Tax Design from a Public Financial Management Perspective

Since public spending, outside of resource-rich and aid-dependent countries, is paid for primarily from tax revenue, tax design is of considerable PFM significance. The tax system has to be capable of delivering a reliable stream of revenue so that expenditure can be planned in the knowledge that necessary resources are available. In practical terms, since the demand for public spending tends to increase as countries become richer, the tax ratio — that is, tax revenue as a share of national income — should increase as an economy grows without requiring tax policy changes. The tax system should also be flexible in the sense that revenue can be increased through policy changes to respond to new expenditure needs, shortfalls in other sources of revenue (such as resource income or foreign aid) and adverse developments in the availability or cost of financing.