This briefing note has three objectives. These are to discuss:
- the reasons for the renewed interest in domestic resource mobilisation in developing countries;
- the reasons why tax revenues tend to be lower in the poorer countries; and
- the potential risks associated with trying to squeeze too much taxation out of the poorest economies.
• Linking the delivery of the Sustainable Development Goals to an increase in domestic resource mobilisation is a good idea in principle. More taxation is associated with benefits beyond the finance it raises, including more accountable and effective institutions and more social spending.
• Some developing countries collect taxes at levels commensurate with their level of economic and institutional development. In many cases, these levels of tax collection are higher than the levels recorded in today’s developed countries when they were at a similar level of development.
• Trying to squeeze too much tax out of the poorest economies has risks. High tax rates can impede private investment. Tax and spending policies are often regressive rather than progressive.
• Blind adherence to a push for more taxation is likely to have adverse consequences unless the international community prioritises support for better tax systems, rather than more tax collection. The two are not always compatible. Good things come to those who build tax systems that are compatible with economic growth
The purpose is not to argue the merits of more versus less taxation, but rather to provide food for thought on the management of expectations around taxation and the development agenda, as articulated in the Sustainable Development Goals.