BETTER tax design and stronger public institutions could allow emerging and low-income countries like the Philippines to finance their development goals and their climate transition, according to the International Monetary Fund (IMF).
In a blog, IMF’s Director of the Fiscal Affairs Department Vitor Gaspar; Division Chief in the Fiscal Affairs Department, Mario Mansour; and Charles Vellutini, economist in the Fiscal Affairs Department, said trillions of dollars are needed by these countries to meet their development needs.
It is estimated that emerging and low-income countries need $3 trillion annually through 2030 to finance their goals and a transition to a green economy.
“Our new research finds that many countries have the potential to increase their tax-to-GDP ratios—enabling them to provide critical government services—by as much as 9 percentage points through better tax design and stronger public institutions,” the authors said.
The IMF said that the average tax-to-GDP ratio of these countries has increased by 3.5 to 5 percentage points since the early 1990s. However, since 2010, tax revenues among emerging and low-income countries have stagnated.
The IMF said that despite the introduction of new tax measures, half of emerging countries and two-thirds of low-income countries had a tax- to-GDP ratio of below 15 percent as of 2020.
“Countries have considerable room to collect more revenue based on their tax potential—the maximum a country can collect given its economic structure and institutions,” IMF said.
Based on their estimates, they found that low-income countries could raise their tax-to-GDP ratio by as much as 6.7 percentage points on average.
The IMF said improving public institutions in these countries through efforts such as reducing corruption would lead to an additional 2.3-point increase in tax revenues.
It added that the total revenue-raising potential, at 9 percentage points of GDP, is a staggering two-thirds increase relative to their tax-to-GDP ratio in 2020.
For emerging market economies, the IMF said they can raise their tax-to-GDP ratio by 5 percentage points on average, while improving their institutions to the average of advanced economies could raise an additional 2 to 3 percentage points.
“Some policymakers hope for additional revenue from the ongoing international collaboration on taxing profits of large multinational corporations. But the direct revenue impact of this initiative is likely to represent only a tiny fraction of the overall revenue needs,” IMF said.
In order to create better tax policies, the IMF recommended that countries improve the design and administration of core domestic taxes such as value-added taxes, excises, personal income tax, and corporate income tax.
VAT revenues could double even without an increase in rates, IMF said, if these are implemented without “preferential treatments.” Using digital technologies will also lead to higher tax collections.
Efforts such as rationalizing tax expenses and implementing a more neutral taxation of capital income as well as better use of property taxes will also improve revenues.
“This multi-pronged approach, over the long term, can balance equity and efficiency considerations—the Achilles’ heel of managing the political economy of tax reforms,” IMF said.