Tax reform and fiscal space in developing countries

Abstract

This paper investigates empirically the effect of tax reform on fiscal space in developing countries. The analysis has used an unbalanced panel dataset comprising 99 developing countries (of which 37 Least developed countries—LDCs) over the period 1980–2015. It has shown empirical evidence that tax reform is associated with greater fiscal space in developing countries, with this positive impact being particularly higher for LDCs than for the set of other countries in the full sample. Furthermore, the higher the degree of openness to international trade, the greater is the positive effect of tax reform on fiscal space. In light of the importance of securing greater fiscal space to finance development needs, policymakers in developing countries should pursue their tax reform in the context of greater trade openness, notably with the assistance of both bilateral partners (developed countries) and relevant international institutions.