Tax Equity in Low- and Middle-Income Countries

Income inequality is high in developing countries and has either stagnated or increased over the past 30 years. Recent estimates from Africa show that, at the regional level, the share of pre-tax income of the top 10 percent is close to 55 percent (Chancel et al. 2023); similarly high levels of inequality are found in large developing countries for which data are available, including Brazil at 58 percent, China at 43 percent, India at 57 percent, and Indonesia at 47 percent (World Inequality Database at https://wid.world/). These levels are comparable to or higher than those observed in the United States, a developed country commonly described as highly unequal, where the share of pre-tax income of the top 10 percent was 46 percent in 2021. This paper asks what role taxation can or might play in reducing high levels of inequality in low- and middle-income countries. Are policy instruments like the personal income tax or value-added tax used in similar ways as in high-income countries, and if so, do they have comparable distributional effects? Alternatively, do specific features of the economic structure of developing countries dilute, or even reverse, the redistributive effects of tax instruments that are commonly considered to be progressive or regressive? If so, how should we rethink tax design over the development path?