Taxation

There are vast differences in the size of government across countries today. In 2018, governments in low-income countries collected 13% of national income in taxes, on average, while middle-income countries and high-income countries collected 24% and 36%, respectively – a nearly three-fold increase between the low-income and high-income groups (Bachas et al. 2022; data from https://globaltaxation.world/). Improving the ability to tax can allow low- and middle-income countries to fund productivity-enhancing public goods and stimulate economic growth. By increasing domestic resource mobilisation, governments can become more independent from foreign economic and political influences that are associated with raising funds on international markets or from donors. Finally, a strengthened tax system can help the government achieve redistributive objectives and potentially improve the social contract between citizens and states. So, why are there such significant differences in governments’ ability to extract a share of national income in taxation at various levels of development? What can low- and middle-income countries do to improve their ability to tax? How does the pursuit of tax collection depend upon and influence other important objectives of a tax system such as equity, growth and the building of a strong state?

This VoxDevLit summarises findings from the growing body of research on taxation and development that speak to these questions. The review is organised along three important dimensions of taxation in low- and middle-income countries. The first is effective taxation and enforcement – what are the sources of effective enforcement in low- and middle-income countries, how do constraints on enforcement impact the pursuit of production efficiency, and how should governments balance the use of limited resources between investing in enforcement capacity and reforming the statutory tax schedule? The second dimension is administrative reforms and communication – what are some feasible policy levers that are generally available to tax authorities in low- and middle-income countries that can help strengthen the tax authority’s processes and interactions with firms and citizens? The third dimension is equity – what role can taxation play to curb the alarming income inequality trends in low- and middle-income countries? 

This initial version of the VoxDevLit is primarily based on Bachas et al. (2024) and Jensen and Weigel (2024). Recent, complementary reviews that focus on topics at the intersection of taxation and development include Pomeranz and Vila-Belda (2019), Okunogbe and Tourek (2024), Brockmeyer et al. (2024), Mascagni (2018), Okunogbe and Santoro (2023). See also Slemrod (2019) for a related review of work on tax compliance and enforcement.

References

Bachas, P J, M Fisher-Post, A Jensen, and G Zucman (2022), "Capital taxation, development, and globalization: Evidence from a macro-historical database", NBER Working Paper 29819.

Bachas, P, A Jensen, and L Gadenne (2024), "Tax equity in low- and middle-income countries", Journal of Economic Perspectives, 38(1): 55-80.

Brockmeyer, A, G Mascagni, V Nair, M Waseem, and M Almunia (2024), "Does the value-added tax add value? Lessons using administrative data from a diverse set of countries”, Journal of Economic Perspectives, 38(1): 107-132.

Jensen, A, and J L Weigel (2024), "No taxation without the state: Bringing the state back into the study of tax capacity", Unpublished manuscript.

Mascagni, G (2018), "From the lab to the field: A review of tax experiments", Journal of Economic Surveys, 32(2): 273-301.

Okunogbe, O, and F Santoro (2023), “Increasing tax collection in African countries: The role of information technology”, Journal of African Economies, 32(Supplement_1), i57-i83.

Okunogbe, O, and G Tourek (2024), "How can lower-income countries collect more taxes? The role of technology, tax agents, and politics", Journal of Economic Perspectives, 38(1): 81-106.

Pomeranz, D, and J Vila-Belda (2019), "Taking state-capacity research to the field: Insights from collaborations with tax authorities", Annual Review of Economics, 11(1): 755-781.

Slemrod, J (2019), "Tax compliance and enforcement", Journal of Economic Literature, 57(4): 904-954.