Monday, November 16, 2009

Why Has Domestic Revenue Stagnated in Low-Income Countries?

A new paper by the Center for Development Policy and Research at the School of Oriental and African Studies in London sets out to answer the question posed in our headline, drawing on extensive disaggregated data. It argues that:

There has been miserably slow progress in increasing domestic revenue in low-income countries since the 1990s. . . the reigning 'tax consensus' has placed an inordinate emphasis on boosting domestic indirect taxes, and the value added tax (VAT) in particular.
. . .
At the same time, the 'consensus' has advocated eliminating import taxes (in order to liberalise trade) and lowering tax rates on corporate profits (in order to compete with other rate-cutting countries). Consequently, trade taxes have been particularly hard hit while increases in direct taxes, which cover mainly personal income and corporate profits, have generally been anaemic.

Overall revenue has ended up stagnating because of the resultant reliance on boosting revenue from only one major component, i.e., taxes on domestic goods and services."


And their conclusions include this:

"Increases in direct taxes have generally been unsatisfactory, due partly to widespread slashing of rates on corporate profits, based on the expectation that more profits would thereby be generated and hence more revenue collected. But the evidence of such an effect is weak or conflicts with such a rosy expectation."

Which dovetails neatly with what we have been saying for some time. A key reference for the above paper, providing more detail, is here.

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