Tax policy and capital formation: African experience with the value-added tax

Most tropical African economies experienced severe decline in the quarter century prior to 1995. Economic policies, including tax policies, played a significant role in this economic distress. In recent years, this process has been arrested in some African countries, and reversed in several others. Policy reform has been a factor in economic recovery across sub-Saharan Africa; tax reform, featuring growing reliance upon broad-based consumption taxes, has been prominent in this turn-around. By mid 1999, twenty African nations were operating the most common form of value-added tax. This paper first identifies the reasons for adoption of inferior tax policies in Africa in the three decades before 1990. Implications of tax policy for unsatisfactory growth through the early nineties are then considered, and the principal constraints on tax policy in Africa are identified. Finally, the paper explains why the value-added tax has figured so prominently in tax reform across Africa.