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.