Looking ahead: Reforms to mobilize revenue, improve transparency, and facilitate debt negotiations The challenges of managing higher debt levels and resolving a rising number of debt crises in the aftermath of the COVID-19 crisis highlight the need for reforms that can facilitate revenue mobilization, better debt management, debt negotiation, and access to capital markets in the longer term. This section explores how improved transparency, as well as legal and tax reforms, can make sovereign debt markets more efficient and sovereign balance sheets more resilient.
Dependence of sovereign debt sustainability on mobilization of new tax revenue Prior to the COVID-19 pandemic, most countries saw a sustained rise in tax revenue—in lower-middleincome countries tax revenue as a share of GDP increased from 17 percent to 22 percent between 2000 and 2019.62 Half of this revenue growth came from indirect taxes (especially the value added tax, VAT), 30 percent from direct taxes on income, and 20 percent from payroll taxes. This upward trend in revenue mobilization was driven by the greater efficiency of tax administrations, technological innovations, and improvements of tax designs. Can governments continue to increase tax revenue over the next decade? The COVID-19 pandemic has created a short-term but drastic revenue shortfall, but it could reinforce revenue mobilization in the medium term by legitimizing the role of the state as a provider of insurance and redistribution. However, there are no magic bullets—higher tax revenue arises principally from long-term investments in tax capacity and from structural changes in countries’ economies bolstered by international efforts to address tax avoidance. Three areas of reforms can nonetheless raise revenue while balancing equity and efficiency considerations. However, progress on mobilizing new tax revenue may be threatened by a delayed or anemic recovery or social backlash, as was seen recently in Colombia.63 First, governments increasingly have the capacity to target high earners with progressive taxes. Currently, in low- and middle-income countries personal income taxes and property taxes account for only a small share of GDP (3 percent and 0.5 percent, respectively), which is a much lower share than in high-income countries. The long-run transition from self-employment to employment in firms is a key enabler of modern personal income taxes. However, this evolution in employment structure must be accompanied by investments in a tax administration’s capacity to target high earners and to tax their income from all sources (including capital) at rising marginal tax rates. Thus the tax effort is borne principally by those with the means to contribute.64 Taxes on property are another progressive source of revenue. But despite a visible tax base, the current revenues are low. As urbanization drives property values up in many cities, modern property registries, documented and accessed by means of technology, make real estate valuation and administration easier. Thus taxes on personal income and property are an untapped source of government revenue and simultaneously can help curb inequality. Second, structural changes arising from the digitalization of economies and the climate emergency present not only challenges but also opportunities to mobilize revenue. As transactions go digital and taxpayers file electronically, tax administrations can compare self-reported economic activity with third-party reports to uncover discrepancies and better target audits. Similarly, large online platforms that aggregate transactions can be used as withholding agents and as mechanisms to formalize smaller firms that want to participate in online markets. Another key evolution is related to the climate emergency; it justifies taxes aimed at limiting energy consumption and could raise additional tax revenue. Policy responses could take the form of removal of energy subsidies and the imposition of fuel taxes or more ambitious carbon taxes. Whatever their shape, taxes must be tailored to each country’s tax MANAGING SOVEREIGN DEBT | 227
