Welcome to the United Nations

Domestic revenue mobilization and taxation

A defining feature of the last decade of public policy has been increased attention to and real improvements in domestic revenue mobilization. Tax administration and public financial management capacities have dramatically improved in many States, and there is strengthened awareness of the link between taxation, expenditure and the accountability and legitimacy of the State. Increasing tax revenues in developing countries – by broadening the domestic tax base, improving tax compliance, and curbing tax evasion – is critical to ending extreme poverty and ensuring shared prosperity.

Revenue mobilization

Domestic revenue mobilization has increased substantially over the past several decades. While domestic resources are first and foremost generated by economic growth, domestic policy frameworks and institutions have an important impact on revenue mobilization. All tax measures ought to be carefully considered, as the incentives generated may affect income distribution and inequality, consumption and investment.

The figure shows the recent trend in tax revenue collection across groups of countries. The particularly weak global growth of 2016 was reflected in the resource mobilization data of some countries. Median tax/gross domestic product (GDP) ratios continued to increase in middle-income countries and small island developing States (SIDS), although at a slower rate, with a median ratio of 17.9 per cent. For least developed countries (LDCs), median tax revenue declined in 2016 to 13.3 per cent of GDP. Of the 42 LDCs with reported data, 19 increased their tax-GDP ratios in 2016. Large gaps remain between LDCs, middle-income countries and countries in developed regions, with the 2016 gaps rising to levels not seen since 2008.

Although every country is different and there is no one size fits all formula, there is increasing evidence that countries with tax revenues below 15 per cent of GDP have difficultly funding basic state functions. Yet taxes in most LDCs remain below that threshold, especially in states that are experiencing or have recently experienced conflict.

Regional breakdown of revenue mobilization

The figure clearly shows that Asia and Sub-Saharan Africa are the two regions which are struggling most at raising tax revenues above the 15 per cent of GDP threshold. Northern Africa and Latin America and the Caribbean are two other regions which appear to host low revenue raising countries, fairing slightly better, with median revenue-to-GDP ratios at 17 and 19 per cent respectively. 

The trend above is reflected in the data reported by the African Economic Outlook 2016. According to this publication, African public domestic revenues decreased from a total of $468 billion collected in 2013 to $461 billion in 2014. Because of that, some African countries have been adopting measures targeting government efficiency and simplification in the collection of taxes. Countries will have different paths and experiences in working out their revenue generation and collection abilities. These will be mostly dependent on the country’s economic situation and the degree of diversification and sophistication of the economy. In the United Nations Economic and Social Commission for Western Africa’s (ESCWA) experience, for example, one of the determining factors in its membership’s ability to generate revenues is whether the country in question is resource rich, or whether it does not carry any natural resources.

Revenue targets

The Addis Agenda welcomes efforts by countries to set nationally defined domestic targets for enhancing domestic revenue as part of their national sustainable development strategies, with international support to those in need to reach these targets. While targets can be oversimplified or distracting, in that establishing a target might not be enough to motivate reform, such targets can demonstrate political will, and help strengthen tax administration practices. Targets are most relevant for countries with low tax revenues to help create the urgency needed for reform.

A number of countries, particularly in Africa and South East Asia have set regional targets for revenue mobilization, which target tax levels higher than 15 per cent of GDP. The East African Community’s (EAC) convergence criteria for their single currency include setting a 25 per cent tax-to-GDP ratio as the target for member countries. Similarly, the West African Economic and Monetary Union (WAEMU) and the Economic Community of West African States (ECOWAS) have set 17 per cent and 20 per cent, respectively, as reasonable convergence targets. Many national development strategies (NDS) that cite tax targets indicate a level of 15 per cent or higher (e.g., Egypt, Ethiopia, Indonesia, Tanzania, Uganda and Vietnam).