Ghana's tax-to-GDP ratio was about 13.8%. Officials aim to reach 18% in the medium term. This underperformance reflects deeper political and economic issues. Ghana’s tax ratio has only risen modestly since around 2000. It increased from about 8% of GDP to the mid-teens but stalled since 2017.

International comparisons show Ghana ranks in the middle among lower-middle-income countries for revenue effort. The average tax yield in Africa is around 16% of GDP. The challenge remains: why is it so hard to mobilize revenue? Four theories provide insights: fiscal contract theory, public choice theory, new institutional economics, and fiscal sociology.

Ghana’s tax revenue as a percentage of GDP has plateaued below the government’s target of 18-20%. Figure 1 shows this trend over time. Fiscal contract theory suggests taxation is a social contract between citizens and the state. Citizens consent to taxes in exchange for reliable state services.

In Ghana, this contract is strained by perceptions of poor governance and corruption. These views erode tax morale and compliance significantly. The Electronic Transfer Levy (E-Levy) introduced in 2022 illustrates this issue well. Initially expected to generate GH¢6.96 billion, it only brought in GH¢612 million due to public backlash.

This shortfall highlights a breakdown in trust between citizens and the state. Instead of revolting, citizens disengaged economically, showing how legitimacy affects compliance. In response to these challenges, policy adjustments were made in 2023, including reducing the levy rate from 1.5% to 1%. These changes improved performance slightly.

The International Monetary Fund (IMF) program also helped rebuild some trust in fiscal governance. However, sustainable revenue mobilization depends on restoring faith in state institutions as well as effective policy design.

Public choice theory sheds light on political constraints affecting Ghana's revenue performance. Unlike fiscal contract theory focusing on citizen compliance, it emphasizes political incentives and rent-seeking behavior among policymakers. In democracies like Ghana, raising taxes can be politically risky for elected officials.

This fear leads them to avoid reforms that might upset voters or disrupt elite coalitions. Consequently, there has been a historical preference for external borrowing instead of politically risky tax increases.

Ghana relied heavily on Eurobond markets during the 2010s but faced a debt crisis when access dried up in 2022. This situation forced a return to an IMF-supported program for financial stability.

The structure of Ghana’s tax system reflects these dynamics too. Broad-based taxes like VAT are easier to implement than those targeting influential groups like property owners. Property taxation remains low at less than 0.5% of GDP due to weak enforcement and lack of political will.

Politicians often avoid confronting wealthy property owners who could destabilize their coalitions if opposed. Tax exemptions further illustrate public choice dynamics; successive administrations have granted special treatment to connected firms under various pretenses.

Despite passing the Exemptions Act in 2022 aimed at rationalizing these concessions, implementation remains slow and ineffective.
Revenue lost through import-duty exemptions rose sharply from GH¢2.388 billion in 2021 to GH¢3.545 billion in 2023.
This indicates ongoing leakage despite legislative efforts against entrenched interests benefiting from current policies.

New institutional economics provides another lens for understanding these challenges.
It emphasizes formal rules and enforcement mechanisms that shape fiscal outcomes.
Ghana established the Ghana Revenue Authority (GRA) in 2009 as part of major reforms aimed at improving efficiency.
While this consolidation has improved coherence and technology use within tax administration, enforcement limitations persist—especially within the informal sector.

Structural issues such as insufficient audit manpower hinder compliance efforts.
Recent policies focus on strengthening institutions through digital reforms like electronic VAT invoicing launched in 2022.
This system requires large taxpayers to issue VAT receipts linked directly to GRA monitoring systems.
Early data suggest improvements are occurring but depend on full taxpayer coverage for effectiveness.

Similarly, a Unified Digital Property Tax Platform aims to address inefficiencies by digitizing property valuation processes.
However, resistance from local authorities arises due to fears that centralization may reduce local control over revenues.
These challenges highlight that institutional reforms must consider existing political contexts for successful implementation.

Fiscal sociology examines how social structures influence taxation behaviors.
Ghana's colonial history with coercive taxes has created lasting distrust toward modern taxation systems.
Many citizens view formal tax compliance not as an obligation but rather as optional until they see benefits from formalization efforts.

Tax resistance stems from collective memory shaped by past grievances against unfair practices.
Protests against VAT introduction back in the '90s still resonate today alongside recent E-Levy backlash reflecting similar sentiments about extractive taxation practices.
Perceptions regarding fairness play crucial roles; many believe elites evade taxes while ordinary workers bear burdens disproportionately without visible returns on their contributions.

Experiences where taxes fund visible public goods tend to foster greater acceptance among citizens.
Thus enhancing civic education about taxation's role can improve overall morale towards compliance efforts moving forward into future reforms focused on equity and accountability measures across society at large will be essential too!

Ultimately addressing Ghana's domestic revenue mobilization dilemma requires more than just technical fixes or new administrative upgrades—it involves navigating complex political economies rooted deeply within institutional weaknesses coupled with widespread public distrust alongside entrenched elite interests resisting change altogether!

The writer serves as Executive Director at IDER