The development of effective tax regimes

Mass tax registration campaigns do not generate much revenue and can undermine the fairness of the tax system

To increase tax revenue in developing countries, policymakers and donors have become increasingly interested in mass registration campaigns. However, research suggests that these campaigns do not substantially increase net revenue because they (1) target low-income citizens and firms who have low or no tax liability and (2) underestimate or ignore administrative costs of registering many small taxpayers. Moreover, these campaigns undermine the fairness of the tax system by focusing on smaller firms while leaving alone higher income people and businesses. This research suggests that (1) revenue authorities should focus on higher income people and firms to increase revenue and (2) mass registration campaigns should focus on sensitizing taxpayers and building a stronger compliance culture, not gaining revenue in the short-term.

Democracy played critical role in the development of effective and fair taxation

A review article traced the development of taxation from the premodern to the modern era. It found that democratic institutions helped governments increase tax revenue and encouraged the adoption of progressive taxes – taxes where the wealthy pay a higher percentage than the poor. Democracy helped governments increase tax revenue because taxpayers consent to higher tax rates when they have a say in governmental rules and decision-making. And democracy encouraged progressive taxation because the expansion of suffrage gave voting power to lower income voters who favored progressive taxation of income. This research shows how democratic development has been important for effective and fair taxation.

Do you have a study we should share for a future Facty Friday? Send an email to drg.el@usaid.gov!