Impacts of Tax Capacity on Development Outcomes

There is increasing recognition that strong tax systems can have impacts on economic growth, the sustainability of revenues for expenditure, state-building, and inequality, although there are debates about the trade-offs to achieving these differing and sometimes incompatible objectives. Tax revenue appears to be more likely to be used to support broad development goals than revenue from grants (Gadenne, 2015) or from natural resources (Prichard et al., 2014). However, state capacity improvements and civil society engagement are important to help ensure that tax revenues improve development outcomes (Prichard, 2010). Mick Moore cautions that the developmental impacts of tax reform may be difficult to discern because “there are very few countries where revenue reform has been effective and sustained over long periods of time” (personal communication, 2017). Excise taxes (such as so-called ‘sin taxes’) may also potentially have specific sectoral impacts, although we were unable to investigate these in detail in the time available for this report. There is evidence, for example, that taxing tobacco more heavily could lead to health benefits: the Center for Global Development calls tobacco taxes “the single most cost-effective way to save lives in developing countries” because of the prevalence of smoking-related diseases (Savedoff and Alwang 2015, p. 1).