IMF calls for smarter tax systems to cut business costs and raise revenue

The International Monetary Fund (IMF) is urging governments to revamp their tax systems to boost revenue for public services while concurrently reducing hidden costs that hinder businesses, investment, and employment. This recommendation arises as global public debt is anticipated to surpass 100% of GDP by 2030, coupled with medium-term global growth projected to remain sluggish at around 3%.

In their October 2026 Fiscal Monitor, the IMF highlights the challenge tax systems face: generating revenue without deterring private investment, innovation, and job creation. The IMF states, "Tax systems carry a dual burden. They must safeguard the revenue that keeps public finances sustainable while supporting or at least not hindering, private investment, innovation, and employment."

The level of tax revenue collected as a percentage of GDP can significantly influence businesses depending on the structure of those taxes. The report identifies Value-Added Tax (VAT) as a sector where poor design can escalate production costs. If businesses cannot fully recoup VAT paid on inputs, the tax becomes embedded in production costs and can inflate prices along supply chains.

Kenya is presently dependent on VAT and other consumption taxes to meet revenue objectives amidst high public debt and sluggish growth. Businesses have expressed concerns over cascading input costs, delayed VAT refunds, and compliance burdens. The IMF's October 2026 Fiscal Monitor reveals that incomplete VAT crediting on business inputs and exemptions can augment firms' production costs by up to 9% in emerging and developing economies, thereby heightening costs along supply chains.

The Fund also asserts that conventional corporate tax rules can escalate the cost of capital by 15-20%, discouraging investment. Kenya's 16% VAT, exemptions, and a substantial informal sector have been previously identified by IMF reviews as factors impacting VAT efficiency, particularly exposing smaller firms to registration, filing, and refund challenges.

The report suggests restoring VAT neutrality, enhancing VAT input cost recovery, and fortifying tax administration to stimulate growth while maintaining revenue. In the examined economies, unrecovered VAT and exemptions have escalated firms' input costs by 2.3% to 8.9%, with the maximum reaching nearly 9% in emerging market and developing economies.

The IMF posits that restoring VAT neutrality by curtailing exemptions and ensuring prompt and full VAT input credit recovery could yield welfare gains of up to 0.8% of GDP in the examined countries, without compromising overall revenue. The report also scrutinizes the impact of corporate income taxes on investment, finding that typical tax systems augment the cost of capital by 15-20% on average.

This can render certain investment projects unfeasible as businesses fail to recuperate their full investment costs. A dataset encompassing 186 countries indicates average marginal effective tax rates of 14.7% in advanced economies and 19.2% in low-income developing countries. The IMF estimates that eliminating the tax-related component of the cost of capital could augment long-term capital stocks by 6.4% in advanced economies and 8.2% in low-income countries, potentially resulting in GDP gains of 2-3%.

The Fund also underscores tax thresholds that may dissuade firms from expanding and employment-tax systems that diminish the financial advantage of taking a job or augmenting earnings. Revenue-neutral reforms expanding in-work support could raise employment rates by 1.2 percentage points in emerging market and developing economies, according to the report.

The IMF further advocates for stronger tax administration to narrow VAT compliance gaps and mitigate the fixed costs associated with fulfilling tax obligations, particularly for small and young firms. "Taxing better means addressing these distortions and improving efficiency, that is, raising the same amount of revenue with the same tax mix, but with less interference in real economic decisions."