Improving tax revenues in the emerging markets: A Laffer curve analysis

Abstract

Emerging market and developing economies (EMDEs) can significantly improve their tax-to-GDP ratios by expanding the tax base and strengthening institutional quality. This paper develops a neoclassical growth model with heterogeneous agents- Ricardian and non-Ricardian households-to examine fiscal capacity using a Laffer curve framework. It highlights two key constraints in EMDEs: a large untaxed population-including exempt and informally employed individuals, and institutional weakness reflected in tax evasion, poor audits, and weak compliance norms. Non-Ricardians are untaxed; Ricardians may evade or pay taxes. Results show that raising tax rates alone is ineffective; broader compliance, limited exemptions, and institutional reforms are essential.