The recent financial crisis and other climate related shocks pose important challenges to fiscal policies in a number of developing countries. The best way for developing countries to respond to the tax challenges are essentially to broaden tax bases, reduce rates and improve tax administration. But equally important, the focus has also to be on economic policies that accelerate growth and expand the tax base. In many developing countries, poor public service delivery, financed with existing revenue, creates dissatisfied citizens which are unwilling to pay taxes. A legitimate and responsive state one that secures the rule of law and keeps corruption under control is important for better mobilisation of tax revenue. With regard to the mix of tax instruments trade taxes will continue to reduce its significance as an important source of revenue. This suggests that indirect taxes such as VAT and direct taxes will be of significant importance in the future. Many developing countries have very narrow tax bases, with large number of exemptions, often designed to protect the interests of powerful groups. In these circumstances broadening the base can have the advantages of raising revenue, improving economic efficiency and achieving greater redistribution. Over the long-term taxation can reduce developing countries’ dependence upon aid and increase its ownership of the development agenda and become accountable to its citizens. This would also reinforce the social contract between state, citizens and the private sector which was how efficient institutions evolved in the developed world.