TheCable

The International Monetary Fund (IMF) has advised developing countries to explore the untapped revenue potential of personal income tax.

The global lender said this in a recent blog post titled ‘Personal Income Tax Has Untapped Potential in Poorer Countries.’

The IMF said that in most low-income countries, personal income tax averages only 2.5 percent which is in part due to their narrow tax base.

Low-income countries are nations that have a per capita gross national income (GNI) of less than $1,026.

It urged many governments aiming to achieve lasting economic recovery from the pandemic must raise significant amounts of revenue in the fairest way possible.

It said the personal income tax—levied on wages, salaries, and other income— is a suitable instrument for the challenge.

IMF said the personal income tax imposes steeper rates on those with a higher income—and reduces inequality measurably.

“In the two decades preceding the pandemic, income tax revenue more than doubled in low-income countries, rising from the equivalent of 1 percent of GDP to 2.1 percent, while emerging markets saw an increase from 2.1 percent to 3.1 percent,” the post reads.

“These were also reflected in the share of tax in overall tax intake, which went from 5 percent to 8 percent of total tax revenue in low-income countries and from 9 percent to 11 percent in emerging markets.

Examining the progress of the personal income tax in developing countries, the IMF highlighted observable tax policy changes and broader economic changes.

It said policy changes have targeted top and bottom statutory rates as well as the level of exempt income.

It, however, said this hasn’t contributed much to the increase in revenue in low-income countries.

“And in emerging market economies, this shift has sometimes actually reduced revenue. This is the case in part because many emerging markets have introduced flat tax systems with low rates and those with progressive schedules have reduced rates over the last two decades,” the Washington-based lender said.

“Economic variables, on the other hand, played a very important role. We looked at increases in per capita incomes and the size of the public-sector wage bill and the reduction in the size of the informal sector, as measured by the share of self-employed workers in the labour force and the share of agriculture in the economy.

“These developments have clearly been the driving force behind the growth in personal income tax revenues. As economies develop, we can expect this tax to take on greater importance.”

The IMF said that improvements in tax administration could play a potential role in boosting revenue.

It added that the accelerated shift into digitalised services could also pave the way for better income tax design and enforcement in developing countries.