- Asia must mobilize taxes and expenditure for sustainable development.
Achieving the Sustainable Development Goals (SDGs) for a greener and more inclusive future requires vast public spending. While more efficient spending can free up some fiscal resources, much greater resources are needed to promote inclusive development in earnest. Tax revenue was gradually rising in the region before the COVID-19 pandemic but was still comparatively low. Restoring fiscal sustainability after COVID-19 adds to the urgency of making all forms of fiscal resource mobilization more effective, especially taxes.
- The region needs to augment fiscal space through higher tax revenue.
Estimates that benchmark current tax revenue against key economic characteristics suggest that economies in developing Asia could increase tax revenue from a pre-pandemic average equal to about 16% of GDP by, on average, 3–4 percentage points. Options to strengthen revenue depend on economy-specific circumstances, but two priorities with broad promise are better optimization of tax expenditures—forgone taxes—and more efficient collection of value-added tax (VAT), including appropriate taxes on the fast-growing digital economy. In addition, strengthening personal income and property taxes can raise additional revenue and make tax systems more progressive.
- Green and health taxes contribute to both revenue and development goals.
Environmental tax instruments continue to grow and positively guide investment and consumption in developing Asia. Some regional governments have long experience in levying environmental taxes, notably on pollutants and fossil fuels. More recently, Asian economies have actively explored carbon pricing instruments to curb emissions. The region can draw valuable lessons from early adopters, especially by ensuring sufficiently high tax rates and pollution prices and effective monitoring, reporting, and verification systems. Higher corrective health taxes, primarily on alcohol and tobacco, can raise additional tax revenue by as much as 0.6% of GDP while improving health outcomes and cutting medical costs.
- Tax and other reform to lift revenue is hard but doable.
New analysis finds that reducing business registration costs can expand the share of the formal sector in the whole economy and the taxes it pays. Tax reform to boost revenue may be politically challenging, but global experience shows that strong leadership can enable success. Effective strategies strengthen tax administration, including through better use of information and communication technology, and improve taxpayer morale by, for example, improving the quality of public spending.