Tax Revenue Performance and Vulnerability in Developing Countries

Abstract

This paper addresses vulnerability of revenue to external shocks using export composition to capture economic structure and differentiating countries according to income levels, resource endowments and political regimes. This gives a richer characterisation than previous studies. Lower income countries are vulnerable to shocks, especially in terms of trade (associated with the greatest revenue loss): democratic regimes seem to be less vulnerable to revenue losses due to shocks than non-democracies whereas revenue in resource rich countries is more vulnerable to shocks (except natural disasters) than non-resource rich countries. We find a negative relationship between manufacturing exports and revenue in lower income countries.

Is There a Fiscal Resource Curse? Resource Rents, Fiscal Capacity and Political Institutions

“…Focusing on the consequences for tax composition in resource-rich economies, Crivelli and Gupta (2014) find a large negative impact of resource revenues on the taxation of goods and services, and a more modest impact on corporate income tax and trade taxes. Looking at tax performance, Morrissey et al (2016) find that a reliance on natural resources amplifies the negative effects of macroeconomic shocks (terms of trade, exchange rates and natural disasters) on total revenues. Interestingly, they also find that democracies tend to outperform non-democracies in revenue resilience to shocks in lower-income countries.…”

Does the Political Resource Curse Affect Public Finance? The Vulnerability of Tax Revenue in Resource‐Dependent Countries

“…There are no compelling theoretical arguments supporting the assumption that RD autocracies are more vulnerable to external shocks than are RD democracies, or vice versa. However, several studies suggest that the revenue systems of democratic regimes are more resilient to external shocks (Arezki et al, 2011;Bhattacharyya & Collier, 2011;Ehrhart & Guerineau, 2013;Morrissey et al, 2016). Based on this literature, regime type should have an impact on the vulnerability of revenue in RD countries.…”

Structural transformation and tax efficiency

“…Several studies find a strong negative relationship between the relative size of the agricultural sector and a country's level of per capita income and tax revenues as a share of GDP (Tanzi, ). Subsequent studies show that a wide range of macroeconomic and demographic factors (such as real GDP per capita, inflation, share of agriculture in GDP, natural resource rents, trade openness, foreign aid, human capital, and urbanization) explain cross‐country differences in tax revenue performance (Besley & Persson, ; Castro & Camarillo, ; Ghura, ; Gupta, ; Morrissey, Von Haldenwang, Von Schiller, Ivanyna, & Bordon, ; Teera & Hudson, ). These studies also provide compelling evidence indicating that institutional factors (such as bureaucratic quality, corruption, government stability, and the rule of law) shape a country's efficiency in tax mobilization.…”