Creating fiscal space

Author:David Coady
Position::Division chief of the Expenditure Policy Division in the IMF's Fiscal Affairs Department
Pages:24-27
 
FREE EXCERPT
24 FINANCE & DEVELOPMENT | December 2018
ART: ISTOCK / BEASTFROMEAST; ALFEXE
Enhancing domestic tax capacity is essential for strengthening social protection
and developing human capital
David Coady
A
key challenge for developing economies
wishing to streng then their social pro-
tection systems and expand access to
education and health is how to raise
the necessar y revenue in the context of a large
informa l sector.
e informal sector is t ypically cha racterized
by high levels of self-employment, low skill levels,
and often multiple and volatile sources of income.
is limits the potential to r aise revenue by taxing
income— especially f rom lower-income groups—
which requires the ability to verify total indiv id-
ual income. In the context of socia l insurance, it
also means greater reliance on financing t hrough
general government revenue sources than on t he
contributory models emphasized in adva nced econ-
omies (see “Shifting Tides” and “Reima gining
Social Protection,” in this issue of FD).
Recent research also finds that countries move to a
higher growth path once tax revenue reaches about 15
percent of GDP (Gaspar, Jaramillo, and Wingender
2016), in part reflecting higher social spending.
However, about half of low-income countries—and
a third of emerging market economies—have tax ratios
below this 15 percent threshold. Low tax ratios in turn
result in low levels of social spending (see Chart 1).
CREATING
FISCAL SPACE

To continue reading

REQUEST YOUR TRIAL