Fiscal Resilience Building: Insights from a New Tax Revenue Diversification Index

By Rasmané Ouedraogo, Rene Tapsoba, Moussé Sow, Ali Compaoré

June 12, 2020

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Rasmané Ouedraogo, Rene Tapsoba, Moussé Sow, and Ali Compaoré. Fiscal Resilience Building: Insights from a New Tax Revenue Diversification Index, (USA: International Monetary Fund, 2020) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Does the reliance on diversified tax structure enhance resilience to fiscal risks? This paper gives an answer to this question by proposing a new cross-country tax revenue diversification index (RDI). The RDI builds on the Theil index, and unlike the few existing tax diversification indices, which are constructed only at the state level for the US, is computed at the national level, covering a broad panel of 127 countries over the period 2000-15. We find suggestive evidence that tax revenue diversification reduces tax revenue volatility, thus bringing to the data long-held views about the prominence of tax revenue diversification for fiscal resilience strengthening. While exploring the drivers of the RDI, we find that tax revenue diversification is not just a reflection of economic diversification, but also an outcome of macroeconomic, political and institutional factors. Interestingly, a non-monotone relationship is also at play between the RDI and economic development, with countries’ portfolio of tax sources getting more diversified as their economy develops, until a tipping point, where richer countries start finding it harder to diversify further their tax revenue sources.

Subject: Consumption taxes, Environment, Income tax systems, Natural resources, Revenue administration, Tax administration core functions, Taxes

Keywords: Collection performance, Consumption taxes, Diversification index, Diversification pattern, East Africa, Income tax systems, Middle East, Natural resources, North Africa, North America, Revenue collection, Revenue volatility, Sources structure, South Asia, Tax administration core functions, Tax diversification, Tax revenue, Tax revenue diversification, Tax source, Taxation, Theil Index, WP, Yes

Publication Details

Pages:

35
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/094
Stock No:

WPIEA2020094
ISBN:

9781513546032
ISSN:

1018-5941

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