Developing Economies’ Untapped Revenues

Efforts to improve tax systems worldwide making a difference

Increase collection of domestic revenues to help lift more people out of poverty

Policymakers need to make better use of donor funding and assistance

This was the subject of a panel discussion entitled “Collect More & Spend Better,” at the IMF-World Bank Spring Meetings in April. Panelist Eric Postel, Associate Administrator at the U.S. Agency for International Development (USAID), who has helped lead the U.S. government’s efforts to lend tax collection assistance worldwide, recently spoke with IMF Survey to expound on how these efforts are helping to bring people out of poverty in developing countries.

IMF Survey: Why do developing countries often have trouble collecting enough tax revenues?

Postel: In some countries, because the processes for collecting taxes are either inefficient, difficult to administer, or corrupt, you have large amounts of people in the informal sector. Local companies do not have a tax ID number, or every citizen a Social Security number, as we do in the United States, for example. Therefore, many citizens in these countries are not in any system.

IMF Survey : In other words, there might be just a few people paying taxes in a country?

Postel: That is exactly right. You have a very small number of people paying taxes, and then there are a lot of people outside of the system who are not paying taxes. And yet they want services. In many cases, if all of those people outside of the system can be added, the tax rates can actually be lowered because you have so many more people contributing to it.

IMF Survey : It seems money is being collected, but in some cases it is disappearing or not being spent right—so that is your “spend better” advice. But how can countries learn to spend that money better?

Postel: A lot needs to be done to spend the money better, without corruption, and with full transparency. Voters do not want to pay taxes if they don’t know what is being bought. If they think the money is lining someone’s pocket, they have no interest in paying taxes—they would prefer the money stayed in their own pockets. If people think it is going to get them better schools, better healthcare, better roads, they start getting very interested in paying taxes. So the “spend better” part of the agenda is very important.

IMF Survey : Can you give us a sense of what USAID and other international organizations are doing to help these countries to...