Essays in Honor of Roy Bahl
Studies in Fiscal Federalism and State–local Finance series
Edited by Richard M. Bird and Jorge Martinez-Vazquez
Chapter 12: A retrospective on taxation in developing countries: Will the weakest link be strengthened?
Nicholas Kaldor told us in 1963 that developing countries did not know how to tax, Richard Goode told us in 1984 that they still had trouble formulating and implementing tax policies, and Richard Bird tells us in 2011 that tax design and tax administration in developing countries have shown considerable improvement but there is a long way to go before taxation can properly support growth and distribution objectives. All three got it right for the time period they were studying. Some middle income countries have been closing the gap with the industrials in revenue mobilization, good tax policy and efficient administration, but the convergence in most low income countries has been much slower. It is not an exaggeration to say that taxation is a weak link in the development policies of low income countries. In many countries, revenues are not large enough to provide a basic level of services or to develop infrastructure on which to build an economy that can capture its comparative advantages. Tax bases are narrow because of legal exemptions, poor enforcement, and hard-to-tax economies. This leads to a misallocation of resources that retards growth, perhaps to a significant extent, and to horizontal inequities that erode confidence in the tax system and encourage noncompliance. It is true enough that taxation is especially difficult in poor countries where both the capacity to pay and the capacity to collect are limited.
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