Progress of the Personal Income Tax in Emerging and Developing Countries

IMF Working Papers, January 28, 2022

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Personal Income Tax (PIT) plays a key revenue role in Advanced Economies (AEs) but a much more limited role in Low-Income Developing Countries (LIDCs) and Emerging Market Economies (EMEs) in terms of revenue and redistributive impact.
LIDCs increased their PIT-to-GDP revenue by 110 percent during the 1990-2019 period.
EMEs increased their PIT-to-GDP revenue by 48 percent during the 1990-2019 period.
The contribution of the PIT to inequality reductions in LIDCs has been significant, based on a novel redistribution index estimated by the authors.

The rise in PIT-to-GDP revenue in LIDCs and EMEs was driven primarily by economic developments and to a lesser extent by changes in the design of PIT systems.
LIDCs that improved their tax-to-GDP ratios relied on a broader set of tax instruments and not exclusively on the PIT, indicating revenue mobilization success is linked to a comprehensive approach covering a wider range of taxes.

A newly assembled dataset of PIT characteristics covers 157 countries over the 2006-2018 period.
The paper estimates a novel redistribution index of the PIT in LIDCs using the assembled dataset.

Successful revenue mobilization strategies for developing countries require a comprehensive approach that includes a wider range of taxes rather than relying exclusively on the PIT.
Improving PIT revenue performance in LIDCs and EMEs may depend more on favorable economic developments in conjunction with targeted changes in PIT system design.