Tax

==In developing countries==
Following Nicolas Kaldor's research, public finance in developing countries is strongly tied to [[state capacity]] and financial development. As state capacity develops, states not only increase the level of taxation but also the pattern of taxation. With larger tax bases and the diminishing importance of trading tax, income tax gains more importance.<ref>{{cite journal |last1=Stern |first1=Nicolas |last2=Burgess |first2=Robin |title=Taxation and Development |journal=Journal of Economic Literature}}</ref>
According to Tilly's argument, state capacity evolves as a response to the emergence of war. War is an incentive for states to raise taxes and strengthen states' capacity. Historically, many taxation breakthroughs took place during wartime. The introduction of income tax in Britain was due to the Napoleonic War in 1798. The US first introduced income tax during the Civil War.<ref name="Besley & Persson">{{cite journal |last1=Besley |first1=Timothy |last2=Persson |first2=Torsten |author1-link=Tim Besley |author2-link=Torsten Persson |title=The Origins of State Capacity: Property Rights, Taxation, and Politics |journal=American Economic Review |date=September 2009 |volume=99 |issue=4 |pages=1218–1244 |issn= 0002-8282 |doi=10.1257/aer.99.4.1218 |url=http://eprints.lse.ac.uk/33768/1/The_origins_of_state_capacity_property_rights,_taxation,_and_politics(lsero).pdf}}</ref> Taxation is constrained by the fiscal and legal capacities of a country.<ref name="Besley & Persson" /> Fiscal and legal capacities also complement each other. A well-designed tax system can minimize efficiency loss and boost economic growth. With better compliance and better support to financial institutions and individual property, the government will be able to collect more tax. Although wealthier countries have higher tax revenue, economic growth does not always translate to higher tax revenue. For example, in India, increases in exemptions lead to the stagnation of income tax revenue at around 0.5% of GDP since 1986.<ref>{{cite journal |last1=Piketty |first1=Thomas |last2=Qian |first2=Nancy |author1-link=Thomas Piketty |author2-link=Nancy Qian |title=Income Inequality and Progressive Income Taxation in China and India, 1986–2015 |journal=American Economic Journal: Applied Economics |date=April 2009 |volume=1 |issue=2 |pages=53–63 |doi=10.1257/app.1.2.53|s2cid=27331525 }}</ref>

Researchers for [[EPS PEAKS]]<ref name="Economics Topic Guide Taxation and Revenue">{{cite web |url=http://partnerplatform.org/?c158bbx3 |title=Economics Topic Guide Taxation and Revenue |author=Hazel Granger |publisher=EPS PEAKS |year=2013}}</ref> stated that the core purpose of taxation is revenue mobilization, providing resources for National Budgets, and forming an important part of macroeconomic management. They said [[economic theory]] has focused on the need to "optimize" the system through balancing efficiency and equity, understanding the impacts on production, and consumption as well as distribution, [[Redistribution (economics)|redistribution]], and [[welfare]].

They state that taxes and tax relief have also been used as a tool for behavioral change, to influence [[investment (macroeconomics)|investment]] decisions, [[labor supply]], [[Consumption (economics)|consumption patterns]], and positive and negative economic spill-overs (externalities), and ultimately, the promotion of economic growth and development. The tax system and its administration also play an important role in state-building and governance, as a principal form of "social contract" between the state and citizens who can, as taxpayers, exert accountability on the state as a consequence.

The researchers wrote that domestic revenue forms an important part of a developing country's public financing as it is more stable and predictable than [[Official development assistance|Overseas Development Assistance]] and necessary for a country to be self-sufficient. They found that domestic revenue flows are, on average, already much larger than ODA, with aid worth less than 10% of collected taxes in Africa as a whole.

However, in a quarter of African countries Overseas Development Assistance does exceed tax collection,<ref>Africa Economic Outlook 2010, Part 2: Public Resource Mobilisation and Aid in Africa, AfDB/OECD (2010)</ref> with these more likely to be non-resource-rich countries. This suggests countries making the most progress replacing aid with tax revenue tend to be those benefiting disproportionately from rising prices of energy and commodities.

The author<ref name="Economics Topic Guide Taxation and Revenue" /> found tax revenue as a percentage of GDP varying greatly around a global average of 19%.<ref>According to IMF data for 2010, from Revenue Data for IMF Member Countries, as of 2011, (unpublished)</ref> This data also indicates countries with higher GDP tend to have higher tax to GDP ratios, demonstrating that higher income is associated with more than proportionately higher tax revenue. On average, high-income countries have tax revenue as a percentage of GDP of around 22%, compared to 18% in middle-income countries and 14% in low-income countries.

