IDS working papers;230

Taxation, governance and poverty : where do the Middle Income Countries fit?

Published on 1 January 2004

Tax reform can contribute to improved governance and poverty reduction both directly and indirectly: by
redistributing income, and by helping establish stronger fiscal social contracts in poorer countries. Middle
Income Countries can play an especially important role in this process. First, they are especially likely to
suffer very high levels of income and wealth inequality and very unjust tax systems. Second, recent
experience shows that Middle Income Countries have a greater capacity than Low Income Countries to
design tax reforms that are appropriate to local circumstances and likely to command local political
support. Because of a series of recent and current changes in the fiscal environment and in tax policies,
tax-payers in many Middle Income Countries are likely to become politically more engaged in the near
future. Issues of taxation and public spending will become more prominent in public policy debates and
election campaigns. This represents an opportunity to promote constructive tax reform – directly in
Middle Income Countries, and indirectly in the many Low Income Countries over which some Middle
Income Countries are beginning to exert increasing development policy influence. Aid donors and
international financial institutions have made substantial useful contributions to tax policy reform in the
South in recent decades. They could continue to have a positive influence, especially if they remain
engaged with Middle Income Countries and become more willing to allow and encourage the opening up
of tax and fiscal policy issues to broad democratic debate.

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