## Mission Impossible? Can Fragile States Increase Tax Revenues?

_IMF Blog, September 25, 2020_

## Source details

**Canonical URL:** [Mission Impossible? Can Fragile States Increase Tax Revenues?](https://www.imf.org/en/blogs/articles/2020/09/25/mission-impossible-can-fragile-states-increase-tax-revenues)

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## Bibliographic details
- Authors: Bernardin Akitoby, Jiro Honda, Keyra Primus
- Published: September 25, 2020

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### Overview
- Authors: Bernardin Akitoby, Jiro Honda, Keyra Primus
- Publication date: September 25, 2020
- Context: The COVID-19 shocks are proving to be especially challenging for fragile states. Pre-COVID, fiscal revenues were low in such countries and governments were struggling to raise them. Now, COVID-19 is hitting them hard and fiscal revenues are falling. Once the pandemic abates, restoring and further enhancing tax collection is even more important to secure debt sustainability, facilitate the post-COVID-19 recovery, and meet development financing needs in order to meet the Sustainable Development Goals.
- Core finding: New staff research finds that achieving sizable gains in tax collection in fragile environments is not “mission impossible.”

### Empirical findings and key statistics
- Four fragile states—Liberia, Malawi, Nepal, and Solomon Islands—achieved sizable increases in tax revenues over a decade: between 7 and 20 percentage points of GDP.
- Most of these countries introduced tax reforms when their tax revenues were far below the average for fragile states, but each went on to exceed the average; Nepal and Solomon Islands did so by a wide margin.
- Successful episodes involved sustained, protracted reform efforts pursued over extended periods of time to achieve long-lasting, sizable gains.
- Political stability can facilitate continuity of tax reforms, though reforms can also be advanced across administrations (example: Malawi).

### Lessons for tax revenue reforms in fragile states
- Two-handed approach:
  - Ensure both well-designed tax systems and effective approaches to revenue administration.
  - Examples: In Liberia and Nepal, using multiple tax policy instruments helped boost tax collection (for instance, reducing tax exemptions, raising excise taxes, and increasing the VAT threshold).
- Potential source:
  - Fairly target high potential sectors and areas that contribute significantly to tax revenues to raise funds and promote fairness.
  - Examples: the logging sector in the Solomon Islands and consumption (from large remittance receipts) in Nepal.
- Quick and strategic:
  - Adopt immediate reform steps to address pressing needs and build momentum, alongside a medium-term strategy to sequence reform measures properly.
  - Immediate-effect reform steps could include reforming indirect taxes on goods and services, curbing exemptions, establishing a Large Taxpayers Office, and enhancing risk-based audits.
- Political commitment and international support:
  - Sustained tax reform efforts over a long period require strong political commitment supported by international partners.
  - In the studied episodes, tax reforms were often pursued with strong political will—for instance in facilitating coordination across agencies—while capacity building support from international partners played a vital role.
  - Note: political commitment is a necessary but not a sufficient condition for successful tax reform.

*Source: IMF blog post titled "Mission Impossible? Can Fragile States Increase Tax Revenues?" by Bernardin Akitoby, Jiro Honda, and Keyra Primus, September 25, 2020.*

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## References

- [staff research](https://www.imf.org/en/Publications/WP/Issues/2020/07/24/Tax-Revenues-in-Fragile-and-Conflict-Affected-States-Why-Are-They-Low-and-How-Can-We-Raise-49570)

_Source: https://www.imf.org/en/blogs/articles/2020/09/25/mission-impossible-can-fragile-states-increase-tax-revenues_