Fiscal Resilience Building: Insights from a New Tax Revenue Diversification Index

IMF Working Papers, June 12, 2020

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Canonical URL: Fiscal Resilience Building: Insights from a New Tax Revenue Diversification Index

Authors: Rasmané Ouedraogo, Rene Tapsoba, Moussé Sow, Ali Compaoré
Publication date: June 12, 2020
Series: IMF Working Papers, Working Paper No. 2020/094
Pages: 35
Volume: 2020
Issue: 094
ISBN: 9781513546032
ISSN: 1018-5941
Empirical coverage: a broad panel of 127 countries over the period 2000-15
Index construction: proposes a new cross-country tax revenue diversification index (RDI) that builds on the Theil index; distinguishes itself from existing tax diversification indices that are constructed only at the state level for the US

Evidence on resilience:
- Tax revenue diversification reduces tax revenue volatility, providing empirical support for the view that diversification strengthens fiscal resilience.
Drivers of the RDI:
- Tax revenue diversification is not solely a reflection of economic diversification.
- The RDI is also an outcome of macroeconomic, political, and institutional factors.
Relationship with economic development:
- A non-monotone relationship exists between the RDI and economic development: countries’ portfolio of tax sources tends to get more diversified as their economy develops, until a tipping point where richer countries find it harder to diversify further their tax revenue sources.
Conceptual contribution:
- Introduces a nationally computed cross-country RDI covering multiple regions and income levels, enabling cross-country comparisons over 2000-15.

The paper provides suggestive empirical evidence linking broader tax bases to lower revenue volatility, reinforcing the policy-relevant argument that tax structure matters for fiscal resilience.
Because the RDI reflects macroeconomic, political, and institutional determinants in addition to economic structure, policies aimed at diversification may need to address institutional and governance factors, not only sectoral economic change.
The identified non-monotone pattern with development implies that diversification strategies and constraints may differ across income levels, with advanced economies potentially facing diminishing returns to further diversification of tax sources.

Subject: Consumption taxes, Environment, Income tax systems, Natural resources, Revenue administration, Tax administration core functions, Taxes
Keywords: collection performance, Consumption taxes, diversification index, diversification pattern, East Africa, Income tax systems, Middle East, Natural resources, North Africa, North America, revenue collection, Revenue volatility, sources structure, South Asia, Tax administration core functions, tax diversification, tax revenue, Tax revenue diversification, tax source, Taxation, Theil Index, WP, yes

IMF Working Paper — Fiscal Resilience Building: Insights from a New Tax Revenue Diversification Index (Working Paper No. 2020/094), June 12, 2020.