Effective Mechanisms for Raising Tax Revenues

Jong Woo Kang and Lovely Tolin
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Jong Woo Kang: Asian Development Bank
Lovely Tolin: Asian Development Bank

No 790, ADB Economics Working Paper Series from Asian Development Bank

Abstract: How well raising tax rates can succeed for an economy intent on increasing tax revenue and narrowing the tax-to-GDP-ratio gap with other economies depends on its ability to meet certain conditions. This paper investigates these conditions and demonstrates that expanding the tax base as a proportion of GDP, either through a tax rate increase or rationalizing loopholes and tax expenditure, is crucial if efforts to increase tax revenues are to be effective. We test this theoretical finding through empirical analysis, including the Instrumental Variables—Two-Stage Least Squares (IV-2SLS) approach, and show how broadening the tax base is critical not only for increasing tax revenues but also for ensuring that an increase in the tax rate expands fiscal revenue. The findings highlight the importance of a balanced approach in tax policy design to achieve revenue goals while maintaining economic efficiency.

Keywords: tax rate; tax revenue; tax base ratio; direct tax (search for similar items in EconPapers)
JEL-codes: H20 H24 H26 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2025-07-11
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Persistent link: https://EconPapers.repec.org/RePEc:ris:adbewp:0790

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