Digital Transformation, Institutional Quality, and Tax Revenue in West Africa
Digital Transformation, Institutional Quality, and Tax Revenue in West Africa

Summary/Abstract: Purpose: The paper examined the individual and combined effects of digitalization and institutional quality on the mobilization of tax revenue in West Africa. It aims to understand the interplay of these factors in shaping tax outcomes in developing economies, with particular attention to distributional impacts and causal mechanisms. Design/Methodology/Approach: The mixed-methods quantitative approach applies to panel data from 14 ECOWAS member countries for 2000-2023. The analysis employs the fixed effects models, Method of Moments Quantile Regression (MMQR), and the panel Structural Vector Autoregression (PSVAR) in measuring the average treatment effects, the heterogeneous effects across the revenue distribution, and dynamic causal effects between digitalization and institutional quality on the one hand and tax revenues on the other hand. Findings: The results indicate that internet penetration, as measured by tax revenue, has a positive impact, with a stronger effect in high-revenue countries. The role of institutional quality is consistently positive and significant for tax mobilization across settings, underscoring the complementarity of technological diffusion and institutional factors. Although there are increasing returns to internet distribution, a variance decomposition analysis shows that tax revenues are more strongly affected by the quality of the institutional environment than by internet penetration per se, suggesting that the digitalization of the tax system works optimally only in an environment with strong institutional structures. Practical Implications: The study advises West African governments to focus on institutional quality and investments in digital infrastructure. Policymakers should aim to strengthen governance structures, enhance regulatory uniformity, and build institutional capacity to ensure that the benefits of digitalization for tax revenue are fully realized. Different countries with varying levels of revenue must adopt different approaches, and low-revenue countries must have their institutional structures in place before digital tax systems will yield high rates. Originality/Value: The work is relevant as it entails a systematic analysis of the nexus between digitalization and institutional quality in tax mobilization in the West African region. In contrast to earlier literature that examined these factors separately, the current study highlights their interactions and distributional heterogeneity, yielding subtle policy implications for policymakers in developing economies seeking to increase fiscal capacity through technological and institutional change. Paper Type: Research Paper.

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