Tax and benefit policies in developing countries

In order to achieve the Sustainable Development Goals by 2030, Governments in low- and middle-income countries need to raise sufficient revenues to fund investments in vital public services, infrastructure and social protection policies. Tax systems also have significant impacts on individuals and businesses, affecting their incomes, incentives and behaviour. Our research in this area aims to generate evidence about how governments can design tax systems which generate the revenues required to meet their spending needs, while balancing the trade-offs related to growth, investment and redistribution.

Our early work involved the development of microsimulation models to analyse the distributional and potential behavioural effects of reforms to taxes in Mexico and El Salvador, and pensions in Chile, making use of large household surveys. IFS researchers have also considered the lessons of the Mirrlees Review for middle-income countries, and examined the design of corporate income taxes in developing countries.

More recently, we have begun partnering directly with Ministries of Finance and Revenue Authorities in Africa to support the applied analysis of tax policies through the FCDO-funded Centre for Tax Analysis in Developing Countries (TaxDev).

Underpinning this applied policy work, our research seeks to better understand how tax systems in low- and middle- income countries impact the distribution of income, and the impacts of tax systems on economic behaviour on individuals, households and businesses. Recent work has included analysing the effects of VAT exemptions on low-income households, and whether the VAT system distorts the trading decisions made by businesses. We pay particular attention to the features of low- and middle-income countries – such as large informal and non-market sectors and more limited administrative capacity, that might imply that the impact of, and rationale for, particular policies might differ to high-income countries.