IMF outlines tax reforms to boost growth and preserve public revenue

High public debt and expensive borrowing have left governments worldwide with no scope for broad tax cuts, the International Monetary Fund (IMF) argues in its Fiscal Monitor analysis, Taxing Better to Boost Growth.

The alternative is to remove distortions in existing tax systems without sacrificing revenue.

BANGKOK: The IMF has published the analysis as a complement to the October 2025 Fiscal Monitor, which examined ways to improve public spending efficiency.

This analysis turns to the revenue side of government budgets, concluding that how governments collect revenue matters at least as much as how much they collect.

The IMF said high public debt, rising borrowing costs, mounting spending pressures and weak medium-term growth prospects had left many governments with virtually no fiscal room for broad tax reductions.

The challenge therefore shifts from cutting taxes to stimulate the economy towards revenue-neutral tax reforms that encourage economic activity without eroding government revenue or worsening inequality.

Potential economic gains

The estimated benefits are larger than many expect.

The IMF said reducing distortions in production and consumption associated with value added tax (VAT) could generate economy-wide welfare gains equivalent to as much as 0.8% of gross domestic product (GDP) in emerging market and developing economies.

Removing tax distortions that raise the cost of capital could increase long-term GDP by about 2.1–2.7%.

Reforms that strengthen work incentives will also help raise employment rates by approximately 1.2% in emerging market and developing economies and 0.8% in advanced economies.

Tax administration efficiency also makes a substantial difference.

Countries whose tax administrations rank at the 67th percentile for operational strength collect revenue equivalent to 1.7% of GDP more than those at the 33rd percentile, without any increase in tax rates.

Removing distortions in existing tax systems

The analysis identifies targeted changes to existing tax systems, rather than lower tax rates, as the source of efficiency gains.

A well-designed VAT system should tax final consumption rather than production.

When businesses can obtain refunds for tax paid on inputs, production costs fall and resources move towards more productive uses.

For business taxation, the IMF recommends allowing investment costs to be deducted sooner to encourage investment, while retaining taxes on economic rents.

Innovation incentives offer greater returns relative to their fiscal cost when they target additional research and development, rather than awarding benefits according to company size or profits only loosely linked to research.

Labour taxes and benefits should also be redesigned to make entering the workforce and earning more financially rewarding, while preserving redistribution objectives.

Tax administration determines results

The IMF stressed that good tax design is meaningless if enforcement is weak.

Stronger tax administration helps collect more of the tax already due, reduces compliance burdens that fall disproportionately on small and newly established businesses, and narrows productivity gaps between firms.

Just as importantly, better administration enables other reforms to be implemented.

A reliable VAT refund system gives governments the confidence to remove exemptions while keeping fraud risks under control.

Credible audit systems help target research and development incentives more effectively, while effective administration ensures that in-work subsidies reach their intended recipients.

For countries with limited capacity, the IMF recommends starting with the fundamentals: registration, filing, payment, refunds and compliance management.

These provide the foundations for further reforms.

Different priorities for different economies

For emerging market and developing economies, the most pressing problems are unrecoverable VAT on business inputs, limited support for people in work, and weaknesses in basic tax administration.

In advanced economies, where tax and benefit systems and tax administrations are already more developed, the emphasis is on refining work incentives and using data and technology to collect taxes more effectively.

Investment distortions and poorly targeted incentives remain common problems for both groups.

Shifting towards taxation of business economic rents could deliver additional benefits where conditions permit.

Political obstacles as costs precede benefits

Despite the clear economic rationale, the IMF acknowledged that the real obstacle lies in political economy.

Reform costs are immediate and concentrated among those losing tax benefits, while efficiency and growth gains are spread more widely and take time to emerge.

Successful reforms therefore require clear objectives, credible implementation, early engagement with stakeholders, effective communication and phased introduction, with targeted measures to mitigate adverse effects where necessary.

The IMF stressed that better taxation does not replace measures to raise revenue where countries still need additional funds, and fairness remains central.

The aim is to collect the revenue required at the lowest economic cost.

Over the longer term, a more productive economy provides a stronger foundation for both growth and public finances.