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Smart Taxation

ROME – An effective tax policy that ensures adequate domestic revenue is a crucial determinant of a country’s ability to pursue development policies. But tax revenues in most developing countries are low, impeding progress toward more balanced, inclusive, and sustainable economic development that can improve public health and raise standards of living.

Although non-tax revenue may contribute significantly to some countries’ total GDP, the average tax/GDP ratios in low-income and lower-middle-income countries are roughly 15% and 19%, respectively – significantly lower than the OECD average of more than 35%. To finance development projects, poor and lower-middle-income countries must devise and implement tax strategies to increase domestic revenue.

This entails abandoning the prevailing dogma that taxes should only be increased when absolutely necessary. This stance assumes that lower tax rates raise the tax/GDP ratio by ensuring better compliance with tax laws, and favors indirect taxation (such as value-added taxes) in order to broaden the tax base to include those with modest incomes.

Meanwhile, direct taxation of corporations and individuals has tended to decline – despite the moot claim that lower direct taxation ensures investment and growth. As a result, the tax/GDP ratio in most countries in Sub-Saharan Africa and Latin America has stagnated or even fallen.