section_path: In developing countries
section_name: In developing countries
paragraph_text: In developing countries
  
  Following Nicolas Kaldor's research, public finance in developing countries is strongly tied to state capacity and financial development. As state capacity develops, states not only increase the level of taxation but also the pattern of taxation. With larger tax bases and the diminishing importance of trading tax, income tax gains more importance. According to Tilly's argument, state capacity evolves as a response to the emergence of war. War is an incentive for states to raise taxes and strengthen states' capacity. Historically, many taxation breakthroughs took place during wartime. The introduction of income tax in Britain was due to the Napoleonic War in 1798. The US first introduced income tax during the Civil War. Taxation is constrained by the fiscal and legal capacities of a country. Fiscal and legal capacities also complement each other. A well-designed tax system can minimize efficiency loss and boost economic growth. With better compliance and better support to financial institutions and individual property, the government will be able to collect more tax. Although wealthier countries have higher tax revenue, economic growth does not always translate to higher tax revenue. For example, in India, increases in exemptions lead to the stagnation of income tax revenue at around 0.5% of GDP since 1986.
  
  Researchers for EPS PEAKS stated that the core purpose of taxation is revenue mobilization, providing resources for National Budgets, and forming an important part of macroeconomic management. They said economic theory has focused on the need to "optimize" the system through balancing efficiency and equity, understanding the impacts on production, and consumption as well as distribution, redistribution, and welfare.
  
  They state that taxes and tax relief have also been used as a tool for behavioral change, to influence investment decisions, labor supply, consumption patterns, and positive and negative economic spillovers (externalities), and ultimately, the promotion of economic growth and development. The tax system and its administration also play an important role in state-building and governance, as a principal form of "social contract" between the state and citizens who can, as taxpayers, exert accountability on the state as a consequence.
  
  The researchers wrote that domestic revenue forms an important part of a developing country's public financing as it is more stable and predictable than Overseas Development Assistance and necessary for a country to be self-sufficient. They found that domestic revenue flows are, on average, already much larger than ODA, with aid worth less than 10% of collected taxes in Africa as a whole.
  
  However, in a quarter of African countries Overseas Development Assistance does exceed tax collection, with these more likely to be non-resource-rich countries. This suggests countries making the most progress replacing aid with tax revenue tend to be those benefiting disproportionately from rising prices of energy and commodities.
  
  The author found tax revenue as a percentage of GDP varying greatly around a global average of 19%. This data also indicates countries with higher GDP tend to have higher tax to GDP ratios, demonstrating that higher income is associated with more than proportionately higher tax revenue. On average, high-income countries have tax revenue as a percentage of GDP of around 22%, compared to 18% in middle-income countries and 14% in low-income countries.
  
  In high-income countries, the highest tax-to-GDP ratio is in Denmark at 47% and the lowest is in Kuwait at 0.8%, reflecting low taxes from strong oil revenues. The long-term average performance of tax revenue as a share of GDP in low-income countries has been largely stagnant, although most have shown some improvement in more recent years. On average, resource-rich countries have made the most progress, rising from 10% in the mid-1990s to around 17% in 2008. Non-resource-rich countries made some progress, with average tax revenues increasing from 10% to 15% over the same period.
  
  Many low-income countries have a tax-to-GDP ratio of less than 15% which could be due to low tax potentials, such as a limited taxable economic activity, or low tax effort due to policy choice, non-compliance, or administrative constraints.
  
  Some low-income countries have relatively high tax-to-GDP ratios due to resource tax revenues (e.g. Angola) or relatively efficient tax administration (e.g. Kenya, Brazil) whereas some middle-income countries have lower tax-to-GDP ratios (e.g. Malaysia) which reflect a more tax-friendly policy choice.
  
  While overall tax revenues have remained broadly constant, the global trend shows trade taxes have been declining as a proportion of total revenues (IMF, 2011), with the share of revenue shifting away from border trade taxes towards domestically levied sales taxes on goods and services. Low-income countries tend to have a higher dependence on trade taxes, and a smaller proportion of income and consumption taxes when compared to high-income countries.
  
  One indicator of the taxpaying experience was captured in the "Doing Business" survey, which compares the total tax rate, time spent complying with tax procedures, and the number of payments required through the year, across 176 countries. The "easiest" countries in which to pay taxes are located in the Middle East with the UAE ranking first, followed by Qatar and Saudi Arabia, most likely reflecting low tax regimes in those countries. Countries in Sub-Saharan Africa are among the "hardest" to pay with the Central African Republic, Republic of Congo, Guinea and Chad in the bottom 5, reflecting higher total tax rates and a greater administrative burden to comply.