Why Do Developing Countries Tax So Little?

TLDR

Low‑income countries collect only 10–20 % of GDP in taxes, compared to about 40 % in high‑income economies, and their poverty stems from factors that also limit tax revenue. The study seeks to explain why developing countries levy such low taxes by examining the forces that shape economic development and tax collection. The authors model tax revenue as a share of GDP, linking it to per‑capita income, tax‑base breadth, and economic structure, and outline a baseline framework for these determinants. They find that weak institutions, fragmented polities, limited media transparency, low national identity, and poor compliance norms jointly constrain tax collection, calling for a dynamic approach that integrates political, social, and economic interactions.

Abstract

Low-income countries typically collect taxes of between 10 to 20 percent of GDP while the average for high-income countries is more like 40 percent. In order to understand taxation, economic development, and the relationships between them, we need to think about the forces that drive the development process. Poor countries are poor for certain reasons, and these reasons can also help to explain their weakness in raising tax revenue. We begin by laying out some basic relationships regarding how tax revenue as a share of GDP varies with per capita income and with the breadth of a country's tax base. We sketch a baseline model of what determines a country's tax revenue as a share of GDP. We then turn to our primary focus: why do developing countries tax so little? We begin with factors related to the economic structure of these economies. But we argue that there is also an important role for political factors, such as weak institutions, fragmented polities, and a lack of transparency due to weak news media. Moreover, sociological and cultural factors—such as a weak sense of national identity and a poor norm for compliance—may stifle the collection of tax revenue. In each case, we suggest the need for a dynamic approach that encompasses the two-way interactions between these political, social, and cultural factors and the economy.