At the IMF annual meetings from 13 to 18 October 2025, an Analytical Corner introduced by Matthieu Bellon and Ross Warwick with the title State Capacity, Growth and Institutions: Taxing for Take-Off looked at the minimum level of revenue that is needed for countries to take off into economic growth. The speakers introduced research indicating that there was a tipping point, after which further growth and development could proceed. Taxation is central to development, as fiscal capacity is one of the three pillars of prosperity (together with legal capacity and collective capacity). There is currently a pressing need to mobilise domestic resources, as ground has been lost through the pandemic, global inflation and the geopolitical issues arising.
Examination of a dataset of tax and development over five decades indicated that the tipping point for sustainable growth was a tax-to-GDP ratio of 10%. Above this point, growth could accelerate in future years. There were two types of country that could go above the threshold. Some countries are “bouncers” that move across the threshold but slip back after a few years, and their tax revenue goes back down. However, there are other countries that move above the threshold and sustain the higher tax revenue. These countries can further increase their revenue and reach a tax-to-GDP ratio of 15% after twelve years.
Only a sustained increase in tax revenue can achieve sustained growth. The long-haul countries that maintain their revenue growth can increase their economic growth more quickly. This would also lead to growth in financial development, government effectiveness, legal structures and governance. The institutions become stronger and more effective. Higher revenue leads to greater government spending and investment, leading to better outcomes.
A large number of countries are still below the tax tipping point. They need to build up their tax capacity, broaden the tax base and build trust. Spending efficiency is also important – governments must tax and also spend effectively to achieve growth. To achieve the required revenue growth, countries need to invest in their tax administrations to improve tax collection and taxpayer services.
