Bridging the Tax Gap: a crucial step towards sustainable development

This blog entry was also published by UNU-WIDER. 

Mobilising domestic resources is essential for sustainable development. The Addis Ababa Action Agenda (AAAA), adopted in 2015, emphasised domestic revenue as a key financing pillar. As we approach the Fourth International Conference on Financing for Development (FfD4), the UNU-WIDER Tax Gap Toolkit, supported by the Addis Tax Initiative (ATI), emerges as a vital resource.

Understanding the Tax Gap Toolkit

The Tax Gap Toolkit, developed by UNU-WIDER, is designed to assist tax authorities in estimating tax gaps for value-added tax (VAT), corporate income tax (CIT), and personal income tax (PIT). The tax gap can identify losses due to non-compliance by assessing the difference between potential and actual revenue. This tool is particularly valuable for developing countries, where tax compliance is low and limited revenue can significantly hinder economic growth and reaching sustainable development goals.

The toolkit uses a bottom-up approach, relying on tax administrative data to estimate tax gaps. It uses advanced machine learning techniques to predict misreporting and non-compliance, providing detailed insights at disaggregated levels. This methodology helps tax authorities develop targeted interventions and improve risk management, ultimately improving tax collection and reducing revenue losses.

The AAAA and DRM

The AAAA set the stage for financing sustainable development, stressing efficient tax systems’ role in driving growth, reducing inequality, and funding of public services. The Tax Gap Toolkit aligns with these goals by enhancing tax authorities’ capacity to identify and address compliance issues, thereby increasing domestic revenue.

The AAAA also underscored the need for global cooperation to tackle illicit financial flows (IFFs) and enhance tax transparency. As a free resource, the toolkit supports these efforts by providing a framework for estimating tax gaps, which can be adapted to various national contexts and embedded in institutional settings. This adaptability empowers countries in the Global South, where tax systems often face unique challenges.

The ATI has been key in supporting the toolkit’s development and implementation. The ATI Declaration 2025 underscores the need to strengthen the capacities of partner countries' revenue administrations. The Tax Gap Toolkit is a practical step in this direction, equipping tax authorities to enhance compliance and improve collection. The ATI also facilitates knowledge sharing and capacity building among partner countries, ensuring the toolkit's benefits reach a wide audience. This collaborative approach aligns with the AAAA's call for international cooperation and solidarity in financing sustainable development.

Insights from the UNDP Global Dialogue on Public Finance & SDGs

During the plenary session on Data and Statistics for Development-focused Public Finance, Maria Jouste, Patricio Barra, and Kyle McNabb emphasised robust data infrastructure‘s critical role in informing public finance decisions.

Maria Jouste emphasised the importance of focusing limited tax audits in high-risk areas. By targeting high-revenue potential areas, governments can maximise impact and ensure a more efficient allocation of resources. She also emphasised the importance of engaging stakeholders in toolkit development, explaining how input from communities of interest, like the ATI Tax Gap Community of Interest (CoI) continues shapingthe Tax Gap Toolkit. This collaboration aligns the toolkit with local needs while complementing global frameworks like the IMF’s tools. By blending global best practices with local insights, the toolkit bridges methodology gaps, strengthens tax compliance systems, and enhances its relevance and usability. IMF’s Patricio Barra supported this, noting the toolkit complements other tax gap methods, offering policymakers providing a more complete view of tax gaps. He recommended the toolkit’s use in broader revenue mobilisation strategies.

Feeding evidence into the FfD4 Agenda

During the Technical Assistance and Capacity Building for Public Finance session at the 2025 Dialogue, Alistair Lobo on behalf of the ATI Steering Committee highlighted the ATI's vital role in aligning global frameworks with local priorities through consensus-building among its diverse membership. This alignment allows the ATI to tailor activities, such as tax gap analyses and regional workshops, to specific local needs, resulting in tangible improvements in tax expenditure reporting.

While the Tax Gap Toolkit represents progress in tax gap analysis, it is only a starting point. Its global implementation could evolve to include additional programming languages and broader compliance assessments, extending to trade, customs, and excise taxes.

As the Fourth International Conference on Financing for Development (FFD4) approaches, evidence-based policymaking is essential. The zero draft of the FFD4 outcome document underscores the need for a renewed global financing framework. By leveraging advanced technologies and international cooperation, we can create a more effective and equitable global tax system, supporting the achievement of the SDGs and ensuring that no country or person is left behind.

The UNU-WIDER Tax Gap Toolkit, with the support of the ATI, is a vital resource for enhancing domestic revenue and promoting sustainable development. As we prepare for FFD4, integrating such evidence-based solutions into the global financing framework can pave the way for a more inclusive and sustainable future.