Why do developing countries tax so little?

Besley, Timothy ORCID: 0000-0002-8923-6372 and Persson, Torsten (2014) Why do developing countries tax so little? Journal of Economic Perspectives, 28 (4). pp. 99-120. ISSN 0895-3309

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Abstract

Low-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.

Item Type:	Article
Official URL:	https://www.aeaweb.org/journals/jep
Additional Information:	© 2014 American Economic Association
Divisions:	Economics
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HG Finance H Social Sciences > HJ Public Finance
JEL classification:	E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E23 - Production E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy Formation, Macroeconomic Aspects of Public Finance, Macroeconomic Policy, and General Outlook > E62 - Fiscal Policy; Public Expenditures, Investment, and Finance; Taxation H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H20 - General H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H26 - Tax Evasion O - Economic Development, Technological Change, and Growth > O1 - Economic Development > O17 - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements: Legal, Social, Economic, and Political O - Economic Development, Technological Change, and Growth > O2 - Development Planning and Policy > O23 - Fiscal and Monetary Policy in Development Z - Other Special Topics > Z1 - Cultural Economics; Economic Sociology; Economic Anthropology > Z13 - Social Norms and Social Capital; Social Networks
Date Deposited:	08 Apr 2016 14:03
Last Modified:	14 Nov 2024 05:09
URI:	http://eprints.lse.ac.uk/id/eprint/66002

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