ABSTRACT
Developing countries have experienced major changes in their tax systems in the last four decades. These changes have been largely attributed to forces that include changes in major economic variables, government policies, demographic and other socio-economic trends and the domestic and international political environment. However, there has also been a substantial variation in these forces across different countries with widely different tax structures; indeed it has been shown that the tax structures of developing countries vary extensively (Tanzi, 1992; Zee, 1996 and Tanzi and Zee, 2000). As recently mentioned in the literature, it is surprising to see so few studies that examine tax structure changes across countries (Volkerink and DeHaan, 1999; Tanzi and Davoodi, 2000; Kenny and Winer, 2001). To set the stage for an analysis of tax policy in developing countries, Tanzi and Zee (2000) list four major challenges to their having efficient tax systems. The first is the difficulty in income tax base calculations due to irregular earnings. The second difficulty is the absence of “well-educated and well-trained” staff in tax administration. The third is the “informal structure of the economy” and difficulties in policy analysis due to lack of data or problems with existing data. The final challenge noted is uneven income distribution in developing countries, which prevents enactment of progressive taxes. Tanzi and Zee concluded that “tax policy is often the art of the possible rather than the pursuit of the optimal.”
