Why Do Developing Countries Tax So Little

TL;DR: The limits to taxation are rarely tied to the administrative capacity of the state as mentioned in this paper, but incentive constraints alone cannot explain the vast differences in the levels of taxation that we see across the world and across time.

Abstract: The power to tax is taken for granted in a great deal of mainstream public finance. In considering limits to taxation, traditional research in the field focuses on limits imposed by incentive constraints, which are tied to asymmetric information or to politics and political institutions. The limits to taxation are rarely tied to the administrative capacity of the state. But incentive constraints alone cannot explain the vast differences in the levels of taxation that we see across the world and across time. 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 essence, our view on these patterns is similar to that taken by Joseph Schumpeter (1918) almost a century ago, when he noted: “The fiscal history of a people is above all an essential part of its general history. An enormous influence on the fate of nations emanates from the economic bleeding which the needs of the state necessitates, and from the use to which the results are put.” 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