## The Art of Taxation

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**Canonical URL:** [The Art of Taxation](https://www.imf.org/en/publications/fandd/issues/2026/03/back-to-basics-the-art-taxation-katherine-baer)

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## Bibliographic details
- Authors: KATHERINE BAER, Ruud de Mooij
- Published: March 3, 2026

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### Why raising revenue is central to development
- 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.

### Tax capacity and benchmark targets
- 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.

### Types of tax and observed patterns
- Historical shift: economies moved from narrow, distortionary taxes (like tariffs) to broader, more efficient taxes on consumption, income, and wealth.
- Trade taxes:
  - Still account for about one-quarter of tax revenue in many developing economies.
  - Overreliance can discourage trade, raise consumer prices, and slow economic integration.
- Value-added tax (VAT):
  - Generates more than one-third of total tax revenue globally, even in many low- and middle-income countries.
  - Efficient because it taxes consumption broadly and allows firms to deduct taxes on inputs, reducing cascading effects.
- Excise taxes:
  - Target goods with social or environmental costs (e.g., tobacco, alcohol, fossil fuels).
  - Can raise revenue and improve public health or environmental outcomes.
- Corporate income tax:
  - Important for taxing profits of large and multinational firms.
  - Under pressure from international tax competition and profit shifting; reform complexity underscores need for international coordination.
- Personal income tax:
  - 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.
  - Notable progress: in Africa, personal income tax revenue has roughly doubled as a share of GDP since 2000.
- Property taxes:
  - Underused in most developing economies.
  - Difficult to avoid and effective for local governments but face political resistance and administrative challenges (e.g., outdated property registries).

### Tax design considerations
- 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):
  - Cumulative cost often large: 3 to 4 percent of GDP in many countries.
  - Represents about a quarter of tax collections.
  - Some serve legitimate goals (simplified regimes for small businesses, targeted relief for low-skilled workers).
  - Problems arise when preferences proliferate without evaluation—creating distortions, undermining fairness, adding complexity, and facilitating avoidance.
- Recommendation: regular review and transparency to assess whether each tax preference achieves its intended goal and is the most effective tool.

### From policy to practice: administration and compliance
- 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:
  - Withholding taxes collected at source by large intermediaries (employers, banks).
  - Risk-based audits focusing enforcement on higher-risk taxpayers.
  - Digitalization: electronic filing and payment, real-time invoicing, data analytics; artificial intelligence offers additional tools.
- 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.

### Cross-country lessons and practical guidance
- 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.

### Politics, trust, and communication
- 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.

*KATHERINE BAER and RUUD DE MOOIJ, IMF Fiscal Affairs Department; March 2026.*

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## Content in this bundle

- **B2b**
  - [B2b (Markdown version)](/-/media/files/publications/fandd/article/2026/03/b2b.pdf.md){rel="alternate" type="text/markdown"}
  - [B2b (PDF)](/-/media/files/publications/fandd/article/2026/03/b2b.pdf){rel="external" type="application/pdf"}
- **G20 Background Note Enhancing Domestic Revenue Mobilization Through Strengthening Revenue Administra**
  - [G20 Background Note Enhancing Domestic Revenue Mobilization Through Strengthening Revenue Administra (Markdown version)](/-/media/files/research/imf-and-g20/2025/g20-background-note-enhancing-domestic-revenue-mobilization-through-strengthening-revenue-administra.pdf.md){rel="alternate" type="text/markdown"}
  - [G20 Background Note Enhancing Domestic Revenue Mobilization Through Strengthening Revenue Administra (PDF)](/-/media/files/research/imf-and-g20/2025/g20-background-note-enhancing-domestic-revenue-mobilization-through-strengthening-revenue-administra.pdf){rel="external" type="application/pdf"}

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_Source: https://www.imf.org/en/publications/fandd/issues/2026/03/back-to-basics-the-art-taxation-katherine-baer_