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

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,
Rene Tapsoba
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Moussé Sow
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, and
Ali Compaorénull

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Series:
IMF Working Papers
Volume/Issue:
Volume 2020: Issue 094
Language:
English
Publication Date:
12 Jun 2020
DOI:
https://doi.org/10.5089/9781513546032.001
ISBN:
9781513546032
ISSN:
1018-5941
Pages:
35
Keywords:
WP; yes; diversification index; Revenue volatility; Taxation; Tax revenue diversification; Theil Index; tax revenue; tax source; tax diversification; sources structure; revenue collection; Income tax systems; Consumption taxes; Natural resources; Tax administration core functions; South Asia; North America; North Africa; Middle East; East Africa; diversification pattern; collection performance
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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.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2020: Issue 094