{
  "title": "The Art of Taxation",
  "sourceUrl": "https://www.imf.org/en/publications/fandd/issues/2026/03/back-to-basics-the-art-taxation-katherine-baer",
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  "summary": "Why raising revenue is central to development",
  "sections": [
    {
      "heading": "Why raising revenue is central to development",
      "content": "- All governments need money to provide public goods and services: roads, schools, hospitals, courts, and public safety.\n- Taxation is the most sustainable source of financing compared with borrowing or foreign aid.\n- Raising revenue is political as well as technical: decisions on who pays, how much, and in what form shape the social contract and depend on trust that taxes are fair and revenues used wisely.\n- Domestic revenue mobilization: the process of raising public resources through taxation in a sustainable, efficient, and equitable manner; central to development and reducing dependence on external aid."
    },
    {
      "heading": "Tax capacity and benchmark targets",
      "content": "- Strengthening domestic revenue mobilization requires building tax capacity across four interconnected dimensions: the level of taxation, the mix of taxes, tax design, and tax administration.\n- Research benchmark: generate tax revenue of at least 15 percent of GDP; below this level, government effectiveness, financial development, and economic growth stagnate.\n- Current shortfall: more than 70 developing economies still collect less than 15 percent of GDP in taxes.\n- Untapped potential: many developing economies could raise an additional 4 to 5 percent of GDP through well-designed tax reforms.\n- Examples of recent progress: Jamaica, Maldives, Morocco, Nepal, Rwanda, and Uzbekistan."
    },
    {
      "heading": "Types of tax and observed patterns",
      "content": "- Historical shift: economies moved from narrow, distortionary taxes (like tariffs) to broader, more efficient taxes on consumption, income, and wealth.\n- Trade taxes:\n  - Still account for about one-quarter of tax revenue in many developing economies.\n  - Overreliance can discourage trade, raise consumer prices, and slow economic integration.\n- Value-added tax (VAT):\n  - Generates more than one-third of total tax revenue globally, even in many low- and middle-income countries.\n  - Efficient because it taxes consumption broadly and allows firms to deduct taxes on inputs, reducing cascading effects.\n- Excise taxes:\n  - Target goods with social or environmental costs (e.g., tobacco, alcohol, fossil fuels).\n  - Can raise revenue and improve public health or environmental outcomes.\n- Corporate income tax:\n  - Important for taxing profits of large and multinational firms.\n  - Under pressure from international tax competition and profit shifting; reform complexity underscores need for international coordination.\n- Personal income tax:\n  - Typically raises relatively little revenue in developing economies due to a small middle class, large informal sectors, widespread self-employment, and limited formal financial sectors.\n  - Notable progress: in Africa, personal income tax revenue has roughly doubled as a share of GDP since 2000.\n- Property taxes:\n  - Underused in most developing economies.\n  - Difficult to avoid and effective for local governments but face political resistance and administrative challenges (e.g., outdated property registries)."
    },
    {
      "heading": "Tax design considerations",
      "content": "- Central principle: neutrality—taxes should minimally interfere with decisions about work, saving, investment, and consumption; achieved through a broad base and moderate rates.\n- Tax expenditures (exemptions, deductions, reduced rates, special regimes):\n  - Cumulative cost often large: 3 to 4 percent of GDP in many countries.\n  - Represents about a quarter of tax collections.\n  - Some serve legitimate goals (simplified regimes for small businesses, targeted relief for low-skilled workers).\n  - Problems arise when preferences proliferate without evaluation—creating distortions, undermining fairness, adding complexity, and facilitating avoidance.\n- Recommendation: regular review and transparency to assess whether each tax preference achieves its intended goal and is the most effective tool."
    },
    {
      "heading": "From policy to practice: administration and compliance",
      "content": "- Even well-designed policy fails without effective implementation.\n- Common constraints: limited administrative capacity, large informal sectors, and noncompliance.\n- Lost VAT revenue costs developing economies about 3 percent of GDP on average.\n- Strategies with better success rates:\n  - Withholding taxes collected at source by large intermediaries (employers, banks).\n  - Risk-based audits focusing enforcement on higher-risk taxpayers.\n  - Digitalization: electronic filing and payment, real-time invoicing, data analytics; artificial intelligence offers additional tools.\n- Avoid expanding taxpayer registries indiscriminately; many informal operators earn too little to owe tax.\n- Importance of clear and simple tax laws; complexity and frequent changes create uncertainty and open doors to corruption.\n- Administrative basics to strengthen: investing in skilled staff, modern organizational structures, and strong governance."
