## EXECUTIVE SUMMARY

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**Canonical URL:** [EXECUTIVE SUMMARY](https://www.imf.org/-/media/files/publications/fiscal-monitor/2026/october/english/execsum.pdf)

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### Context and challenge
- High public debt levels, elevated borrowing costs, mounting spending pressures, and weak medium-term growth leave many governments little room for broad tax cuts.
- The chapter complements the focus of the October 2025 Fiscal Monitor on improving the efficiency of public spending by examining the revenue side of the budget.
- Objective: strengthen economic activity without eroding the revenue base by removing unnecessary distortions in tax design and implementation.

### Mechanisms for efficiency gains from tax design
- A well-designed value-added tax (VAT) taxes final consumption, not production; when firms can recover taxes paid on inputs, production costs fall and resources can move to more productive uses.
- Business taxation can support investment by allowing faster recovery of investment costs while preserving the taxation of economic rents.
- Tax incentives can generate more innovation for a given fiscal cost when they target additional research and development (R&D) rather than firm size or profits only loosely connected to research activity.
- Employment taxes and benefits can be redesigned to make entering the workforce and earning more financially rewarding while maintaining distributional objectives.
- Stronger implementation of tax systems is critical to realizing these gains.

### Quantified potential gains
- Reducing VAT-related production and consumption distortions could yield economy-wide welfare gains of up to 0.8 percent of GDP in emerging market and developing economies.
- Removing tax-induced increases in the cost of capital could raise long-term GDP by an estimated 2.1 to 2.7 percent.
- Reforms that strengthen work incentives could increase employment rates by about 1.2 percentage points in emerging market and developing economies and 0.8 percentage point in advanced economies.
- Stronger tax administration can generate higher revenue: countries at the 67th percentile of the operational strength of tax administration collect about 1.7 percentage points of GDP more than countries at the 33rd percentile.
- Aggregate implication: better tax design and implementation can materially strengthen economic performance.

### Importance of tax administration and implementation sequencing
- Stronger administration can:
  - Increase the collection of taxes already due.
  - Reduce compliance burdens that fall disproportionately on small and young firms.
  - Narrow productivity gaps between firms.
  - Expand the range of feasible reforms (e.g., reliable VAT refunds enable limiting exemptions while managing fraud risks).
  - Improve targeting of R&D incentives via credible verification.
  - Allow in-work support to reach intended recipients.
- Where capacity is limited, priority actions are to strengthen registration, filing, payment, refunds, and compliance management as a foundation for further reform.
- Countries should target distortions that impose the greatest economic costs and sequence reforms according to implementation capacity.

### Policy priorities by country group
- Emerging market and developing economies:
  - Key priorities include addressing unrecovered value-added taxes on business inputs, limited in-work support, and weaknesses in core administrative functions.
- Advanced economies:
  - Emphasis may fall more on refining work incentives and using information and technology more effectively in tax administration.
- Across country groups:
  - Priorities include limiting VAT exemptions and improving refunds, accelerating recovery of investment costs, smoothing thresholds that discourage the growth of firms, targeting R&D incentives more effectively, redesigning in-work support, and considering broader shifts toward rent-based taxation on businesses where circumstances allow.

### Political economy and implementation considerations
- Political economy can impede reform: costs of reform are often immediate and concentrated among groups that lose tax-favored treatment, while benefits are diffuse and emerge gradually.
- Successful reform requires clear objectives, credible implementation, early engagement with affected stakeholders, effective communication, and, where appropriate, phasing and targeted measures to mitigate losses.

### Relationship to revenue needs and equity
- Taxing better is not a substitute for additional revenue measures where they are needed.
- Equity remains central: the aim is to ensure that necessary revenues are raised at lower economic cost.
- Over time, a more productive economy provides a stronger foundation for both growth and public finances.

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_Source: https://www.imf.org/-/media/files/publications/fiscal-monitor/2026/october/english/execsum.pdf_