Public Finance in Developing Countries

This review of public finance in developing countries covers tax advice and practice during the past half century, principles of good public finance, some key issues in development finance during the period, fiscal decentralization and some important open questions. Thinking about good tax systems for developing countries has changed from systems centered on progressive income taxes to, in the 1980s, systems with low rates having a broad based indirect tax as the major revenue instrument. Although there is no 'one size fits all' set of rules, a framework for evaluating public finance structures and institutions in terms both public revenue and spending as well as the fiscal balance is set out, and some key areas - income taxes, VAT, earmarking, tax evasion and administration, and such non-tax revenues as those from government monopolies, natural resources and borrowing – discussed. The review of fiscal decentralization points to possible efficiency gains and from increased local accountability and knowledge as the major benefit if fiscal powers of local government are increased and suggests that greater reliance on own revenue promotes fiscal discipline, a further benefit that may outweigh such possible costs as the loss of some macroeconomic control and possibly lopsided investment priorities. The challenges of increased globalization to national tax bases and the possibility of global taxes to finance global public goods are also discussed briefly, as is the need to improve local fiscal expertise and institutions in developing countries