    },
    {
      "heading": "Cross-country lessons and practical guidance",
      "content": "- Think in systems: level, mix, design, and administration are closely linked; isolated reforms rarely deliver lasting results.\n- Be patient: building tax capacity takes time; quick gains possible (withholding, inflation indexation), but sustainable improvements require years of consistent effort and political continuity.\n- International cooperation helps (information exchange, tax treaties, global corporate tax agreements) but cannot substitute for strong domestic institutions; overreliance on international solutions can divert attention from domestic reforms."
    },
    {
      "heading": "Politics, trust, and communication",
      "content": "- Domestic revenue mobilization ultimately depends on trust: perception that taxes are fair and revenues are used for shared prosperity.\n- Transparency, accountability, and clear communication are essential to build support.\n- Framing: paying taxes should feel like investing in a shared future rather than losing private wealth.\n\nKATHERINE BAER and RUUD DE MOOIJ, IMF Fiscal Affairs Department; March 2026.\n\n---\n\n Content in this bundle\n\n- B2b\n  - B2b (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - B2b (PDF){rel=\"external\" type=\"application/pdf\"}\n- G20 Background Note Enhancing Domestic Revenue Mobilization Through Strengthening Revenue Administra\n  - G20 Background Note Enhancing Domestic Revenue Mobilization Through Strengthening Revenue Administra (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n  - G20 Background Note Enhancing Domestic Revenue Mobilization Through Strengthening Revenue Administra (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/fandd/issues/2026/03/back-to-basics-the-art-taxation-katherine-baer"
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    "Authors: KATHERINE BAER, Ruud de Mooij",
    "Published: March 3, 2026",
    "All governments need money to provide public goods and services: roads, schools, hospitals, courts, and public safety.",
    "Taxation is the most sustainable source of financing compared with borrowing or foreign aid.",
    "Raising revenue is political as well as technical: decisions on who pays, how much, and in what form shape the social contract and depend on trust that taxes are fair and revenues used wisely.",
    "Domestic revenue mobilization: the process of raising public resources through taxation in a sustainable, efficient, and equitable manner; central to development and reducing dependence on external aid.",
    "Strengthening domestic revenue mobilization requires building tax capacity across four interconnected dimensions: the level of taxation, the mix of taxes, tax design, and tax administration.",
    "Research benchmark: generate tax revenue of at least 15 percent of GDP; below this level, government effectiveness, financial development, and economic growth stagnate.",
    "Current shortfall: more than 70 developing economies still collect less than 15 percent of GDP in taxes.",
    "Untapped potential: many developing economies could raise an additional 4 to 5 percent of GDP through well-designed tax reforms.",
    "Examples of recent progress: Jamaica, Maldives, Morocco, Nepal, Rwanda, and Uzbekistan.",
    "Historical shift: economies moved from narrow, distortionary taxes (like tariffs) to broader, more efficient taxes on consumption, income, and wealth.",
    "Trade taxes:",
    "Value-added tax (VAT):",
    "Excise taxes:",
    "Corporate income tax:",
    "Personal income tax:",
    "Property taxes:",
    "Central principle: neutrality—taxes should minimally interfere with decisions about work, saving, investment, and consumption; achieved through a broad base and moderate rates.",
    "Tax expenditures (exemptions, deductions, reduced rates, special regimes):",
    "Recommendation: regular review and transparency to assess whether each tax preference achieves its intended goal and is the most effective tool.",
    "Even well-designed policy fails without effective implementation.",
    "Common constraints: limited administrative capacity, large informal sectors, and noncompliance.",
    "Lost VAT revenue costs developing economies about 3 percent of GDP on average.",
    "Strategies with better success rates:",
    "Avoid expanding taxpayer registries indiscriminately; many informal operators earn too little to owe tax.",
    "Importance of clear and simple tax laws; complexity and frequent changes create uncertainty and open doors to corruption.",
    "Administrative basics to strengthen: investing in skilled staff, modern organizational structures, and strong governance.",
    "Think in systems: level, mix, design, and administration are closely linked; isolated reforms rarely deliver lasting results.",
    "Be patient: building tax capacity takes time; quick gains possible (withholding, inflation indexation), but sustainable improvements require years of consistent effort and political continuity.",
    "International cooperation helps (information exchange, tax treaties, global corporate tax agreements) but cannot substitute for strong domestic institutions; overreliance on international solutions can divert attention from domestic reforms.",
    "Domestic revenue mobilization ultimately depends on trust: perception that taxes are fair and revenues are used for shared prosperity.",
    "Transparency, accountability, and clear communication are essential to build support.",
    "Framing: paying taxes should feel like investing in a shared future rather than losing private wealth.",
    "**B2b**",
    "**G20 Background Note Enhancing Domestic Revenue Mobilization Through Strengthening Revenue Administra**"
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