Assessing the tax performance of developing countries

Governments, donors and international organisations need to be able to judge the performance of tax systems in a broader context of development, governance and international cooperation. The tax performance assessment (TPA) introduced in this paper seeks to give a comparative overview of the tax performance of developing countries, based on aggregate data and country-specific information. This should put governments, donors and international organisations in a better position to decide on tax reform programmes and aid modalities.

The analysis highlights the following:

• Of data gathered on a total of 177 countries, 36 qualify as high tax performers, whereas 41 fall in the low tax performing group. The remaining 100 countries are considered average performers.
• Non-tax revenue is higher for low tax performers in all income groups, but total revenues and total expenditures are lower. This means that the lack of tax revenue is only partly offset by alternative sources of financing.
• The size of the public sector and the quality and quantity of public services may be the outcome of choice by a society. If a country is governed in a democratic and transparent manner, there is no reason to talk about revenue mobilisation problems, even if the country has a low tax ratio. 
• Low tax performers have a higher death toll in armed conflicts and a larger number of displaced persons, and only a few low tax performers have a public sector capable of implementing public policies in an orderly and transparent way.
  

The paper provides the following recommendations:

• Development policy must not focus solely on the tax ratio, but consider a partner country’s tax system as a whole, in a broader governance context.
• In the context of bilateral development cooperation, states with persistently and significantly low tax ratios should be encouraged to be more active in fiscal terms and to increase revenue collection.