Tax revenue can be raised in a fair and reasonable way to provide much-needed public services and support the poor and disadvantaged still reeling from the pandemic.
It’s been said taxes are the price we pay for a civilized society. Without taxes governments simply don’t have the resources to pay for the public goods and services that everyone depends on.
Despite Asia’s stellar progress in reducing poverty and improving living standards, governments across the region often struggle to generate sufficient revenue.
Consequently, many countries in the region spend comparatively little on public education, healthcare, and social protection. Spending shortfalls in these areas were vividly illustrated by the severe impact of the COVID-19 pandemic, evident in strained education infrastructure, overflowing hospitals, and limited financial assistance to the poor.
All of these problems can ultimately be traced back to insufficient taxes and fiscal resources.
Change is needed if the region is to achieve its potential. For example, it is estimated trillions of dollars in additional spending are needed to achieve the Sustainable Development Goals by 2030. Beyond 2030 spending demands will likely increase even further as the region copes with long-term challenges such as climate change and fast-aging populations which require more spending on healthcare and pensions. Much of this spending will inevitably need to be backed by higher government revenues, especially taxes.
Before COVID-19, developing countries in Asia made some progress in increasing tax revenue. But at a modest 16% of GDP, the region lags behind Latin America and trails far behind high-income countries. Some countries in Asia, particularly in South and Southeast Asia, collect significantly less, resulting in financially constrained governments with inadequate fiscal resources.
Most recently, the pandemic set back progress. As economic activity stalled in the region and governments provided fiscal support, tax revenues collapsed, and fiscal deficits and debt jumped. The region therefore emerges from the pandemic with weakened government finances that require urgent action.
So how can Asia’s developing countries mobilize taxes to support development?
There is no one size fits all approach to tax mobilization, with solutions depending on individual country circumstances and priorities. Tax policy needs to balance objectives of efficiency, to ensure taxes don’t unduly hinder economic growth; equity, to support the poor; and simplicity, to make it easier for taxpayers to pay taxes.
Widespread tax expenditures – special concessions or “tax breaks” – given to businesses and others, yield doubtful and hard-to-measure benefits and can undermine competition. Typically, they lack the same level of scrutiny as regular government spending and are difficult to get rid of once in place. This can cause undue revenue losses and can be mitigated by better reporting and a more judicious use of such incentives.
Value-added taxes are the single most important source of revenue for developing economies in Asia but they can be improved. Indicators suggest revenues could be increased by streamlining tax rates, ensuring coverage of fast-growing digital commerce, and better using technology to improve collection.
Personal income and property taxes can raise more revenue and promote equity, by imposing a higher tax obligation on the affluent. Labor market modernization in the region is making it easier for governments to assess individuals’ earnings, which facilitates income tax collection. International cooperation is playing a key role in promoting a fairer and less uncertain system for corporate income taxation.
Environment-related and health taxes can both contribute revenue and directly support development, by discouraging bad behavior and encouraging good behavior. Many governments have well-established pollution and fossil fuel taxes but these are often underutilized. Carbon taxes and pricing schemes are growing in popularity, but their effectiveness can be enhanced via strengthened design and implementation, and quality monitoring, reporting, and verification.
Taxes on alcohol, tobacco, and sugar-sweetened beverages can be better used to tackle the rising incidence of non-communicable disease and at the same time raise revenues.
Tax reform can be challenging, since it produces winners and losers. However, international experience shows that diverse countries have achieved reforms that substantially increased revenues. Strong political leadership and public buy-in is essential. Timing can also matter. As the region emerges from COVID-19 now is an opportune moment for ambitious reform in many countries. Broader economic reform that reduces the informal sector and thus expands the tax base can help too.
Tax administrations, vital for ensuring fair and efficient tax collection, can be strengthened by making better use of technology to improve taxpayer services, such as electronic filing. As tax administrations in developing economies in Asia are sometimes poorly staffed, there is scope to expand human resources and use them more strategically. Research informed by behavioral insights highlights opportunities for tax administrations to experiment with sticks and carrots to incentivize tax compliance.
Finally, people are sometimes reluctant to pay their taxes, fearing that these will be squandered. It is therefore essential that governments motivate taxpayer compliance by making every effort to improve the quality of public goods and services.
Developing economies in Asia are entering a critical period as they emerge from the pandemic. Efficient and equitable tax collection is an important part of that equation.