Why Do Developing Countries Tax So Little?
AbstractLow-income countries typically collect taxes of between 10 to 20 percent of GDP while the average for high-income countries is more like 40 percent. In order to understand taxation, economic development, and the relationships between them, we need to think about the forces that drive the development process. Poor countries are poor for certain reasons, and these reasons can also help to explain their weakness in raising tax revenue. We begin by laying out some basic relationships regarding how tax revenue as a share of GDP varies with per capita income and with the breadth of a country's tax base. We sketch a baseline model of what determines a country's tax revenue as a share of GDP. We then turn to our primary focus: why do developing countries tax so little? We begin with factors related to the economic structure of these economies. But we argue that there is also an important role for political factors, such as weak institutions, fragmented polities, and a lack of transparency due to weak news media. Moreover, sociological and cultural factors—such as a weak sense of national identity and a poor norm for compliance—may stifle the collection of tax revenue. In each case, we suggest the need for a dynamic approach that encompasses the two-way interactions between these political, social, and cultural factors and the economy.
CitationBesley, Timothy, and Torsten Persson. 2014. "Why Do Developing Countries Tax So Little?" Journal of Economic Perspectives, 28 (4): 99-120. DOI: 10.1257/jep.28.4.99
- E23 Macroeconomics: Production
- E62 Fiscal Policy
- H20 Taxation, Subsidies, and Revenue: General
- H26 Tax Evasion and Avoidance
- O17 Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
- O23 Fiscal and Monetary Policy in Development
- Z13 Economic Sociology; Economic Anthropology; Social and Economic Stratification