Revenue Mobilization and International Taxation: Key Ingredients of 21st-Century Economies
IMF News, February 22, 2016
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- Authors: Christine Lagarde
- Published: February 22, 2016
Revenue mobilization: rationale, challenges, and country examples
- Main point: Robust government revenue is the lifeblood of modern states—required to provide public goods that support strong and durable growth (police, health, education, research).
- Global and regional pressures:
- Oil exporters in the MENA region "lost more than US$340 billion in oil revenue from their budgets, amounting to 20 percent of their combined GDP."1
- Oil prices have "fallen by around two-thirds from their most recent peak" and supply/demand factors suggest persistence of low prices.
- Fiscal adjustment responses will include reducing spending and increasing revenue; adjustment needs vary by country.
- Policy recommendations for GCC and oil exporters:
- "Start by putting in place a simple system that initially focuses on VAT—ideally, a harmonized regional VAT. Even at a low single-digit rate, such a tax could raise up to 2 percent of GDP."
- "Add to this a greater emphasis on corporate income taxes, as well as property and excise taxes."
- "And continue to invest in building tax administration capacity that could eventually allow for the introduction of personal income taxes."
- Emphasize fairness, simplicity, and efficiency when redesigning tax systems; reduce heavy reliance on oil revenues and boost non-hydrocarbon sources.
- Middle-income and low-income country priorities:
- MENA oil importers generate "tax revenue of about 13 percent of non-oil GDP, on average—compared with 17 percent in other emerging and developing economies."2
- Tunisia example: fiscal incentives for privileged export-oriented firms "amounted to about 2 percent of GDP in 2012."3 The government has halved the tax differential between privileged firms and peers; further reductions would preserve competitiveness while improving equity and efficiency.
- Fiscal thresholds and targets for developing countries:
- "New IMF research suggests that once the tax-to-GDP ratio reaches 12¾ percent, real GDP per capita increases sharply."4
- Recommendation: aim to remain comfortably above this threshold—"say, above 15 percent."
- Current comparisons: "In about half of all developing countries, tax ratios are below 15 percent of GDP—compared with 18 percent in emerging economies and 26 percent in advanced economies."5
- Governance and spending:
- Revenue increases must be matched by efficient, effective spending, supported by strong fiscal institutions and public financial management.
- IMF provides extensive technical assistance and capacity building in these areas.
International taxation: problems, progress, and gaps
- Central concern: Overly aggressive tax competition and profit-shifting undermine national revenue mobilization and public confidence that multinationals and wealthy individuals pay a fair share.
- Progress highlighted:
- Automatic exchange of taxpayer information is a new global standard to make it harder for wealthy individuals to hide assets offshore.
- BEPS project (OECD-led) and G20 agreement aim to prevent "base erosion and profit shifting".
- Quantified impacts and estimates:
- OECD estimate: government revenue losses from profit-shifting "have grown to as much as $240 billion a year, or 10 percent of global corporate income-tax receipts."
- Offshore wealth: "about 30 percent of Africa’s financial wealth is held offshore" (estimate attributed in text).6
- IMF staff estimates: "lost tax revenues in developing economies are equivalent to 1.3 percent of their GDP, compared with one percent in advanced economies."7
- Limitations and remaining challenges:
- BEPS rules are designed within a traditional international-tax architecture developed nearly a century ago and may not fully address taxation of traded services and shifting of intellectual property.
- BEPS measures do not fully address specific needs of developing economies (e.g., indirect, offshore transfer of interests in assets like telecoms or mineral licenses), which in some cases "has caused hundreds of millions of dollars in lost government revenue."
- IMF role and responsibility:
- IMF seeks to help develop taxation approaches appropriate for low-income members and works with partners (World Bank, regional development banks, United Nations).
The role of the IMF: tools, activities, and results
- Core IMF functions on fiscal and tax issues: research, policy advice, direct technical assistance, and training across 188 member countries.
- Principal areas of IMF assistance:
- Work with Ministries of Finance on expenditure policy and public financial management to deliver high-quality public services transparently and cost-effectively.
- Help members establish fiscal rules, strengthen public debt management, and manage natural resource wealth.
- Annually help more than 100 countries improve domestic revenue mobilization via analysis and hands-on assistance on tax policy and administration.
- Scale and growth of assistance:
- "Over the past five years, our worldwide technical assistance on revenue mobilization has more than doubled—and we plan to further expand this work."
- Examples of tangible outcomes from IMF technical assistance:
- Kosovo: IMF assistance aligning tax administration with international standards, including electronic filing; these measures "allowed Kosovo to boost its tax revenue by 8 percent in 2013."
- Peru: IMF support helped modernize tax administration and improve VAT performance; tax-to-GDP ratio rose "from 15 ½ percent in 2010 to 16 ½ in 2014."
- Senegal: technical assistance expanded the number of taxpayers subject to VAT and sharply increased revenue collection from medium-sized enterprises; revenues used to support growth and poverty reduction.
- Mutual learning and integration into surveillance:
- IMF incorporates technical assistance insights into Article IV surveillance; domestic revenue mobilization and international taxation will feature prominently in Article IV reports over the next few years.
Conclusion: framing and key message
- Adam Smith citations framing objectives:
- Adam Smith: “Little else is required to carry a state to the highest degree of opulence...but peace, easy taxes, and a tolerable administration of justice.”
- Adam Smith: “Political economy…proposes two distinct objects: first, to provide a plentiful revenue or subsistence for the people…and secondly, to supply the state or commonwealth with a revenue sufficient for the public services.”
- Main message:
- Creating successful 21st-century economies requires (1) robust government revenues and (2) an international tax system that works for everybody.
- These ingredients are essential for growth, fairness, and development and provide fertile ground for national prosperity.
- The IMF stands ready to assist its membership in achieving reliable, fair, and efficient government financing.
Speech by Christine Lagarde, Managing Director, International Monetary Fund, Abu Dhabi, February 22, 2016.