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Home Research areas International development Tax and benefit policies in developing countries

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.

Selected highlights

Journal article | Fiscal Studies, Vol. 35, No. 4, December 2014
corporate_tax_in_developing_countries_current_trends_and_design_issues
This paper looks at corporate income taxes in developing countries from both an empirical and a theoretical perspective.
External publication
Drawing on the seminal Mirrlees Review, this report sets out the basic principles of good tax design and reform, with a particular focus on the implications for middle income countries such as Turkey.
IFS Working Paper W19/21
Do tax systems distort firm-to-firm trade? Using data from both firms that do and don’t pay VAT in West Bengal in India, this paper shows that they can have significant effects, contributing to highly segmented supply chain networks.
IFS Working Paper W18/11
redistribution_via_vat_and_cash_transfers_an_assessment_in_four_low_and_middle_income_countries
As in high-income countries, reduced rates of VAT and VAT exemptions (“preferential VAT rates”) are a common feature of indirect tax systems in LMICs. Many of the goods and services that are granted preferential rates – such as foodstuffs and kerosene – seem likely to receive such treatment ...
Report
This paper, written collaboratively by IFS researchers and policy-makers from Ethiopia and Ghana, has multiple and interlinked objectives: (i) to provide an overview of tax incentives and best practices for their design grounded in economic principles, and assess how these apply to the case studies ...

Contacts

Contact IFS on 020 7291 4800 or mailbox@ifs.org.uk

David Phillips
Associate Director
Yani Tyskerud
Assistant Director
Michel Azulai
Post-doctoral Fellow
Ross Warwick
Senior Research Economist