ABSTRACT
Tax policy in less-developed countries merits utmost interest. As governments seek to mobilize requisite resources to finance basic public expenditures and promote economic and social development, the ability to design effective tax systems becomes indispensable. Effectiveness, in conjunction with efficiency and equity, is perceived as a desirable criterion. But fulfilling these goals is far from easy. Many trade-offs are inherent and critical, and in most developing countries tax policy options are invariably constrained by the structure of the economy and administrative capacity. Wealthier taxpayers are likely to try to avert tax reforms seen as prejudicial to them. On top of this, tax systems in developing countries are often unduly complicated, attempting to meet too many objectives, let alone riddled with exceptions and hence often beyond the capabilities of tax authorities to administer. All combined, these factors pose a potentially serious risk to the government’s capacity to broaden the tax base and, ultimately, generate much-needed revenue. A rather different reason why tax policy in less-developed economies
deserves consideration concerns the pursuit of macroeconomic stabilization. Unless reasonably stable macroeconomic conditions are put in place, developing countries will have a hard time finding their way onto a path of sustained economic progress. In recent times, many of these countries have been confronted with growing fiscal deficits, as a corollary of unexpected negative external shocks blended with over-ambitious development programmes. In the face of rising debt burdens, declining commodity prices and everincreasing trade imbalances, commitment to fiscal austerity appeared as a fundamental priority of macroeconomic policy. Sadly, in a very large number of cases, fiscal retrenchment to obtain budgetary balance entailed substantial cuts in government expenditure, often with adversely severe implications for social services offered to a vulnerable segment of the population. Strengthening tax systems can help not only to reduce the savings gap but also to alleviate the inherent costs of the adjustment process in developing countries.
