Issues in income tax reform in developing countries

Of all taxes, income taxes are the most difficult to implement. Developing countries are usually able to generate large amounts of income tax revenue only from large corporations or foreign investments. They are rarely effective in taxing wealthy individuals or small or medium-size businesses. Using recent tax reforms in Jamaica, Indonesia, and elsewhere as examples, the paper discusses the pros and cons of specific tax reform elements. It summarizes the major issues typically faced in reforming income taxes in developing countries. More revenue, increased efficiency, and a better distribution of the tax burden are usually the underlying goals. Improving enforcement and compliance by simplifying the tax structure and increasing the legitimacy of the tax process is usually the major challenge.