Development-oriented Tax Policy

No public policy issue is more important than the structure and level of taxes. Governments have fallen because of tax reform. Proposals to extend the value-added tax (VAT) or increase its rates have caused po liti cal agitation in many countries, including Ec ua dor and Mexico. In many less-developed countries, a shortage of funds impedes development eff orts, yet attempts to increase tax revenues not only meet enormous po liti cal re sis-tance but are often futile. Simplistic recommendations to increase the power of the tax police often backfi re, generating substantially more revenue for the tax collectors but very little extra for the public fi sc. Part of the problem lies in the fact that those providing advice on taxation to developing countries are insensitive to the diff erences in economic and po liti cal structures both among developing countries and between these countries and more developed ones, to the administrative diffi cul-ties faced by developing countries, or to their diff ering objectives. To take but one example: standard textbook expositions of the objectives of tax policy for developed countries, for instance, emphasize effi ciency, and more recent expositions discuss problems of tax avoidance and evasion but seldom note corruption. But corruption has increasingly come to be recognized as one of the major challenges facing developing countries. Designing institutions and policies, including tax structures, that reduce the scope for corruption— what we call corruption-resistant tax structures— thus should be a central concern in tax design. While outside advisers often lecture moralistically on the need to improve tax administration and reduce corruption, they seldom address corruption as part of tax design. Th is illustrates how diff erences in the structure of the economy (where that term embraces institutional capacities— the ability to control corruption) and objectives (reducing corruption) dictate a diff erence in tax policy.