In high-income countries, the highest tax-to-GDP ratio is in [[Denmark]] at 47% and the lowest is in Kuwait at 0.8%, reflecting low taxes from strong oil revenues. The long-term average performance of tax revenue as a share of GDP in low-income countries has been largely stagnant, although most have shown some improvement in more recent years. On average, resource-rich countries have made the most progress, rising from 10% in the mid-1990s to around 17% in 2008. Non-resource-rich countries made some progress, with average tax revenues increasing from 10% to 15% over the same period.<ref>IMF FAD (2011), Revenue Mobilization in Developing Countries</ref>

Many low-income countries have a tax-to-GDP ratio of less than 15% which could be due to low tax potentials, such as a limited taxable economic activity, or low tax effort due to policy choice, non-compliance, or administrative constraints.

Some low-income countries have relatively high tax-to-GDP ratios due to resource tax revenues (e.g. [[Angola]]) or relatively efficient tax administration (e.g. [[Kenya]], [[Brazil]]) whereas some middle-income countries have lower tax-to-GDP ratios (e.g. [[Malaysia]]) which reflect a more tax-friendly policy choice.

While overall tax revenues have remained broadly constant, the global trend shows trade taxes have been declining as a proportion of total revenues(IMF, 2011), with the share of revenue shifting away from border trade taxes towards domestically levied [[sales taxes]] on goods and services. Low-income countries tend to have a higher dependence on trade taxes, and a smaller proportion of income and consumption taxes when compared to high-income countries.<ref>IMF WP/05/112, Tax Revenue and (or?) Trade Liberalization, Thomas Baunsgaard and Michael Keen</ref>

One indicator of the taxpaying experience was captured in the "Doing Business" survey,<ref>"Doing Business 2013", World Bank/IFC (2013)</ref> which compares the total tax rate, time spent complying with tax procedures, and the number of payments required through the year, across 176 countries. The "easiest" countries in which to pay taxes are located in the Middle East with the [[UAE]] ranking first, followed by [[Qatar]] and [[Saudi Arabia]], most likely reflecting low tax regimes in those countries. Countries in [[Sub-Saharan Africa]] are among the "hardest" to pay with the [[Central African Republic]], [[Republic of Congo]], [[Guinea]] and [[Chad]] in the bottom 5, reflecting higher total tax rates and a greater administrative burden to comply.

