In the first half of the twentieth century, Panama's tax base was narrow, and taxes were regressive. Up to 40 percent of the urban work force was employed in the Canal Zone (including most of those with higher wages) where, because of treaty arrangements, their incomes could not be taxed by Panama. The rural population was largely untaxed because of farming's subsistence nature and the high costs of collecting rural taxes. Before the 1940s, over half of the taxes were from imports, mainly consumption goods for urbanites.

A 1955 treaty revision substantially expanded government revenue sources. The treaty permitted taxation of Panamanians working in the Canal Zone it increased wage scales for those workers. A major tax reform, undertaken in 1964, made individual and corporate income taxes more progressive and improved the procedures for tax collection. By 1968, the tax structure compared favorably with that of other developing countries. Nearly half the tax revenues came from taxes on income and wealth import duties and excise taxes on nonessential commodities provided an additional 15 percent of tax revenues.

The structure of government current revenue changed in 1979 because of the implementation of the Panama Canal treaties. Total revenue increased from US$477 million in 1979 to US$986 million in 1985. Direct taxation grew as a share of revenue, from 45.2 percent in 1979 to 52.6 percent in 1985. Tax receipts (direct and indirect taxation), as a share of revenue, dropped from 84.9 percent in 1979 to 69.8 percent in 1985. The drop was brought about primarily by the rise in the annual income received from operating the canal, which accounted for about 40 percent of non-tax revenue in 1985. Other sources of non-tax revenue included royalties and taxes from the trans-isthmian oil pipeline, and levies on gambling.

Data as of December 1987