## The Art of Taxation ## Source details **Canonical URL:** [The Art of Taxation](https://www.imf.org/-/media/files/publications/fandd/article/2026/03/b2b.pdf) ## Other formats - [Markdown version](/-/media/files/publications/fandd/article/2026/03/b2b.pdf.md) - [Structured JSON version](/-/media/files/publications/fandd/article/2026/03/b2b.pdf.json) --- ### Importance of domestic revenue mobilization - All governments need money to fund roads, schools, hospitals, courts, and public safety; taxation is the most sustainable source of financing. - Domestic revenue mobilization is central to development because it determines whether governments can finance priorities, reduce dependence on external aid, and respond to shocks. - Revenue mobilization is deeply political: decisions about who pays, how much, and in what form affect the social contract and require trust that the system is fair and revenue will be used wisely. ### Benchmarks, current gaps, and potential - Research suggests a useful benchmark is to generate tax revenue of at least 15 percent of GDP. - More than 70 developing economies still collect less than 15 percent of GDP in taxes. - Estimates suggest many developing economies could raise an additional 4 to 5 percent of GDP through well-designed tax reforms. - Country examples of recent meaningful gains include Jamaica, Maldives, Morocco, Nepal, Rwanda, and Uzbekistan. ### Types of tax and their roles - Historical shift: countries tend to move from narrow/distortionary taxes toward broader, more efficient taxes. - Trade taxes: - Were important historically and remain about one-quarter of tax revenue in many developing economies. - Overreliance can discourage trade, raise consumer prices, and slow integration. - Value-added tax (VAT): - Generates more than one-third of total tax revenue, even in many low- and middle-income countries. - Efficient because it taxes consumption broadly and allows firms to deduct taxes on inputs, reducing cascading effects. - Excise taxes: - Used on goods that impose social costs (tobacco, alcohol) or environmentally harmful activities (burning fossil fuels). - Can raise revenue and improve public health or environmental outcomes. - Corporate income taxes: - Important for taxing profits of large companies and multinationals. - Under pressure from international tax competition and profit shifting, making reform complex and underscoring the need for international coordination. - Personal income taxes: - Typically raise relatively little revenue in developing economies due to a small middle class, large informal sectors, widespread self-employment, and a limited formal financial sector. - In Africa, personal income tax revenue has roughly doubled as a share of GDP since 2000. - Strengthening these taxes supports revenue and progressivity. - Property taxes: - Underused in most developing economies; effective for local governments. - Face political resistance and administrative challenges, such as outdated property registries. ### Tax design principles and challenges - Central principle: neutrality—taxes should interfere as little as possible with decisions about work, saving, investment, and consumption. - Ideal design: broad tax base combined with moderate rates. - Tax expenditures (exemptions, deductions, reduced rates, special regimes): - Cumulative cost often large, amounting to 3 to 4 percent of GDP in many countries (about a quarter of tax collections). - Some can be justified (simplified regimes for small businesses, targeted relief for low-skilled workers); problems arise when preferences proliferate without evaluation, creating distortions and complexity. - Recommendation: regular review and transparency to assess whether each tax preference achieves its intended goal and is the most effective tool. ### From policy to practice — administration and compliance - Even good tax policy fails without effective implementation. - Weak administration erodes revenues, undermines fairness, harms investment, and damages trust. - Key administrative challenges: limited capacity, large informal sectors, and noncompliance. - Estimated lost VAT revenue in developing economies is about 3 percent of GDP on average. - Strategies with better prospects than indiscriminate taxpayer registry expansion: - Withholding taxes collected at source by large intermediaries (employers, banks). - Risk-based audits focusing enforcement on higher-risk taxpayers. - Digitalization: electronic filing and payment, real-time invoicing, data analytics. - Use of artificial intelligence to improve compliance and reduce administrative costs. - Importance of clear and simple tax laws; complexity and frequent legal changes create uncertainty and invite corruption. - Need to invest in skilled staff, modern organizational structures, and strong governance. ### Cross-cutting lessons from country experience - Think in systems: tax level, mix, design, and administration are closely linked; isolated reforms rarely deliver lasting results. - Be patient: building tax capacity takes time; quick gains possible (withholding, inflation indexation), but sustainable improvements often require years of consistent effort and can be reversed by policy instability or crises. - International cooperation helps (information exchange, tax treaties, global agreements on corporate taxation) but cannot substitute for strong domestic institutions; excessive reliance on international solutions risks diverting attention from essential domestic reforms. ### Politics, trust, and communication - Domestic revenue mobilization is ultimately about trust: perceptions of arbitrariness or corruption reduce compliance; seeing taxes as contributing to shared prosperity increases support. - Transparency, accountability, and clear communication are essential to build trust. - Paying taxes should feel like investing in a shared future so that revenue mobilization can underpin sustainable development. * katherine baer and ruud de mooij are deputy directors in the IMF’s Fiscal Affairs Department.* --- _Source: https://www.imf.org/-/media/files/publications/fandd/article/2026/03/b2b.pdf_