Distortionary tax systems

When government needs to reduce public deficits, the economic cost of raising more revenue is weighed against the cost of public spending. The temptation in the short-run is to rely on ad hoc increases in taxation because they are administratively and politically convenient. But in many countries this has led to complex and highly distortionary tax systems that not only fail to collect sufficient revenue but also damage long-term growth and increase the burden on the poor.

Taxation on the earnings and property (via direct and indirect taxes) of lower to middle-wage earners may take away anything from one-half to two-thirds of their pay. Increased taxes reduce savings, reduce bank capital available to stimulate economic growth, and have caused bank failures. Similarly, taxes on business for both international and local trade have mounted so drastically that 80 to 90% of gross income after costs and expenses may go to various taxes, and in the case of international trade, to various governments as well. Many governments maintain very low taxes on rural land allowing underuse, on the other hand settlers are allowed to establish title to "virgin" land – forests – by converting it to farmland.

[Developing countries] When there are considerable economic inequalities, indirect taxes on income and wealth exert less restraint than direct taxes on socially wasteful consumption, yet the majority of developing countries collect 70% or more of their tax revenue from indirect taxation (customs duties, for example). In addition, exemption levels tend to be higher than they need be. In some developing countries, personal incomes up to a multiple of ten or twenty times the average per capita income remain altogether exempt from income tax (compared with from one to three times in developed market economies). In particular, the tax shelter enjoyed by wealthy landlords is an obstacle to overall economic progress.