Raising Revenue Right : A Roadmap for Domestic Resource Mobilization - Chapter 7 : How Much Tax Revenue to Collect and How? - A Marginal Value of Public Funds Approach

Overview & Synopsis

This chapter presents a practical framework to help governments in emerging market and developing economies (EMDEs) determine whether to raise additional tax revenue, which tax instruments to use, and how to allocate the proceeds. Building on the Marginal Value of Public Funds (MVPF) framework, it introduces the Welfare-Weighted Marginal Value of Public Funds (WMVPF), a metric that measures the welfare cost to citizens of raising an additional dollar of government revenue. The chapter demonstrates how WMVPF can be used to compare tax policy options, including value-added taxes, personal income taxes, and corporate income taxes, using examples from Indonesia and Mexico. It also shows how the framework guides decisions on both revenue mobilization and public spending by identifying the most efficient ways to raise and allocate funds. Finally, the chapter explains why focusing on marginal tax reforms is more practical and actionable than attempting to estimate a single optimal tax-to-GDP ratio.