A Retrospective on Taxation in Developing Countries: Will the Weakest Link be Strengthened?
This paper is about revenue mobilization and tax structure changes in developing countries since the 1970s, the factors underlying this pattern, and what this history suggests for the future. Several distinguished students of taxation have studied this set of questions for different periods of time (Chelliah, 1971, Tanzi, 1987, Bird, 2011a) and their conclusions are more or less in step with those reached here. But the longer time horizon of this study and the different take on some of the questions about the poor tax performance in developing countries may add some new value. In the next section of this paper, the evidence on long run changes in revenue mobilization is reviewed, and some explanations for the relatively weak performance in many low income countries are offered. We turn then to the same question for changes in the tax structures. The general conclusions reached here are that the rate of taxation in low income countries has not risen appreciably faster than GDP over this period, that countries have ignored the advice to broaden the tax base as often as they have acted on it, and that administrative improvements have been slow to come on line. The culprits in all of this have been a slow process of economic modernization, too little investment in the tax administration infrastructure and too little commitment to enforcement, and a political economy that often seems rigged against both more taxation and good taxation. In section 4, I suggest that there are underlying factors that might cause this pattern to change during the next decade, and bring about more convergence in tax practices between developing and industrial countries. A final section concludes. The discussion in this paper is limited to taxation in developing countries. I do not take up user charges or other non-tax revenues, nor do I address the important question of revenue mobilization from natural resources. Tax reform in transition countries is another very interesting study (Bahl, 1999, and Martinez-Vazquez, Rider and Wallace, 2008), but also too different to do justice to it here.
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