TAXATION SYSTEM CONCERNING GROWTH

AND PROMOTION OF UNDERDEVELOPED

COUNTRIES

Page 1
The function of tax revenue in relation to the business cycle
differs between developed and underdeveloped countries. In both
types of economies, tax revenue is dependent on the level of
business activity and fluctuates with the business cycle. But only
in the developed countries is the amplitude of business
fluctuations dampened through changes in government revenues
resulting from built-in stabilizers, such as the income tax.

Economic problems in underdeveloped countries are similar

to those in developed countries, but there are differences in
emphasis and in importance. This is also true of taxation policies,
which have slightly different objectives and relatively greater
importance in underdeveloped countries. Generally speaking, in
developed countries taxation policies, and tax revenues, are
geared to cover the amount of socially desired expenditures.

Page 2
In underdeveloped countries the government sector is
usually more important than other sectors, not only in those
countries where governments have taken upon themselves the
task of increasing productive capacity, but also in those where the
private sector is relied upon to ensure economic growth.1 In
practically all underdeveloped countries it is now customary to
have a development program, and fiscal policy is the kingpin in
determining the total level of investment. Within fiscal policy,
expenditure policies are important; but if tax receipts are not
sufficient, governments cannot invest directly or lend to the
private sector without resort to deficit financing.

Page 3 – Tabel 1

Page 4
A major characteristic of the tax system in underdeveloped
countries is that it does not provide governments with much
revenue; this is true not only of actual amounts but also of tax
revenue in relation to national income. As shown by Table 1,
which presents countries by groups according to per capita
incomes—high, medium, and low—central government revenue
as a percentage of national income varies greatly even between
countries in the same range of per capita income. However, the
figures in the table provide only orders of magnitude, especially
since local governments, which are not included in the table, may
be an important part of the government sector in some countries
and not in others. Thus, if local governments were included, the
revenue collected by the government sector in Belgium, Canada,
and the United States would be in the range of one fourth to one
third of their national income instead of between 17 per cent and
18 per cent; in India, it would be double the percentage shown in
Table 1. However, it is clear that the median percentage is
highest for the high income countries and lowest for the low
income countries. This suggests some relationship between
levels of national income and taxes collected. The reason is that
most governments are of the opinion that when per capita income
is low, and especially when it is near starvation level, it is not
desirable to tax the masses.

Page 5 – Tabel 2

Page 6
A second characteristic of the tax system in underdeveloped
countries is the small proportion of total revenue raised by direct
taxation.4 This is clearly indicated by the data in Table 2, which
show that the median for direct tax revenue as a percentage of
total revenue in the high per capita income countries is 43, while
that in the low per capita income countries is 20. There are a
number of reasons for this. In particular, underdeveloped
countries have found that it is easier to collect indirect taxes (e.g.,
customs duties) than direct taxes, especially when proper records
are not kept by small businessmen and professional people. Also,
the rate of total taxation has been lower in the underdeveloped
than in the developed countries, both in relation to absolute
incomes and in relation to per capita income.

Page 7 – Tabel 3
Page 8
The method of taxing the incomes of corporations and other
businesses is basically the same in the underdeveloped countries
as in the developed countries. But naturally there are differences
between countries, depending in part on whether the tax laws
have been modeled after the U.K., French, or U.S. system of
taxation. These differences concern, in particular, technical
details, such as the carry-over of losses from earlier years,
depreciation allowances, and the double taxation of profits.

Companies with limited liability are usually taxed more

heavily than unincorporated enterprises or private partnerships.
This may seem justifiable on the grounds that the larger the
business, the easier it is to earn income. But in order to promote
investment and to create capital markets, it is desirable that
preference be given to the corporate form of enterprise. One of
the difficulties in raising the level of private investment in
underdeveloped countries is that even the rich do not have
sufficient funds to establish industries using modern methods of
production. This difficulty can be overcome only by encouraging
large numbers of investors to pool their financial resources.

The basic level of taxation on companies in underdeveloped

countries is generally lower than in the developed countries
(Table 3). Among the underdeveloped countries, it is lowest in
South America and highest in the Middle and Far East, except in
a few countries, such as Thailand, where it is low. Generally
speaking, at least in the former colonies of the British Empire,
companies have to pay an excess profits tax, defined in varying
ways, in addition to the basic rate.
Page 9
That government revenues in underdeveloped economies
are woefully inadequate is clear, but the method by which they
can be increased rapidly is not so obvious. Particular tax devices
which work successfully in one country (e.g., a marketing board in
Burma) may not be appropriate in another. However, there are
three fronts along which governments could advance, namely, tax
principles, tax administration, and the social and political will to
succeed.

Tax reforms, as mentioned above, can be made only slowly;

they depend not only on good laws but also on how the laws are
implemented. If tax systems are judged by the amount of revenue
collected in relation to the gross national product, some
improvement has occurred in postwar years in a number of
countries: those in Asia include Burma, India, Korea, and the
Philippines, and those in Latin America include Chile, Costa Rica,
Ecuador, Honduras, and Venezuela. In the majority of
underdeveloped countries, however, there has been very little or
no change in the ratio. When tax systems are judged by the
proportion of direct taxes to total tax revenue, improvement since
the war is indicated for only a few countries: Burma, Ceylon,
Costa Rica, El Salvador, Guatemala, Honduras, India, and
Mexico.

Page 10 – Bibliography
International Monetary Fund. Research Dept. - Taxation System
The Bulletin of the National Tax Association, Vol. 31, No. 5
Oxford Review of Economic Policy, Vol. 504-12
National Tax Journal 63.4, 1145–84