===Key facts===
The below facts were compiled by EPS PEAKS researchers:<ref name="Economics Topic Guide Taxation and Revenue" />
* [[Trade liberalization]] has led to a decline in trade taxes as a share of total revenues and GDP.<ref name="Economics Topic Guide Taxation and Revenue" /><ref name="Revenue Mobilisation in Sub Saharan Africa Challenges from Globalisation I Trade Reform">{{cite journal |last1=Keen |last2=Mansour |year=2010 |title=Revenue Mobilisation in Sub-Saharan Africa: Challenges from Globalisation I – Trade Reform |journal=Development Policy Review |volume=28 |issue=5 |pages=553–71 |doi=10.1111/j.1467-7679.2010.00498.x|s2cid=153915109 }}</ref>
* Resource-rich countries tend to collect more revenue as a share of GDP, but this is more volatile. Sub-Saharan African countries that are resource-rich have performed better tax collecting than non-resource-rich countries, but revenues are more volatile from year to year.<ref name="Revenue Mobilisation in Sub Saharan Africa Challenges from Globalisation I Trade Reform" /> By strengthening revenue management, there are huge opportunities for investment for development and growth.<ref name="Economics Topic Guide Taxation and Revenue" /><ref>See for example Paul Collier (2010), The Political Economy of Natural Resources, social research Vol 77: No 4: Winter 2010.</ref>
* Developing countries have an informal sector representing an average of around 40%, perhaps up to 60% in some.<ref>Schneider, Buehn, and Montenegro (2010), Shadow Economies all over the World: New Estimates for 162 Countries from 1999 to 2007.</ref> Informal sectors feature many small informal traders who may not be efficient in bringing into the tax net since the cost of collection is high and revenue potential limited (although there are broader governance benefits). There is also an issue of non-compliant companies who are "hard to tax", evading taxes and should be brought into the tax net.<ref name="Economics Topic Guide Taxation and Revenue" /><ref name="IMF 2011">IMF, 2011, Revenue Mobilization in Developing Countries, Fiscal Affairs Department</ref>
* In many low-income countries, the majority of revenue is collected from a narrow tax base, sometimes because of a limited range of taxable economic activities. There is therefore dependence on few taxpayers, often multinationals, that can exacerbate the revenue challenge by minimizing their tax liability, in some cases abusing a lack of capacity in revenue authorities, sometimes through [[Transfer pricing|transfer pricing abuse]].{{elucidate|date=November 2013}}<ref name="Economics Topic Guide Taxation and Revenue" /><ref name="IMF 2011" />
* Developing and developed countries face huge challenges in taxing multinationals and international citizens. Estimates of tax revenue losses from evasion and avoidance in developing countries are limited by a lack of data and methodological shortcomings, but some estimates are significant.<ref name="Economics Topic Guide Taxation and Revenue" /><ref>See Section 3 'International Taxation' e.g. Torvik, 2009 in Commission on Capital Flight from Developing Countries, 2009: Tax Havens and Development</ref>
* Countries use incentives to attract investment but doing this may be unnecessarily giving up revenue as evidence suggests that investors are influenced more by economic fundamentals like market size, infrastructure, and skills, and only marginally by tax incentives (IFC investor surveys).<ref name="Economics Topic Guide Taxation and Revenue" /> For example, even though the [[Government of Armenia]] supports the IT sector and seeks to improve the investment climate, the small size of the domestic market, low wages, low demand for productivity enhancement tools, financial constraints, high software piracy rates, and other factors make growth in this sector a slow process. Meaning that tax incentives do not contribute to the development of the sector as much as it is thought to contribute.<ref>[https://www.export.gov/article?id=Armenia-information-technology], Armenia – Information Technology</ref> Support towards the IT industry and tax incentives were established in the 2000s in [[Armenia]], and this example showcases that such policies are not the guarantee of rapid economic growth.<ref>[https://futurearmenian.com/wp-content/uploads/2021/08/Armenian-ICT-Sector-State-Of-The-Industry-Report.pdf], Armenian ICT Sector State Of The Industry Report</ref>
* In low-income countries, compliance costs are high, they are lengthy processes, frequent tax payments, bribes and corruption.<ref name="Economics Topic Guide Taxation and Revenue" /><ref name="IMF 2011" /><ref>'Doing Business 2013', World Bank/IFC 2013</ref>
* Administrations are often under-resourced, resources are not effectively targeted on areas of greatest impact, and mid-level management is weak. Coordination between domestic and customs is weak, which is especially important for VAT. Weak administration, governance, and corruption tend to be associated with low revenue collections (IMF, 2011).<ref name="Economics Topic Guide Taxation and Revenue" />
* Evidence on the effect of aid on tax revenues is inconclusive. Tax revenue is more stable and sustainable than aid. While a disincentive effect of aid on revenue may be expected and was supported by some early studies, recent evidence does not support that conclusion, and in some cases, points towards higher tax revenue following support for revenue mobilization.<ref name="Economics Topic Guide Taxation and Revenue" />
* Of all regions, Africa has the highest total tax rates borne by the business at 57.4% of the profit on average but has reduced the most since 2004, from 70%, partly due to introducing VAT and this is likely to have a beneficial effect on attracting investment.<ref name="Economics Topic Guide Taxation and Revenue" /><ref>Paying Taxes 2013: Total tax rate is a composite measure including corporate income tax, employment taxes, social contributions, indirect taxes, property taxes, and smaller taxes e.g. environmental tax.</ref>
* Fragile states are less able to expand tax revenue as a percentage of GDP and any gains are more difficult to sustain.<ref>IMF Working Paper 108/12 (2012), Mobilizing Revenue in Sub-Saharan Africa: Empirical Norms and Key Determinants</ref> Tax administration tends to collapse if conflict reduces state-controlled territory or reduces productivity.<ref>African Economic Outlook (2010)</ref> As economies are rebuilt after conflicts, there can be good progress in developing effective tax systems. [[Liberia]] expanded from 10.6% of GDP in 2003 to 21.3% in 2011. [[Mozambique]] increased from 10.5% of GDP in 1994 to around 17.7% in 2011.<ref name="Economics Topic Guide Taxation and Revenue" /><ref>IMF Revenue Data, 2011: Total Tax Revenue as a percentage of GDP</ref>

=== Summary ===
Aid interventions in revenue can support revenue mobilization for growth, improve tax system design and administrative effectiveness, and strengthen governance and compliance.<ref name="Economics Topic Guide Taxation and Revenue" /> The author of the Economics Topic Guide found that the best aid modalities for revenue depend on country circumstances, but should aim to align with government interests and facilitate effective planning and implementation of activities under evidence-based tax reform. Lastly, she found that identifying areas for further reform requires country-specific diagnostic assessment: broad areas for developing countries identified internationally (e.g. IMF) include, for example, property taxation for local revenues, strengthening expenditure management, and effective taxation of extractive industries and multinationals.<ref name="Economics Topic Guide Taxation and Revenue" />