Why Do Developing Countries Tax So Little?

Low-income countries typically collect taxes of between 10 to 20 percent of GDP while the average for high-income countries is more like 40 percent. In order to understand taxation, economic development, and the relationships between them, we need to think about the forces that drive the development process. Poor countries are poor for certain reasons, and these reasons can also help to explain their weakness in raising tax revenue. We begin by laying out some basic relationships regarding how tax revenue as a share of GDP varies with per capita income and with the breadth of a country's tax base. We sketch a baseline model of what determines a country's tax revenue as a share of GDP. We then turn to our…