External publications

Vulnerability of tax revenues in developing countries

von Haldenwang, Christian
External Publications (2015)

in: Barbara Fritz / Lena Lavinas (eds.), A moment of equality for Latin America? Challenges for redistribution, Farnham: Ashgate, 199-215

ISBN: 978-1-4724-4672-5
Information

It has been conventional wisdom for quite some years now that a narrow tax base combined with an excessive reliance on a few commodity exports exposes countries to the risk of increased revenue volatility and, ultimately, lower tax collection. Beyond this general statement, however, there is still a knowledge gap regarding the relationship of exogenous shocks and public revenue. Facing heterogeneity of cases combined with limited access to data, academic research has found it difficult to even develop consistent measures of tax capacity and tax performance in developing countries - let alone addressing the question of how revenue systems react to unforeseen external events.
This chapter argues that beyond the general impact of shocks on economic growth there are specific effects of shocks on revenue systems that shape the capacity of governments to react to adverse external events and sustain development expenditure. These effects vary not only with the kinds of shock affecting the economies, but also with the characteristics of these economies (welfare levels, dependence on natural resources, etc.), the political and administrative capacity of states to react to changing situations, and the structure of the tax systems. At the same time, it is important to keep in mind that shocks do not only affect the level of tax collection, but also (perhaps even more importantly) the stability and predictability of revenue.

The chapter  presents an approach to empirically assess the impact of several kinds of shocks on revenue systems in a broad set of countries, and in developing countries in particular. Findings indicate that non-democratic and non-resource-rich countries are particularly vulnerable to shocks affecting income taxes and non-tax revenue. The results are discussed with a particular view on the Latin American region.