# Introduction

In addition to raising revenue, tax systems have a key role to play in achieving countries’ equity goals. However, many tax systems in developing countries currently exhibit very little progressivity, relying heavily on indirect taxes and raising relatively little revenue from key sources of progressivity such as the personal income tax, capital income taxes and property taxes. As countries look to raise revenue following multiple crises, it is therefore important that tax reforms are implemented in ways that increase progressivity and ensure that better off households pay their fair share of tax.

In this context, the World Bank is currently undertaking a project examining how countries can increase the progressivity of their tax systems in order to both enhance domestic resource mobilization and promote inclusive growth. At the same time, for IDA20, the World Bank has committed to assessing the progressivity of tax systems in International Development Association (IDA) countries over FY2023-25.<sup>1</sup> This paper – which focuses on measurement of tax progressivity – contributes to both these work streams. The paper examines potential approaches to assessing the progressivity of tax systems and then, based on this analysis, proposes a set of progressivity metrics to be adopted over the next three years to assess tax progressivity in IDA countries.

Measurement of tax progressivity is a challenging issue for several reasons. Most significantly, data limitations have a large impact on what taxes can be examined, what measurement approaches can be adopted to examine those taxes, and how reliable those approaches are likely to be. This is particularly important for IDA countries where data limitations are typically most significant. Additionally, there is no single definition of progressivity, or single method for measuring the degree of progressivity of a tax, thereby necessitating a range of decisions and value judgements to be made to undertake any assessment. The appropriate definition of progressivity will depend on the underlying question being asked, and will potentially impact the way in which the degree of progressivity can be measured. Contingent upon the definition chosen, there are several approaches that can then be adopted to measure the degree of progressivity of a tax, each with benefits and drawbacks that must be weighed in determining the most appropriate approach. Finally, measurement of tax progressivity – particularly when based on microdata – can be extremely resource intensive, and this must be taken into account, particularly in the current context where the progressivity of a large number of countries needs to be assessed.

The first impact that data limitations have is on the range of taxes that can be examined. Ideally, policy makers should be interested in assessing the progressivity of the entire tax system (and indeed, more broadly, in the progressivity of the entire fiscal system). However, data limitations make it virtually impossible to undertake a detailed analysis of the progressivity of the entire tax system, yet alone the entire fiscal system – although the in-depth CEQ analyses undertaken by the CEQ Institute and the World Bank go a long way towards this by assessing the distributional impacts of a number of major components of tax, transfer and expenditure systems (see Commitment to Equity Institute Data Center on Fiscal Redistribution, 2022; Lustig, 2018).

> 1 For more information on IDA, see: https://ida.worldbank.org/en/home.

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