Tax Systems and Development

This paper analyzes the optimal tax system consisting of the tax rate and the capacity of the tax administration. I challenge the conventional wisdom that tax rates and tax administrations’ capacity are complements showing that their relationship depends on a country’s level of development. Accordingly, developed and developing countries should set higher tax rates and administrative capacities than moderately developed countries. The discrepancy compared to observed practices regarding administrative capacities can be resolved by an aspect previously disregarded in the tax systems literature: the degree of tax administrations’ autonomy. With autonomous tax administrations, capacity increases monotonically with development as suggested by the empirical literature. Finally, I analyze how fighting tax havens affects non-haven countries’ tax revenues. While developed countries benefit, the same applies to developing countries only if tax administrators and lawmakers tightly coordinate their actions.