Can governments collect more taxes while making their economies fairer and more efficient?
Conventional wisdom suggests that raising taxes comes at a cost: higher taxes can discourage investment and economic activity, while making tax systems fairer may add further distortions. But what if many developing countries could raise more revenue, boost growth, and make their tax systems fairer—all at the same time?
This question is increasingly urgent. Tax revenues in many developing economies have barely budged in fifteen years, even as spending needs have grown, debt burdens have risen, and development assistance has become less certain. Tax exemptions and loopholes alone cost governments roughly one-fifth to one-quarter of what they already collect.
Our new report, Raising Revenue Right: A Roadmap for Domestic Resource Mobilization, brings together evidence from dozens of countries, drawing on tax records, household surveys, firm-level data, and recent randomized evaluations. It explores what countries have tried, what has worked (and what hasn’t), and what governments can learn from one another.
Taxing smarter, not just more
What’s the best way to raise more tax revenue? Raise tax rates? Many tax systems struggle on three fronts: they collect too little, distort economic activity, and distribute the burden unfairly. But the problem is rarely that tax rates are too low. It’s that tax systems are badly designed: riddled with poorly targeted exemptions, undermined by weak compliance, and unable to track income and assets that cross borders.
Tax debates often assume that, for a given amount of revenue, greater fairness comes at the cost of economic efficiency, and vice versa. Raising Revenue Right challenges the idea that countries always face this trade-off.
What a country can realistically achieve depends on its economic structure, administrative capacity, and the size of its informal sector. Together, these factors define what the report calls the fiscal frontier: the best combination of efficiency and fairness a country can achieve given its circumstances for a fixed level of revenue.
Countries at this frontier face genuine trade-offs, but most developing economies operate well below it. They can raise more revenue while making their tax systems fairer and more efficient by improving how taxes are designed and collected.
Tax breaks illustrate the opportunity. In developing economies, exemptions are poorly targeted and rarely evaluated. Add profit shifting by multinationals and weak compliance among domestic firms, and the tax burden becomes uneven: some taxpayers bear heavy burdens, while others escape the tax net almost entirely. Broadening the base and reducing these disparities can raise significant revenue without touching tax rates—and make the tax system both more efficient and fairer in the process.
read more:https://blogs.worldbank.org/en/developmenttalk/raising-revenue-right–better-taxes-for-development
