![]() A study shows that higher tax rates are associated with fewer formal businesses and lower private investment. Where taxes are high, businesses are more inclined to opt out of the formal sector. The amount of the tax cost for businesses matters for investment and growth. ![]() Note: the relationships are significant at the 1% level and remain significant when controlling for income per capita. 2 Firms in economies that score better on the Doing Business ease of paying taxes indicators tend to perceive both tax rates and tax administration as less of an obstacle to business (figure 1).įigure 1 - Tax administration and tax rates are perceived as less of an obstacle in economies that score better on the paying taxes indicators Sources: Doing Business database World Bank Enterprise Surveys ( ). Recent firm survey data for 147 economies show that companies consider tax rates to be among the top five constraints to their operations and tax administration to be among the top 11. Governments also need to design a tax compliance system that will not discourage taxpayers from participating. 1Īll governments need revenue, but the challenge is to carefully choose not only the level of tax rates but also the tax base. Holding governments accountable encourages the effective administration of tax revenues and, more widely, good public financial management. How taxes are raised and spent can determine a government’s very legitimacy. Taxation not only pays for public goods and services it is also a key ingredient in the social contract between citizens and the economy. And they require that governments raise revenues. Programs providing health, education, infrastructure and other services are important to achieve the common goal of a prosperous, functional and orderly society. To foster economic growth and development governments need sustainable sources of funding for social programs and public investments. ![]() Why do tax rates and tax administration matter? ![]()
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