Tax mobilization: The new development imperative in a world of foreign aid decline | Experts’ Opinions

To reduce the significant and growing national public debts, many countries adjust fiscal policies towards tax increases. This tactic is in line with the International Monetary Fund’s recommendation to governments to take more action towards domestic revenue mobilization, given the shrinking aid and the high levels of public debt. However, many experts disagree with such measures, considering that the focus should be on streamlining public spending, so that the burden of covering the deficit is not transferred to taxpayers. This is particularly relevant for developing countries, where growing fiscal pressure on households and businesses could deepen inequality. To assess the pros and cons of tax mobilization as a counter-measure to increase income and reduce the public debt, we asked experts to reflect on this critical issue. Their opinions follow.

DevelopmentAid: To what extent can stronger domestic tax mobilization compensate for declining foreign aid?

“Stronger tax collection can reduce dependence on foreign aid, but it cannot fully replace it. Many developing countries have room to improve tax administration, reduce exemptions, and tackle avoidance. Yet the poorest economies often have small formal sectors, widespread poverty, and limited administrative capacity. Raising enough revenue to fund essential public services therefore takes time. The central question is not only how much governments collect, but also who pays. Consumption taxes are relatively easy to introduce, but they can place the greatest burden on low-income households and small businesses. This may weaken demand, tax compliance, and public trust. A fairer approach would focus on high incomes, wealth, unjustified exemptions, and multinational companies shifting profits abroad. That requires stronger domestic institutions and international cooperation. Even successful reforms cannot reproduce aid’s role in responding to crises, funding major investments, or supporting countries with very limited tax bases.”

“As global foreign aid declines, poor countries are under increasing pressure to finance their own development. The real question is not whether taxes can replace aid—but whether governments can build tax systems that are fair, efficient, and growth-oriented. For countries like the Solomon Islands, simply increasing tax rates is unlikely to solve fiscal challenges. Higher taxes can raise the cost of living, discourage private investment, and place additional pressure on small businesses and low-income households. Instead, the focus should be on broadening the tax base, strengthening compliance, digitalizing tax administration, and reducing tax evasion. From a business perspective, an efficient tax system is more than a revenue tool—it is an investment in economic competitiveness. Predictable taxation, transparent public spending, and strong institutions create confidence for investors, encourage entrepreneurship, and support sustainable private sector growth. Foreign aid will continue to play a vital role in financing climate resilience, major infrastructure, and disaster recovery. However, long-term fiscal sustainability depends on governments mobilising domestic resources while ensuring taxpayers see tangible returns through better public services and accountable governance.”

“Many developing countries have weak tax collection capacity, and improving compliance is a slow, difficult process. This is often combined with poorly aligned or outdated distribution of the tax burden between employed individuals, SMEs, corporates, and the wealthy. Any realignment of taxation to increase the overall take must be very careful not to disincentivize the small and medium businesses which create employment and support social cohesion. These businesses are “easy pickings” because they are often easily visible, and lack the professional expertise and legal flexibility that allows corporations and/or oligarchs to delay or mitigate tax exposure. It’s much more difficult but far better in the long run to build the political support and alliances needed to ruthlessly find public expenditure savings through better management and prioritization, and reduced inefficiencies – in other words, more professional and transparent public finance management. International development can sometimes outshine and devalue local capacity. In tandem with improved public finance management, low-income countries should take stock of untapped social capital. Previously under-utilized or sidelined organizations and expertise that may have been off the radar of big development players could return to center stage and operate more cost-effectively, credibly and deliver more value-for-money impact. Why increase the tax burden on already strained workers and entrepreneurs, when even modest savings from a usually bloated and inefficient public sector could fund effective homegrown development expertise and solutions.”

“Economic growth requires sustained investment in both human and physical capital. Low-income countries often depend on imported resources, technology, and expertise to build their capital stock and improve productivity. Foreign aid enables large parts of these investments without diverting scarce domestic resources abroad. As a result, declining aid reduces the international transfer of resources, making it more difficult for low-income countries to invest in infrastructure, education, healthcare, and other development priorities. At the same time, stronger domestic tax mobilization is essential for long-term development. A simple, transparent, and equitable tax system that raises revenues well above 15% of GDP, limits tax avoidance and evasion, and encourages the expansion of the formal economy can provide governments with a much-needed stable source of finance. These revenues help fund public services and strengthen domestic capital formation.”

