Taxing the Digital Way: IMF Explores Public-Private Tech Synergy for Revenue Gains

A new working paper by the International Monetary Fund (IMF) presents a compelling case for how digitalization in both the private and public sectors can significantly enhance domestic tax revenue mobilization. Authored by IMF economists Manabu Nose, Nicola Pierri, and Jiro Honda, and developed in collaboration with insights from institutions such as the World Bank, OECD, and the World Economic Forum, the study investigates a question long overlooked in fiscal policy debates: Can the digital transformation of firms meaningfully improve tax compliance and collection? Drawing on large-scale firm-level data from 36 million companies in 56 countries and supported by cross-country datasets, the paper delivers a persuasive answer, yes, but only when public digital infrastructure keeps pace.

How Digitally Savvy Firms Drive Better Tax Compliance

While existing literature has well established that firm-level digital adoption leads to greater productivity, wage growth, and economic resilience, the authors focus on a novel dimension: tax behavior. The study finds that firms with higher “digital intensity”, defined as a greater share of ICT-related inputs in their production processes, are significantly more likely to pay taxes and contribute a larger proportion of their revenues in the form of tax payments. This relationship is particularly pronounced in developing economies, where informal business activity is more common and tax compliance rates are lower.

In emerging markets, the effect is substantial. A one-standard-deviation increase in digital intensity results in a 20 percent rise in the tax-to-turnover ratio. In advanced economies, the increase is around 6 percent. These findings suggest that digital adoption helps businesses integrate more transparently into formal economic structures, thus widening the tax net. Importantly, the study controls for firm age, profitability, size, and other country-specific factors to isolate the effects of digitalization. It shows that even among similar firms, those with higher ICT use contribute more in taxes, supporting the idea that digital adoption leads to improved tax compliance, not just greater profits.

The Power of GovTech: When Governments Go Digital Too

However, digitalization in the private sector alone is not sufficient. The paper reveals that the full fiscal benefits of firm digitalization materialize only when public tax administrations are also technologically equipped. Using the UN’s E-Government Index and data from the World Bank’s GovTech maturity assessments, the authors show that in countries with high levels of government digitalization, the impact of firm digitalization on tax revenues is significantly amplified.

For instance, in countries in the top quartile of e-government performance, a one-standard-deviation improvement in business digitalization is linked to a three-percentage-point increase in the tax-to-GDP ratio. In contrast, in countries with low public-sector digital capacity, the effect is marginal or statistically insignificant. This demonstrates a strong synergy effect, one that demands coordinated digital strategies between governments and private businesses. If either side lags, the benefits are limited. Particularly in low-income countries, where both GovTech and firm digitalization levels are often low, the paper emphasizes the urgency of progressing on both fronts simultaneously.

Evidence from the Ground: Compliance as the Key Mechanism

To further explore how digitalization affects tax behavior, the authors employ a decomposition analysis using the Oaxaca-Blinder method. They assess whether firms that use more ICT pay more taxes because they are more productive or because they comply better with tax rules. In the service sector, typically more informal than manufacturing, the analysis finds that between 40 to 70 percent of the higher tax payments made by digital firms are due to better compliance, not increased profits. This finding supports the hypothesis that digitalization simplifies tax reporting, reduces compliance costs, and limits opportunities for evasion, especially for smaller firms or those in loosely regulated environments.

Moreover, the study finds that small firms and those operating in countries with high business informality show the largest compliance improvements from digitalization. These are precisely the types of businesses that are hardest to tax effectively, suggesting that digital tools could be instrumental in closing longstanding tax gaps.

A Call for Dual Investment in Public and Private Digital Infrastructure

The overarching message of the paper is clear: digitalization is no longer a choice but a necessity for modern tax systems. But the impact is maximized only when both sides, government and firms, adopt digital tools in tandem. The authors argue that investments in broadband access, digital IDs, ICT training, and tax administration modernization should be considered high-return public investments. Although upfront costs may be significant, the potential tax revenue gains in the medium term can more than offset these expenses.

For developing countries in particular, where fiscal space is limited, this offers a strategic pathway to build stronger, more resilient tax systems. Policymakers are urged to incorporate expected future tax gains into cost-benefit analyses for digital public investments. As shown in the study, even modest improvements in digital infrastructure and adoption could substantially narrow the tax-to-GDP gap between low-income and advanced economies.

Ultimately, the IMF working paper champions a harmonized digital agenda, one that connects public-sector readiness with private-sector innovation to deliver sustainable fiscal dividends in the digital era.