IMF conditionality supports revenue collection: is it just tax rates?

ABSTRACT

This article examines if the observed favourable impact of conditionality in IMF programmes on revenue performance arises from changes in tax rates. It does so by studying the experience of 126 low- and middle-income countries during 1993–2013. When changes in tax rates are controlled for, the impact of revenue conditionality (and especially conditionality on revenue administration reform) not only remains strong on value-added tax collection but also, in contrast to earlier results, it contributes to significant improvements in income tax collection.

KEYWORDS:

• IMF
• tax revenue reform
• tax rates
• structural conditionality

JEL CLASSIFICATION:

• C33
• E62
• F33
• H2

Notes

¹ Also known as the efficiency ratio, widely used for evaluating VAT systems (Ebrill et al. 2001). While recognizing that a more appropriate proxy for the tax base could be total consumption for the VAT, compensation of employees for the PIT, and corporate profits for the CIT, lack of comparable data for this large panel limits the choice to revenue ratios to GDP for all taxes.

² A robustness test including conditionality on tax policy and tax administration in the same regression indicates that their relative importance in explaining changes in revenue productivities is similar (with p-values well above 10%).