Fiscal Resilience Building: Insights from a New Tax Revenue Diversification Index

36 Pages Posted: 23 Jul 2020

See all articles by Ali Compaoré

Ali Compaoré

Université Clermont Auvergne

Rasmané Ouedraogo

World Bank

Moussé Sow

International Monetary Fund; Université d'Auvergne - Clermont 1 - Centre d'Etudes et de Recherches sur le Developpement International (CERDI)

Rene Tapsoba

International Monetary Fund (IMF)

Date Written: June 1, 2020

Abstract

Does the reliance on diversified tax structure enhance resilience to fiscal risks? This paper gives an answer to this question by proposing a new cross-country tax revenue diversification index (RDI). The RDI builds on the Theil index, and unlike the few existing tax diversification indices, which are constructed only at the state level for the US, is computed at the national level, covering a broad panel of 127 countries over the period 2000-15. We find suggestive evidence that tax revenue diversification reduces tax revenue volatility, thus bringing to the data long-held views about the prominence of tax revenue diversification for fiscal resilience strengthening. While exploring the drivers of the RDI, we find that tax revenue diversification is not just a reflection of economic diversification, but also an outcome of macroeconomic, political and institutional factors. Interestingly, a non-monotone relationship is also at play between the RDI and economic development, with countries' portfolio of tax sources getting more diversified as their economy develops, until a tipping point, where richer countries start finding it harder to diversify further their tax revenue sources.

JEL Classification: C43, H20, H21, O11, O17, E01, H71, H83, H2, K34

Suggested Citation

Compaoré, Ali and Ouedraogo, Rasmané and Sow, Moussé and Tapsoba, Rene, Fiscal Resilience Building: Insights from a New Tax Revenue Diversification Index (June 1, 2020). IMF Working Paper No. 20/94, Available at SSRN: https://ssrn.com/abstract=3652512

Ali Compaoré (Contact Author)

Université Clermont Auvergne ( email )

Clermont-Ferrand
France

Rasmané Ouedraogo

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Moussé Sow

International Monetary Fund ( email )

1900 Pennsylvania Avenue, NW
Washington, DC 20431
United States

Université d'Auvergne - Clermont 1 - Centre d'Etudes et de Recherches sur le Developpement International (CERDI) ( email )

65 Boulevard Francois Mitterrand
63000 Clermont-Ferrand Cedex 1
France

Rene Tapsoba

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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