Domestic Revenue Mobilization and Tax Expenditures in Developing Countries

Domestic revenue mobilization (DRM) is a fundamental component of any sustainable development strategy. This is particularly salient in developing countries where low DRM levels are often one of the most important impediments to inclusive economic growth. Whereas external financing – including, e.g. official development assistance and foreign direct investment (FDI) – is a crucial source of revenue for many developing economies, there is a broad consensus regarding the key role of DRM to support inclusive and sustained economic growth.

Against this background, mobilizing the full range of available domestic resources has moved-up the priorities of developing economies’ governments and international organizations (IOs) alike.

The first global conference of the Platform for Collaboration on Tax – a joint initiative launched in 2016 by the IMF, the OECD, the United Nations as well as the World Bank– that took place earlier this year was a case in point. The main topic of the conference was the broad role of taxation in achieving the United Nations’ Sustainable Development Goals (SDGs). As highlighted by the four IOs in their joint statement after the event, “… [the SDGs] set ambitious targets for all countries, to end all forms of poverty, fight inequalities and tackle climate change, while ensuring that no one is left behind. Achieving these goals requires enormous financial resources…Taxation has a key role to play in financing the SDGs” (IMF et al., 2018).

The mobilization of domestic resources through taxation is crucial for many reasons. Revenues collected through the tax system are generally more stable and predictable than those coming from foreign aid or domestic non-tax sources, e.g. royalties from the minerals sector. Moreover, the contribution of taxes can strengthen the social contract between citizens and their government and thus have a positive effect on governance.

Unfortunately though, the status quo is worrisome. While the average tax-to-GDP ratio for advanced economies is 26 percent, about half of developing countries have tax-to-GDP ratios below 15 percent – a threshold usually accepted as the minimum required to allow developing economies to take-off economically. (IMF, 2017). Some commentators consider even that threshold as too low.

In addition, increasing tax revenues is an ambitious and complex task depending on several factors such as designing efficient tax systems, improving institutional capacity, increasing tax compliance and empowering tax administrations, among others.

Against this backdrop, phasing-out ineffective tax expenditures – e.g. tax exemptions, deductions and deferrals – is a low hanging fruit. These tax subsidies are costly and often ineffective in reaching their stated goals. They also frequently trigger unwanted side effects. The use of tax incentives to attract investments is a case in point. Low-income economies often grant a myriad of tax holidays and tax exemptions that have little impact on investment or growth and hence significantly reduce the availability of public funds (IMF et al., 2015). Scaling back tax expenditures would broaden tax bases and, at the same time, allow countries to reduce marginal tax rates and/or save resources that, in turn could be allocated to more productive uses or more effectively targeted to tackle social issues such as reducing poverty and inequality.

Systematically identifying, estimating and reporting the revenue foregone through tax expenditures is a time and resource intensive but nonetheless critical task (Redonda et al., 2018).

In general, tax expenditure reporting among developing and emerging economies lags behind minimum standards (Kassim and Mansour, 2017). The lack of reliable data on the fiscal cost of these schemes is also an issue among developed countries. In a previous post, we discuss the preliminary insights from the Global Tax Expenditure Database (GTED) project and show the heterogeneity in TE reporting across the 43 OECD and G20 countries. While 33 countries have an official tax expenditure report, only 25 are considered comprehensive and detailed. Even more strikingly, 10 countries in this group do not report on tax expenditures at all (Neubig and Redonda, 2017).

At the same time, comprehensive and consistent estimates of tax expenditures are a necessary input to assess their effectiveness and efficiency through the implementation of sound cost-benefit analyses. This, in turn, is crucial to increase the effectiveness and fairness of tax systems and, ultimately, to increase transparency and accountability.

As emphasized in the closing statement of their first event, the Platform for Collaboration on Tax intends to “support developing countries to address tax transparency”. Helping these economies to improve their tax expenditure reporting, e.g. by providing financial and technical assistance, would be a significant step forward.


Kassim, L. and M. Mansour (2017). “Evaluation of Tax Expenditure Reporting in Developing Countries”, ATRN working paper 19, African Tax Research Network.

IMF (2017). “Fiscal Monitor. Achieving More with Less”, IMF April 2017,

IMF, OECD, UN and World Bank (2015). “Options for Low Income Countries’ Effective and Efficient Use of Tax Incentives for Investment”, A Report to the G-20 Development Working Group.

IMF, OECD, UN and World Bank (2018). “Platform Partners’ Statement at the Closing of the Conference”,

Neubig, T. and A. Redonda (2017). “Shedding Light on Hidden Government Spending: Tax Expenditures”, IMF PFM Blog,

Redonda, A., S. Diaz de Sarralde, M. Hallerberg, L. Johnson, A. Melamud, R. Rozemberg, J. Schwab and C. von Haldenwang (2018). “Tax Expenditure ad the Treatment of Tax Incentives for Investment”, Policy Brief, Think 20 (T20) Engagement Group for the G20,