Digitalization and Domestic Revenue Mobilization: Governmental Responsiveness and Capabilities Matter

Although previous research has highlighted digitalization as a potential avenue for enhancing domestic revenue mobilization—a critical component for the sustainable economic and political development of nations—the relationship between digitalization and domestic revenue mobilization remains underexplored. This paper contributes to the current literature by investigating how the relationship between digitalization and the government's capacity to tax is influenced by governmental responsiveness and capabilities, an element largely disregarded in prior analyses. Empirical results from a time-series cross-sectional dataset that includes up to 159 countries spanning from 2004 to 2021 demonstrate that a high level of digitalization does not automatically result in an increased non-resource tax revenue-to-GDP ratio. However, when digitalization is combined with robust governmental responsiveness and capabilities—specifically regarding Voice and Accountability or Regulatory Quality—it substantially enhances domestic revenue mobilization. This study also reveals that the interaction effects are more pronounced in the low–to–middle segments of digitalization and among low- and middle-income countries. These findings underscore the need to bolster institutional frameworks in conjunction with digitalization endeavors to ensure the sustained success of domestic revenue mobilization.