Raising revenue right: Better taxes for development

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. Three tools that are changing what is possible Technology, transparency, and trust (the “3Ts”) are mutually reinforcing tools that can help countries move toward the fiscal frontier. • Technology: Digital tools are transforming what tax administrations can see and collect. Electronic invoicing, digital identification systems, and modern tax management platforms can help identify taxpayers, verify liabilities, and reduce compliance costs. In Ethiopia, electronic sales registration systems increased value-added tax revenues by almost 50 percent demonstrating that even in low-capacity settings, well-implemented digital tools can produce quick and impressive gains. • Transparency: Globalization has made income and assets easier to move across borders and harder for tax authorities to track. New transparency initiatives and global coordination are closing these gaps. In Argentina, a 2016 disclosure program that drew on the credible threat of automatic information exchange between governments uncovered previously hidden assets worth 21 percent of GDP and raised revenue equal to 1.8 percent of GDP, a powerful illustration of how transparency reform can unlock revenue that has long been out of reach. • Trust: People are more willing to pay taxes when they believe others are paying too, when officials treat them fairly, and when they can see where the money goes. In Sierra Leone, property tax payments increased when residents were shown concrete examples of public services financed by those revenues. Building trust is also a revenue strategy. A roadmap for action The report does not prescribe a single tax mix or a universal revenue target. Economic structures, administrative capacity, and social preferences differ, so the right level and composition of taxation will vary. Commonly cited tax-to-GDP thresholds of 15–20 percent should be interpreted with caution, since governments can operate near the fiscal frontier at very different revenue levels. So where should governments start? Not with a revenue target, but with a diagnosis. How far is the tax system from what it could achieve? Where are the biggest inefficiencies? Which exemptions serve little purpose? Where is tax evasion most widespread? And which of the 3Ts could make the biggest difference? The answers will differ across countries. For those facing high debt burdens or limited external financing, the priority may be to raise additional revenue at the lowest possible economic and social cost. For others, the goal may be to collect the same amount of revenue, in fairer, less harmful ways, moving closer to the fiscal frontier without raising taxes overall. And where better public services far outweigh the costs of raising additional revenue, the case for collecting more is especially strong. A path forward The fiscal pressures facing developing economies are unlikely to disappear soon, but countries have options. With smarter use of technology, stronger transparency frameworks, and deliberate investment in taxpayer trust, countries can build tax systems that are more productive, more equitable, and more legitimate, without demanding more from those who already pay. Future posts in this series will explore some of these themes in greater depth. In the meantime, readers interested in learning more can re play the recent Policy Research Talk with the authors or read the full report.