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This article is about determinants of tax revenues and about constraints affecting taxation policy and its reform. Its analysis is in the context of a neoliberal policy framework practised in a small developing country, Sri Lanka. As in other countries in similar conditions, neoliberalism has created a fiscal crisis in Sri Lanka too. There has been almost continuous increase in public debt, associated with declining overall levels of taxation. The examination of related issues systematically highlights the crucial relevance of a series of socio-political as well as economic factors in respect of Sri Lanka's government revenue problem. The main theme emerging from a political economy perspective on taxation, including as an essential ingredient an historical view, is that while technical and administrative aspects of tax reform are crucial, the sustainability of reforms requires an understanding of how reforms become legitimate and accepted by the people. The focus on institutional designs and other technical tax issues would be incomplete if the essential political nature of taxation is ignored.