The Effect of Tax Digitization on Revenue Collection Efficiency in Developing Countries

Abstract

Purpose – This study aims to empirically investigate the effect of tax digitization on revenue collection efficiency in developing countries. It examines whether the adoption of digital technologies in tax administration—such as e-filing, e-payment, integrated databases, and data analytics—significantly improves tax revenue performance and reduces administrative collection costs. Additionally, the study explores the moderating role of institutional quality, specifically control of corruption, in conditioning the effectiveness of digital tax reforms.

Design/methodology/approach – This quantitative study employs a panel dataset comprising 68 developing countries over a ten-year period from 2014 to 2023. A multi-dimensional Tax Digitization Index is constructed using principal component analysis (PCA) based on data from international sources including the IMF, World Bank, and OECD. The study utilizes Fixed Effects panel regression with Driscoll-Kraay robust standard errors to account for heteroscedasticity, autocorrelation, and cross-sectional dependence. Control variables include GDP per capita, trade openness, agriculture value added, and control of corruption. An interaction term between digitization and corruption control is included to test for moderating effects.

Findings – The results reveal that tax digitization has a significant positive effect on revenue collection efficiency. A one-unit increase in the Tax Digitization Index is associated with a 0.412 percentage point increase in the Tax-to-GDP ratio (p < 0.001) and a 0.028 improvement in collection cost efficiency (p < 0.001)., based on a total sample of N = 680 observations.  Furthermore, control of corruption significantly moderates this relationship (β = 0.289, p < 0.05). The marginal effect of digitization is nearly three times larger in countries with strong corruption control compared to those with weak corruption control, indicating that institutional quality is a critical determinant of digital reform success.

Research limitations/implications – The study is limited by potential endogeneity concerns and the aggregation of diverse digital interventions into a single index. Future research should employ quasi-experimental designs and disaggregate digitization into specific technological components. The findings imply that policymakers should pursue digitization and anti-corruption reforms as complementary strategies. Investments in digital tax systems yield substantially higher returns when accompanied by strong institutional frameworks and accountability mechanisms.

JEL: H20, H21, H83, O33, O38