Enhancing domestic revenues: constraints and opportunities

Enhancing domestic revenues: constraints and opportunities is a new cross-country comparative study that examines country tax capacity, effort, and gaps. This study is part of a larger project on innovative ways to close critical health financing gaps. An executive summary is provided below. Under each link, you can access the full report of the study, a short policy brief, and a blog. These publications are also listed under the publications tab.

This is a collaborative report by the Center for Policy Impact in Global Health and the Duke Center for International Development.

EXECUTIVE SUMMARY

Achieving the Sustainable Development Goals (SDGs) will require significant increases in financial resources from many different sources especially domestic resource mobilization (DRM). This Policy Brief summarizes a new study “Enhancing domestic revenues: constraint and opportunities A cross country comparative study of tax capacity, effort and gaps” that addressed three key questions about DRM:

  • How much domestic resources should a country be reasonably mobilizing—that is, what is its tax capacity?
  • What are the reasons a government is not raising the tax and non-tax revenues it needs—that is, what are the main reasons for the gap between capacity and performance?
  • What are the implications for governments and for donors—that is, how should aid relationships change as developing countries approach income transitions?

The study found that there is currently considerable variation in DRM between and within low-income countries (LICs), lower middle-income countries (LMICs), upper middle-income countries (UMICs), and high-income countries (HICs). The share of domestic revenues (taxes, user fees, and mandatory contributions) is 15% of gross domestic product (GDP) in LICs, 25% in LMICs, 30% in UMICs, and 40% in HICs. The largest increment of domestic revenue is noticed when a country moves from the LIC to the LMIC category.

In terms of determinants of revenue performance among LICs and LMICs, economic structure matters the most for revenue performance — especially the size of the informal sector (as indicated by the share of agriculture in the economy) and the existence of effective tax handles (such as the share of imported goods in GDP). For LMICs and UMICs, foreign assistance has a negative impact on revenue performance and reduces tax performance by about 40% to 60% of the amount of external grants received. In general, GDP per capita, goods imports as a share of GDP, and the domestic tax rate indicator have positive impacts on tax capacity while the share of agricultural value added has a negative impact.

The study calculates tax effort across income groups. While tax and revenue efforts of UMICs have increased over the last two decades, the performance of LICs and LMICs appears to be declining. The study highlights that although tax expenditures are an important determinant of the tax and revenue capacities of a country, they are the least transparent forms of government spending and are not properly measured and recorded for most countries.

Improved tax expenditure reporting and analysis, and elimination of cost ineffective tax expenditures should be an integral part of a country’s DRM enhancement strategy.Countries experience a progressive reduction in donor financing when they move from LIC to LMIC and then to UMIC. Donors should work closely with countries and provide adequate support to facilitate DRM before and during graduation from aid. Capacity building for better tax administration, improved tax expenditure reporting, strengthening institutions, and advancing economic growth would be key to ensure continued revenue performance improvements when countries reach middle-income status.

Enhancing domestic revenues: constraints and opportunities by the Center for Policy Impact in Global Health and the Duke Center for International Development. 

Please click on the following links for relevant publications:

  1. The complete report: Enhancing domestic revenues: constraints and opportunities 
  2. The policy brief: Domestic revenue mobilization: estimating the gaps between ability and effort
  3. The Brookings Institution’s Future Development Blog: Measuring the gap between ability and effort in domestic revenue mobilization