06 April 2022

Tax Reform Key to Sustainable Growth in Asia and the Pacific

MANILA, PHILIPPINES (6 April 2022) — Putting a price on pollution. Making it easier for small businesses to register. Taxing digital goods and services more effectively. These are some of the ways economies in developing Asia and the Pacific can raise the tax revenue needed to help ensure sustainable growth, according to a new Asian Development Bank (ADB) report.

The region faces a shortfall of public funding for priorities such as health, education, infrastructure, the fight against climate change, and the recovery from the coronavirus disease (COVID-19) pandemic. Available policy reforms, strategically applied, could enable economies in developing Asia to boost tax revenue by as much as 4% of gross domestic product (GDP) on average, according to the Asian Development Outlook (ADO) 2022, released today.

Developing Asia’s aging population will require higher spending on pensions and health care, while rising affluence will boost expectations for more and better public goods and services. Vast investments in clean energy are needed to tackle the threat of climate change. To meet these demands and others, countries will need to draw on the full range of private and public financial resources. Solutions for governments to consider include more efficient collection of value-added taxes, reforming tax incentives, bringing more businesses into the formal economy, and optimizing personal income and property taxes.

“Economies in Asia and the Pacific will face a growing need for effective public spending in areas like health, education, and the environment,” said ADB Chief Economist Albert Park. “Policy reforms that improve tax collection and increase revenue can help the region achieve sustainable and inclusive economic growth. Such reforms must be carried out on a case-by-case basis, and in ways that don’t stifle growth or create undue burdens on taxpayers.”

Even before the pandemic, the United Nations Economic and Social Commission for Asia and the Pacific estimated that the region would need to increase annual spending by about $1.5 trillion—or about 5% of GDP—to achieve the Sustainable Development Goals by 2030. By enacting reforms, developing Asia’s economies could increase tax revenue from a pre-pandemic average of around 16% of GDP by 3 to 4 percentage points on average, according to ADB estimates.

For instance, making it easier to register a business and lowering transaction costs could bring more small businesses into the formal economy, enhancing tax collection. In Southeast Asia, micro, small, and medium-sized businesses accounted for 98% of all enterprises and 41% of GDP as of 2020. Governments can also improve the collection of taxes from Asia and the Pacific’s burgeoning trade in digital services, which more than tripled since 2005 to $1.4 trillion in 2020.

Other taxes can raise revenue while directly promoting environmental protection and public health. Carbon pricing instruments and fossil fuel taxes, for example, have been proven to reduce pollution. Taxes on alcohol, tobacco, and unhealthy food and drinks can raise additional revenue by up to 0.6% of GDP, while leading to better health outcomes and reducing medical costs, according to ADO 2022.

Public information campaigns drawing on behavioral insights, and better use of digital technologies, can also help enhance tax collection. Improving the quality of government spending is key to tapping people’s intrinsic willingness to pay taxes, the report notes.

ADB is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty. Established in 1966, it is owned by 68 members—49 from the region.

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© Asian Development Bank