The International Monetary Fund (IMF) has urged Nigeria and other developing economies to raise significant amounts of revenue from personal income tax.
The tax—levied on wages, salaries, and other income—is a suitable instrument for revenue generation in developing countries where many people earn a living at low incomes, the IMF said in a blogpost titled ‘Personal Income Tax Has Untapped Potential in Poorer Countries.’
The Washington-based lender added that PIT is a suitable instrument for countries aiming to achieve a durable economic recovery from the pandemic.
In addition to bringing in revenue, the IMF said that tax “is progressive—imposing steeper rates on those with a higher income—and reduces inequality measurably.”
In most emerging market and low-income countries, the IMF said, such taxes are still in their infancy.
“Revenue from this source averages only 2.5 percent of GDP in these countries, in part because of their narrow tax base, and it does little to lessen inequality,” it said.
“But gradual changes have been taking place. In the two decades preceding the pandemic, income tax revenue more than doubled in low-income countries, rising from the equivalent of 1 percent of GDP to 2.1 percent, while emerging markets saw an increase from 2.1 percent to 3.1 percent.
“These were also reflected in (the) share of the tax in overall tax intake, which went from 5 percent to 8 percent of total tax revenue in low-income countries and from 9 percent to 11 percent in emerging markets.”
The IMF said that policy changes have targeted top and bottom statutory rates as well as the level of exempt income, even though it hasn’t contributed much to the increase in revenue in low-income countries.
“And in emerging market economies, this shift has sometimes actually reduced revenue. This is the case in part because many emerging markets have introduced flat tax systems with low rates and those with progressive schedules have reduced rates over the last two decades,” it said.
“Economic variables, on the other hand, played a very important role. We looked at increases in per capita incomes and the size of the public-sector wage bill and the reduction in the size of the informal sector, as measured by the share of self-employed workers in the labor force and the share of agriculture in the economy.
“These developments have clearly been the driving force behind the growth in personal income tax revenues. As economies develop, we can expect this tax to take on greater importance.”
The IMF added that improvements in tax administration also potentially play a role in boosting revenues, though that also extends to other taxes.
The accelerated shift into digitalized services because of the pandemic can pave the way for better income tax design and enforcement, it added.
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