Raising Revenue Right: How Smarter Tax Systems Can Finance Development Without Hurting Growth

The World Bank says developing economies can raise revenue more fairly by reducing tax exemptions and investing in technology, transparency and public trust. Smarter tax systems could expand fiscal space, protect vulnerable households and give businesses a simpler, more predictable environment.

Emerging market and developing economies are facing a difficult fiscal squeeze. Budget deficits are widening, debt-servicing costs are consuming resources needed for essential services, and development assistance is becoming less reliable. A World Bank Policy Research Report argues that governments should respond not merely by raising tax rates, but by creating revenue systems that collect money more efficiently, fairly and transparently.

Prepared by Pierre Bachas, Oyebola Okunogbe, Mahvish Shaukat and Dario Tortarolo, Raising Revenue Right: A Roadmap for Domestic Resource Mobilization draws on international tax data, administrative records and country experiences. It presents technology, transparency and public trust as the foundations of sustainable domestic revenue mobilisation.

When Debt Rises but Tax Revenue Stands Still

The median primary deficit in emerging market and developing economies has doubled from around 2 percent of GDP at the beginning of the century. In several countries, interest payments now exceed government spending on health and education, leaving less money for infrastructure, social protection and climate resilience.

Tax revenue has remained broadly stagnant since 2010 at about 10 percent of GDP in low-income countries, 13 percent in lower-middle-income economies and 19 percent in upper-middle-income countries. However, the report cautions against imposing a universal tax-to-GDP target of 15–20 percent. Revenue needs differ according to national priorities, institutional capacity and the quality of public spending.

The problem is often not low tax rates. Many developing economies impose relatively high rates on formal firms but collect limited revenue because exemptions, preferential regimes, avoidance and weak enforcement narrow the tax base. Tax concessions cost governments roughly one-quarter of total tax revenue, while consumption-tax exemptions reduce potential collections in developing economies by an estimated 16–18 percent.

Governments should publish the cost and beneficiaries of tax incentives, remove concessions that do not produce measurable investment or employment, and simplify fragmented rules. These reforms could increase revenue while reducing unfair advantages for selected companies and industries.

Digital Tax Systems Can Unlock Hidden Revenue

Technology can help authorities identify taxpayers, verify liabilities and collect payments at lower cost. By 2025, approximately 97 percent of countries had a tax-management information system, compared with only 36 percent two decades earlier.

Digital identification, electronic filing, e-invoicing and online payments can bring unreported transactions into the formal system. Ghana doubled property-tax collections after introducing digital property identification and billing. Ethiopia achieved an almost 50 percent increase in value-added tax revenue through electronic sales-registration machines. Indonesia more than doubled collections from medium-sized taxpayers after specialised offices tripled the staff-to-taxpayer ratio.

Technology, however, cannot replace effective institutions. Tax authorities may collect millions of electronic records without having enough trained personnel or compatible databases to analyse them. Artificial intelligence can improve audit selection, property valuation and taxpayer assistance, but it also introduces privacy, cybersecurity and bias risks.

International development partners should support data governance, staff training and cooperation between public agencies rather than financing software alone. Assistance should be tied to measurable results such as greater taxpayer coverage, faster refunds, higher filing rates and better dispute resolution.

Fairer Taxes Must Reach Wealth Without Hurting the Poor

Developing economies rely heavily on consumption taxes while collecting relatively little from personal income, property, capital gains, multinational profits and offshore assets. In some countries, taxes and transfers together push more people into poverty than they lift out.

Value-added tax remains useful where informal employment makes income difficult to verify. But governments should protect low-income households through targeted cash transfers instead of multiple VAT exemptions, which often benefit wealthier consumers and complicate administration.

International transparency offers an opportunity to collect more from wealthy individuals and large corporations. More than one-third of multinational profits have been estimated to shift to low-tax jurisdictions, reducing global corporate tax revenue by over 10 percent. At least 10 percent of global financial wealth is held offshore.

Automatic financial-information exchange, beneficial-ownership registries and country-by-country corporate reporting can reveal hidden profits and assets. Such registries now cover about two-thirds of the global population, while foreign-owned deposits in tax havens have fallen by one-quarter. Argentina's 2016 disclosure programme uncovered assets equal to 21 percent of GDP, generated immediate penalties worth 1.8 percent of GDP and doubled wealth-tax revenue.

A Practical Reform Roadmap for Every Economy

The report estimates that 66 percent of countries with relatively strong foundations and 73 percent of those with weaker foundations remain below their achievable "fiscal frontier"—the best possible balance between efficiency and fairness at a given revenue level.

Countries with weak administrations should first build taxpayer registries, strengthen large-taxpayer offices and introduce electronic filing. Economies with functional systems but extensive informality should expand e-invoicing and improve property records. More capable countries should simplify overlapping taxes, eliminate ineffective exemptions, improve refunds and use international data to tax top earners and mobile capital.

Private companies could benefit from predictable rules, faster refunds, digital services and fairer competition. The principal risks are costly compliance, intrusive data collection and aggressive enforcement without effective appeals. Governments should consult businesses, phase in reforms and avoid placing excessive burdens on small firms.

Future tax decisions should compare the value of additional public spending with the cost of collecting the money. Evidence from Mexico suggests that raising one additional dollar through top-income taxes creates an estimated welfare loss of two cents, compared with 77 cents through a VAT increase. The figures cannot be applied automatically everywhere, but they show why governments must choose tax instruments carefully.

The report's central message is straightforward: sustainable revenue mobilisation depends on collecting taxes better, not simply collecting more. Technology, transparency and trust can help governments finance development, protect vulnerable households and create a more predictable environment for investment.