Tax Challenges Facing Developing Countries

Most developing countries continue to face serious problems in developing adequate and responsive tax systems. This paper reviews the three principal ways in which developing countries may expand and improve their taxation systems - base-broadening, rate reduction, and administrative improvement - in the context of the political economy of tax reform. While each of these paths to reform is essential, in the end what 50 years of experience tells us is that improving the transparency and understanding with which fiscal issues are discussed by all relevant players, both within and outside government, is the really essential ingredient to developing viable and sustainable tax systems in developing countries. Such institution-building activities are not a boring bit of infrastructure to be brushed aside in order to get into the real business of making this or that substantive reform in tax policy or administration: they are the "real business" with which serious tax reformers in any country should be most concerned.[IIB WP]