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Reforming Tax Collection to Lift Up Communities

El Salvador’s secret to strengthening basic services
El Salvador | 2017
| Global Economy
|

An Inadequate System

Underdeveloped tax systems can lead to low tax revenues, often constraining the ability of already resource-strapped countries to carry out priorities and deliver basic services such as health care, public education, or public utilities.

Such was the case in El Salvador – where decades of civil war and widespread tax evasion led to some of the lowest tax revenues in Central America as the country struggled to rehabilitate basic infrastructure and expand access to social services.

El Salvador's treasury
added nearly

$230 Million

in tax revenue
from 2011 to 2016

Tax Revenue Solutions

Recognizing the need for change, the Salvadorian government partnered with the U.S. Agency for International Development (USAID) and DAI to carry out a comprehensive reform of its public finance and taxation system through institutional changes and information campaigns.

Providing the technical assistance to reform the government’s tax law, DAI helped El Salvador launch new audit systems and adopt fresh technologies to reduce tax evasion and avoidance. By helping the government to bolster its tax revenues, DAI put El Salvador on the path toward making its development prospects more sustainable, while reducing reliance on assistance from abroad.

Impact

New administrative procedures and tax reforms that were supported by the donor community and implemented by the government of El Salvador reaped more than $1.5 billion in returns between 2005 and 2010.

These same reforms, as well as additional measures supported by the donor community, helped increase the government’s net revenue as a percentage of GDP from 13.5 percent in 2010 to 15.5 percent in 2016. Strong enforcement and tax collection mechanisms directly supported by DAI also added nearly $230 million in tax revenue to El Salvador’s treasury from 2011 to 2016.

This increase in revenues directly enabled the country to increase spending on social programs, which are critical to building human capital and fueling economic growth.

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