Collecting revenue is essential if developing countries are to make the investments needed to generate jobs and growth – such as building roads or hiring teachers. So, the question arises: What’s a better revenue source, domestic taxes or trade taxes?
The Trade and Development Chart offers an answer. In countries that rely less on trade taxes, which include tariffs – and more on domestic taxes – revenue is higher as a proportion of GDP. In other words, domestic taxes deliver more fiscal firepower than tariffs on imports.
Nevertheless, developing countries often favor tariffs for revenue because they require less administrative capacity and technology to collect. There are fewer collection points, and transactions tend to be larger, making it easier for customs authorities to enforce compliance. The downside: Tariffs are distortionary and a less reliable, narrower source of revenue.
By contrast, taxing millions of firms and individuals – who are often reluctant to pay – is much harder. Yet countries with stronger capacity to collect domestic taxes benefit from a broader tax base and a more stable and diversified revenue stream. The World Bank’s report on domestic revenue mobilization highlighted good practices that emerged from seven case studies. These include closing tax loopholes, strengthening revenue management, and keeping tax rates low to bring people into the formal, taxpaying economy.
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