State Capacity, Institutions and Growth: Taxing for Takeoff—Revisiting the Tax Tipping Point

IMF Working Papers, October 3, 2025

Source details

Canonical URL: State Capacity, Institutions and Growth: Taxing for Takeoff—Revisiting the Tax Tipping Point

Cumulative growth over 10 years increases by 10 percentage points when a country’s tax-to-GDP ratio increases above a 10 percent threshold.
Crossing the 10 percent tax-to-GDP threshold coincides with the beginning of significant improvements in measures of:
- financial development,
- government effectiveness,
- legal framework,
- governance.
Only transformational episodes of tax increases above the threshold deliver persistent gains; episodic crossings that:
- fail to bring tax revenues durably above the threshold, and
- do not coincide with improvements in financial development and government effectiveness,

yield fleeting gains.

Conclusion: A minimal tax capacity is necessary for growth, but only a sustained tax increase associated with other developmental progress is sufficient.

The study revisits the 2016 “tax tipping point” result using:
- event studies, and
- a richer dataset.
Estimation approaches include:
- a regression discontinuity approach, and
- a dynamic difference-in-differences estimation.
Event studies are used to distinguish transformational from episodic tax increases and to assess timing of institutional and financial improvements.

Increasing the tax-to-GDP ratio above a minimal threshold (10 percent) can be associated with materially higher growth, conditional on accompanying institutional and financial sector progress.
Policy emphasis should be on:
- sustaining tax revenue increases rather than one-off episodic increases, and
- sequencing or coordinating tax capacity strengthening with improvements in financial development, government effectiveness, and legal and governance frameworks to realize lasting growth gains.

Subject: Corruption, Crime, Expenditure, Financial markets, Financial sector development, Fiscal policy, Public investment spending, Revenue administration, Revenue mobilization
Keywords: Corruption, Development, Event Study, event study robustness, Financial sector development, Global, Income per Capita, Multiple Equilibria, Public investment spending, Revenue mobilization, sample event study graph, tax ratio, tax tipping point, tax-ratio threshold, Tax-to-GDP ratio, Tax-to-GDP threshold, Taxation

IMF Working Paper No. 2025/203 — By Matthieu Bellon and Ross Warwick, October 3, 2025. Pages: 56. DOI: https://doi.org/10.5089/9798229028295.001