“Domestic tax mobilization is a necessary but slow substitute for declining aid. IMF data shows that since 2000, developing countries have lost revenue equivalent to 3.8% of GDP from falling foreign aid and natural resource receipts combined. Meanwhile, higher tax collection has only recovered 2.6%. According to IMF and OECD research done last year, developing sustainable tax capacity and building robust tax administrations is a process measured in decades, not single budget years. In contrast, an aid cut can happen in a single budget cycle as seen with USAID restructuring, G7 budget revisions, and UN emergency appeal Reductions in 2025. So I’d be very careful in framing this problem. It is not that ‘tax replaces aid’ but it should be, ‘how fast can we compress the timeline’. The gap between the two is where service delivery gets cut.”

DevelopmentAid: What are the main pros and cons of relying more heavily on taxation to finance development, particularly for low-income populations and businesses?

“Tax-driven finance is often more stable, accountable, and nationally owned than aid, but badly implemented taxes can shift the burden of declining aid onto those least able to pay. Relative to foreign assistance, domestic revenues are typically more secure and allow governments more discretion over spending. Taxes also build healthier connections between citizens and the state. Taxpayers will demand reliable services, transparency, and an accountable government. But tax policies and collection practices can just as easily damage this relationship. Value-added taxes, payroll fees and simplified business taxes are easier to collect than wealth taxes or taxes on multinational corporations. But they can also increase the cost of living, deter formal employment and hurt households and small businesses. Draconian enforcement on visible local taxpayers – while businessmen with political connections and international companies find loopholes – likewise undermines compliance and trust. Progressive rates, exemptions for lower-income households, simplified rules for small businesses, and enforcement against large-scale tax avoidance are critical to ensure taxes support accountability and equality.”

“Let’s start with the pros. Relying more on taxation gives the government economic sovereignty, sustainable development, democratic trust and government capacity. These are the outcomes citizens and governments should want. However, in reality, almost all developing-country tax systems are archaic and structurally unfair. Starting with the direct tax, which is unfairly distributed among the rich and the poor. Because tax authorities lack the tools to audit wealthy individuals. Then the indirect tax over-relies on easy-to-collect options like flat consumer taxes (VAT), which absorb a much higher percentage of a poor household’s income. Trade taxes are regressive by nature and hit low-margin, cash-constrained SMEs hardest, while larger firms often have the accountants and lobbying power to secure exemptions. As I see it, without addressing that asymmetry, we risk stifling the very economic formalization we need, while deepening inequality and eroding the social contract.”

DevelopmentAid: What reforms are needed to increase tax revenues in developing countries without deepening inequality or slowing economic growth?

“For starters, we should focus on collecting taxes that are already owed, and making sure they’re collected fairly. Developing countries have room to raise revenue by eliminating unjustified exemptions, improving tax collection, and curtailing profit-shifting by multinational corporations. Taxing high incomes, property, wealth, and natural-resource rents more effectively could raise revenue from those with the greatest ability to pay, while easing burdens on consumption and jobs. Tax reform should also acknowledge that small businesses may remain informal because registration fees are high and requirements are burdensome. Simplified tax codes, digital filing, and allowing informal companies to gradually formalize can increase compliance while protecting their livelihoods and incentives to grow. Tax collection efforts must also be paired with international cooperation. Developing countries should have better and timely access to financial information to properly enforce tax laws. They must be given greater taxing rights to collect profits from multinational corporations, along with assistance when negotiating complex tax treaties. In return, governments should be transparent about how newly collected revenues are spent. Government compliance increases when taxpayers can see their money being put to good use and trust that rules will be fairly enforced.”

“First, close the leaks before raising rates: the World Bank estimates low- and lower-middle-income countries lose around 2.4% of GDP a year to poorly targeted tax exemptions. IMF research finds that many countries have the potential to increase their tax-to-GDP ratios by 9 percentage points simply through better tax design and stronger public institutions. I strongly believe this is mandatory. Secondly, shift the balance toward progressive taxing instruments, such as based on property, income, and closing corporate loopholes. Third, invest in modernizing the administration to create accuracy and transparency. The OECD’s Tax Co-operation for Development 2025 report notes that capacity-building has already helped developing countries identify an additional EUR 48 billion in revenue since 2009 through better transparency measures. What is also very important to remember is that none of this can be done on one budget cycle. With proper sequencing, strategy and time this is achievable.”

See also: Could deeper cooperation between developing states reshape traditional aid models and speed up poverty alleviation? | Experts’ Opinions

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