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Why Do Developing Countries Tax So Little?

Author

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  • Timothy Besley
  • Torsten Persson

Abstract

Low-income countries typically collect taxes of between 10 to 20 percent of GDP while the average for high-income countries is more like 40 percent. In order to understand taxation, economic development, and the relationships between them, we need to think about the forces that drive the development process. Poor countries are poor for certain reasons, and these reasons can also help to explain their weakness in raising tax revenue. We begin by laying out some basic relationships regarding how tax revenue as a share of GDP varies with per capita income and with the breadth of a country's tax base. We sketch a baseline model of what determines a country's tax revenue as a share of GDP. We then turn to our primary focus: why do developing countries tax so little? We begin with factors related to the economic structure of these economies. But we argue that there is also an important role for political factors, such as weak institutions, fragmented polities, and a lack of transparency due to weak news media. Moreover, sociological and cultural factors- such as a weak sense of national identity and a poor norm for compliance- may stifle the collection of tax revenue. In each case, we suggest the need for a dynamic approach that encompasses the two-way interactions between these political, social, and cultural factors and the economy.

Suggested Citation

  • Timothy Besley & Torsten Persson, 2014. "Why Do Developing Countries Tax So Little?," Journal of Economic Perspectives, American Economic Association, vol. 28(4), pages 99-120, Fall.
  • Handle: RePEc:aea:jecper:v:28:y:2014:i:4:p:99-120
    Note: DOI: 10.1257/jep.28.4.99
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    References listed on IDEAS

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. On Black Money, Corruption, and Demonetization
      by paragwaknis in Musings of the Sorts on 2016-12-29 09:03:07

    Citations

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    Cited by:

    1. Rakesh Mohan & Muneesh Kapur, 2015. "Pressing the Indian Growth Accelerator; Policy Imperatives," IMF Working Papers 15/53, International Monetary Fund.
    2. Carlos Bethencourt & Lars Kunze, 2015. "The political economics of redistribution, inequality and tax avoidance," Public Choice, Springer, vol. 163(3), pages 267-287, June.
    3. Barry Naughton, 2017. "Is China Socialist?," Journal of Economic Perspectives, American Economic Association, vol. 31(1), pages 3-24, Winter.
    4. Andrew Pickering & Sheraz Rajput, 2015. "Inequality and the composition of taxes," Discussion Papers 15/04, Department of Economics, University of York.
    5. Asatryan, Zareh & Peichl, Andreas, 2016. "Responses of firms to tax, administrative and accounting rules: Evidence from Armenia," ZEW Discussion Papers 16-065, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    6. Dhammika Dharmapala & Vikramaditya Khanna, 2017. "Stock Market Reactions to India's 2016 Demonetization: Implications for Tax Evasion, Corruption, and Financial Constraints," CESifo Working Paper Series 6707, CESifo Group Munich.
    7. repec:eee:wdevel:v:105:y:2018:i:c:p:13-24 is not listed on IDEAS
    8. Leopoldo Fergusson & Carlos Molina & Juan Felipe Riaño, 2017. "I evade taxes, and so what? A new database and evidence from Colombia," DOCUMENTOS CEDE 015444, UNIVERSIDAD DE LOS ANDES-CEDE.
    9. Fabio Lamantia & Mario Pezzino & Fabio Tramontana, 2017. "Tax evasion, intrinsic motivation, and the evolutionary effects of tax reforms," The School of Economics Discussion Paper Series 1707, Economics, The University of Manchester.
    10. Jacqueline Cottrell & Damian Ludewig & Matthias Runkel & Kai Schlegelmilch & Florian Zerzawy, 2017. "Environmental tax reform in Asia and the Pacific," MPDD Working Paper Series WP/17/05, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP).
    11. repec:eee:pubeco:v:155:y:2017:i:c:p:122-137 is not listed on IDEAS
    12. Henrik Jacobsen Kleven & Claus Thustrup Kreiner & Emmanuel Saez, 2016. "Why Can Modern Governments Tax So Much? An Agency Model of Firms as Fiscal Intermediaries," Economica, London School of Economics and Political Science, vol. 83(330), pages 219-246, April.
    13. Oskar Nupia, 2017. "Income Taxes, Political Accountability and Public Goods Provision," DOCUMENTOS CEDE 015835, UNIVERSIDAD DE LOS ANDES-CEDE.
    14. Salim Nuhu Ahmed & John M. Musah, 2018. "On asymmetric information and tax morale in developing countries," WIDER Working Paper Series 012, World Institute for Development Economic Research (UNU-WIDER).
    15. Björn Jahnke, 2017. "How does petty corruption affect tax morale in sub-Saharan Africa? An empirical analysis," WIDER Working Paper Series 008, World Institute for Development Economic Research (UNU-WIDER).
    16. Avdiu, Besart, 2018. "Optimal capital and labor income taxation in small and developing countries," MPRA Paper 84884, University Library of Munich, Germany.
    17. Hassen, Azime A., 2016. "Agricultural taxation and economic growth in Ethiopia," 2016 AAAE Fifth International Conference, September 23-26, 2016, Addis Ababa, Ethiopia 246395, African Association of Agricultural Economists (AAAE).
    18. Asatryan, Zareh & Bittschi, Benjamin & Doerrenberg, Philipp, 2017. "Remittances and public finances: Evidence from oil-price shocks," Journal of Public Economics, Elsevier, vol. 155(C), pages 122-137.
    19. repec:eur:ejesjr:238 is not listed on IDEAS
    20. Abrams M.E. Tagem, 2017. "The economics and politics of foreign aid and domestic revenue," WIDER Working Paper Series 180, World Institute for Development Economic Research (UNU-WIDER).
    21. Chen, Shawn Xiaoguang, 2017. "The effect of a fiscal squeeze on tax enforcement: Evidence from a natural experiment in China," Journal of Public Economics, Elsevier, vol. 147(C), pages 62-76.
    22. Nasr G. Elbahnasawy & Michael A. Ellis, 2016. "Economic Structure And Seigniorage: A Dynamic Panel Data Analysis," Economic Inquiry, Western Economic Association International, vol. 54(2), pages 940-965, April.

    More about this item

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • O23 - Economic Development, Innovation, Technological Change, and Growth - - Development Planning and Policy - - - Fiscal and Monetary Policy in Development
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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