How does digitalization improve non-resource tax revenue mobilization? Evidence from developing countries

Abstract

This paper examines the effect of digitalization on non-resource tax revenue mobilization in developing countries. Panel data from 111 countries selected between 2005 to 2019 have enabled us to carry out econometric estimates based on fixed effects. Our empirical analysis uses the digitalization index composed of the ICT access and use index. The results suggest that digitalization positively influences non-resource tax revenue mobilization in developing countries. The results also support the view that access to ICT is a readiness phase for its usage. More interestingly, the favorable effect of digitalization is sensitive to the characteristics of developing countries, namely the level of economic development , the level of digitalization, and the quality of institutions. Furthermore, we use an instrumentalization strategy to correct the endogeneity bias that might result from our model. We use connectivity shocks linked to the telecoms infrastructure, i.e., technical failures of submarine cables. This connectivity shock minimizes the under-identification problem and clarifies the channels linking Internet diffusion and submarine cable connec-tivity. The results argue that countries with experience repairing these failures have a higher level of digitalization conducive to tax revenue mobilization. Furthermore, the results remain robust after further robustness tests (reverse causality and dynamic effect). These results support our argument that developing countries could benefit significantly from digitalization by adopting policies promoting ICT access. JEL Classification : H20; O11; 033; 055