## Countries Can Tap Tax Potential to Finance Development Goals

_IMF Blog, September 19, 2023_

## Source details

**Canonical URL:** [Countries Can Tap Tax Potential to Finance Development Goals](https://www.imf.org/en/blogs/articles/2023/09/19/countries-can-tap-tax-potential-to-finance-development-goals)

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## Bibliographic details
- Authors: Vitor Gaspar, Mario Mansour, Charles Vellutini
- Published: September 19, 2023

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### Key findings and context
- Emerging market and low-income economies have a significant untapped tax potential of 8 percent to 9 percent of GDP.
- Emerging markets and developing economies need $3 trillion annually through 2030 to finance their development goals and the climate transition, equal to about 7 percent of these countries’ combined 2022 gross domestic product.
- The average tax-to-GDP ratio in emerging market and developing economies has increased by about 3.5 percentage points to 5 percentage points since the early 1990s, driven primarily by taxes on consumption such as value-added and excise taxes.
- Some countries mobilized more than 5 percentage points of GDP (examples cited: Albania, Argentina, Armenia, Brazil, Colombia, and Georgia), with much of the increase occurring before the 2008 global financial crisis.
- Half of emerging market economies and two-thirds of low-income countries had a tax-to-GDP ratio in 2020 that was lower than 15 percent—a tipping point above which growth has been found to accelerate.
- Resource-rich countries have typically generated less tax revenue, as some governments reduced taxes due to higher revenue from natural resources.
- The direct revenue impact of the ongoing international collaboration on taxing profits of large multinational corporations is likely to represent only a tiny fraction of the overall revenue needs, as shown in a February policy paper.

### Tax revenue potential by country group
- Low-income countries:
  - Could raise their tax-to-GDP ratio by as much as 6.7 percentage points on average based on tax potential.
  - Improving public institutions, including reducing corruption, to the level of those in emerging market economies would result in an additional 2.3-point increase.
  - The total revenue-raising potential for low-income countries is 9 percentage points of GDP—a two-thirds increase relative to their tax-to-GDP ratio in 2020.
- Emerging market economies:
  - Can raise their tax-to-GDP ratio by 5 percentage points on average based on tax potential.
  - Improving institutions to the average of advanced economies could raise an additional 2 to 3 points.

### Essential reforms and policy recommendations
- Adopt a holistic and institution-based approach focused on leveraging core domestic tax policies.
- Improve the design and administration of core domestic taxes:
  - Value-added taxes (VAT), excises, personal income taxes, and corporate income taxes should be strengthened.
  - VAT revenue in low-income countries, for instance, could be doubled by limiting preferential treatments and improving compliance without increasing standard tax rates.
  - Widespread adoption of digital technologies would result in higher revenue collection and narrow compliance gaps.
- Implement bold reform plans with emphasis on tax base broadening:
  - Rationalize tax expenditures.
  - Pursue more neutral taxation of capital income.
  - Make better use of property taxes.
  - Headline tax rates are generally not the main concern.
  - Use excise taxes—particularly fuel excises and forms of carbon pricing—to mitigate domestic health and climate-related costs.
  - This multi-pronged approach can balance equity and efficiency considerations and address the political economy challenges of tax reforms.
- Improve institutions that govern the tax system and manage tax reform:
  - Provide evidence to convince the public of the gains and show progress in policy implementation over time.
  - Ensure adequate staffing to forecast and analyze the impact of tax policies on the economy.
  - Increase professionalization of public officials working on tax design and implementation.
  - Use digital technologies to strengthen compliance.
  - Enhance transparency and certainty in how policy and administration are translated into legislation.
- Carefully prioritize and coordinate reforms across government agencies:
  - Recognize that the broader institutional context matters.
  - Strengthened institutions create a virtuous circle: improved state capacity enhances tax design quality and its acceptance by citizens.
  - This institution-centered approach encapsulates the IMF’s approach to supporting countries in tax system reform and raising domestic revenue.

*Source: Countries Can Tap Tax Potential to Finance Development Goals — Vitor Gaspar, Mario Mansour, Charles Vellutini; September 19, 2023.*

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## References

- [Our new research](https://www.imf.org/en/Publications/Staff-Discussion-Notes/Issues/2023/09/15/Building-Tax-Capacity-in-Developing-Countries-535449)
- [a tipping point](https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Tax-Capacity-and-Growth-Is-there-a-Tipping-Point-44436)
- [February policy paper](https://www.imf.org/en/Blogs/Articles/2023/02/16/the-unfinished-business-of-international-business-tax-reform)

_Source: https://www.imf.org/en/blogs/articles/2023/09/19/countries-can-tap-tax-potential-to-finance-development-goals_