The Disparate Impact of Digitalization on Tax Revenues: An Illustration from Developing APEC Economies

While prior research has highlighted digitalization as a potential avenue for enhancing domestic revenue mobilization—a crucial component for the long-term economic and political development of economies—the relationship between digitalization and domestic revenue mobilization remains underexplored. This working paper contributes to the existing literature by examining how the interplay between digitalization and the government’s capacity to tax is influenced by governance quality, an aspect largely overlooked in previous studies. Empirical findings based on a time-series cross-sectional dataset including up to 159 economies from 2004 to 2021 show that a higher level of digitalization alone does not necessarily translate into a higher non-resource tax revenue-to-GDP ratio. However, when digitalization is coupled with sound governance—specifically in terms of voice and accountability or regulatory quality—it significantly boosts domestic revenue mobilization. The study also finds that the interaction effects between digitalization and these governance variables vary according to the levels of digitalization and development across economies. The findings and case studies presented in this paper underscore the importance of strengthening institutional frameworks alongside digitalization efforts to ensure enduring success in mobilizing domestic revenue, offering valuable insights especially for developing APEC economies where the potential for improvement is most pronounced.