The International Monetary Fund (IMF) has released a report highlighting the potential for countries to increase their tax-to-GDP ratios, allowing for the provision of critical government services. The report states that through better tax design and stronger public institutions, many countries have the potential to increase their tax-to-GDP ratios by as much as 9 percentage points.
According to the IMF, merging markets and developing economies require an estimated $3 trillion each year through 2030 to support their development goals. This amounts to approximately 7% of the countries' combined GDPs from 2022. The IMF report notes that this is a challenging statistic for low-income countries. However, by improving the design, efficiency, administration, and staffing of their tax systems, these countries can generate increased revenue and stimulate economic growth.
The IMF's research indicates that developing countries and economies can improve their tax-to-GDP ratios by up to 9 percentage points through tax system reforms and institutional capacity building. The IMF suggests that achieving this would require an institution-based approach targeting policy improvements, administration, and the legal implementation of taxes. Notably, the average tax-to-GDP ratio in developing economies has increased by 3.5-5 percentage points since the early 1990s, primarily driven by taxes on consumption.
Globally, tax revenues as a percentage of GDP have stagnated since 2010, potentially due to the aftermath of the 2008 financial crisis. This halted the growth in revenue percentages observed in countries such as Albania, Argentina, Armenia, Brazil, Colombia, and Georgia. The IMF report highlights that two-thirds of low-income countries had a tax-to-GDP ratio below 15 percent in 2020. This threshold is considered the marker above which economic growth has been found to occur and accelerate.
The IMF's findings suggest that emerging market countries can increase their tax revenue percentages by an average of 6.7 percentage points by harnessing their tax potential, which is determined by the country's economic structure and institutions. Additionally, targeting corruption within their ranks could provide an additional 2.3 percentage points on average.
In conclusion, the IMF's research emphasizes the potential for countries to enhance their tax-to-GDP ratios through improved tax design and stronger institutions. By implementing tax system reforms and addressing corruption, governments can generate increased revenue and provide critical government services to their populations.