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The tortoise defeats the hare

The past four decades have seen marked improvements in the collection of domestic revenue (tax and non-tax revenues) in many countries of the Global South. Domestic revenue mobilization (DRM) is a crucial steppingstone for meeting development needs: the costs of achieving the Sustainable Development Goals have been estimated at US$2.5 trillion.

Yet, DRM is not fundamental only for building a global financing architecture to achieve the 2030 Agenda. It is also important for strengthening the social contract between the state and its citizens and improving a state’s capacity to deliver on the needs, priorities, and aspirations of its citizens. With rising poverty and inequality since the onset of the COVID-19 crisis, DRM can also be important for expanding or building safety nets. However, in low-income countries, government revenues were projected to decline by 7.5% between 2019 and 2020 alone. Thus, there might still be a long way to go whereby the potential of DRM is yet to be fully realized.

Trends in the collection of tax and non-tax revenue

In our newly released  working paper, we look back over the past four decades to examine whether tax and non-tax collection has increased and whether these improvements have been sustained. We take advantage of the 2021 edition of the UNU-WIDER Government Revenue Dataset (GRD) and measure DRM as total tax or total revenue collected as a percentage of a country’s GDP. To find out how trends evolved across and within decades, we compared averages of the first five years of the decade with the average of the following five years, starting in the late 1980s (1985–89).

In all but the earliest period at least half of the countries for which we have data showed an increase in their total tax to GDP ratio (see Table 1 below). This means that generally the domestic collection of tax revenues has increased in a majority of countries since the early 1990s.

By how much have tax revenues increased?

There was a notable shift in the early to late 2000s (see Figure 1 below). Not only does this period show the greatest share of high-increaser-countries at 22% — it also has greatest share of increasers overall (68% across low-, moderate-, and high- increase categories).

The early to late 2000s reflects not only the pre-Great Recession boom years in many developed countries, but a period where the importance of DRM as a financing mechanism for development was coming to the fore in the Global South. Associated reforms to tax policy and administrations in developing countries could be another explanation of the peak in increasing tax revenues.

This also shows up in our regional breakdowns for the early to late 2000s. Many of the countries that experienced high or moderate increases in their total tax revenues were countries of the global South (see Figure 2 below). Indeed, one third of ‘high increasers’ and more than a quarter of ‘moderate increasers’ were Sub-Saharan African countries, while just five of the region’s countries experienced declining tax revenues.

Tortoise or hare?

So what happened after the early to late 2000s? Were countries with a high or moderate growth of tax revenues able to sustain this trend? It depends. Perhaps surprisingly, countries that started out with high increases in their tax-to-GDP ratios showed – on average – lower increases in the following periods compared to those with moderate increases in the early to late 2000s.

A possible explanation could be the ending of the ‘commodities super-cycle’ whereby a share of ‘high increasers’ relied on revenues from natural resources. With the ‘commodities super-cycle’ subsiding in the mid-2010s, revenues in such countries often dropped more notably. Countries which continued to increase their tax revenues in a more sustainable manner often embarked on steady reform to tax policy and administration. While these findings are tentative, they can provide a first clue for future progress: moderate growth might well be more sustainable. The tortoise did defeat the hare after all.

The views expressed in this piece are those of the authors, and do not necessarily reflect the views of the Institute or the United Nations University, nor the programme/project donors