Fiscal Adjustment in Developing Countries Through Tax Administration Reform

Abstract

Many developing countries undertaking a fiscal adjustment have followed the International Monetary Fund's (IMF) recommendation to create a large taxpayer unit (LTU) to ensure stable or enhanced revenue flows, but the problem is that researchers have not conducted a systematic evaluation (other than a survey) of this recommendation's revenue raising effects. It is important to understand the effects of this reform measure because limited country resources should be allocated carefully to policy reforms that have a reasonable chance of success. In order to address the issue, this paper evaluates the effectiveness of this fiscal reform using economic data. A unique panel data set has been assembled to evaluate performance of LTUs based on each country's tax share (tax revenue divided by GDP) over a seven-year period. Employing a straightforward empirical methodology of comparing changes in the average annual tax share before and after implementation, a surprising 43 percent of countries experienced a decline in the tax share after implementing an LTU. The implication for policy makers is that successful reform not only includes adopting the correct policy, but also taking adequate steps to ensure that the policy is well-implemented.

Knock, Knock: The Taxman’s at Your Door! Practice Sense, Empathy Games, and Dilemmas in Tax Enforcement

“…In developing countries, tax administrations' enforcement activities are often undermined by weak institutions, challenging socioeconomic environments (Alm and Martinez-Vazquez 2007;Mansfield 1988;McKerchar and Evans 2009;Tennant and Tennant 2007;Vehorn 2011), overburdened court systems (Cornia and Walters 2010), and resource constraints. In addition, tax legislation may be insufficient (Gill 2000), tax rolls may be outdated (McCluskey and Franzsen 2005), prohibitive cultural practices may sometimes be embedded in the tax administration's practices (Nerré 2008;Wynter and Oats 2018), and tax morale, that is, willingness to pay tax, is often low (Bahl and Wallace 2007).…”

Ideology and Interests in Tax Administration Reform inJamaica

“…Reforms to tax administration systems in other jurisdictions can guide policy changes to improve efficiency and effectiveness. The policy lessons learned include adjustments to organizational forms and structure, modernization of systems and procedures to minimize the information needs, and reductions in compliance and administrative costs (Bird ; Fossat and Bua ; Vehorn ).…”

“…Ostensibly, early action will enhance tax collection, provide better taxpayer services that increase compliance, and reduce opportunities for corruption. Although Vehorn () identifies the establishment of a semi‐autonomous revenue authority, and the LTU among the benchmarks for reform, careful assessment of the use of LTUs as a strategy for increased revenue collection and attention to the risks of implementation are necessary, otherwise success may be limited.…”

“…Reforms can proceed along multiple dimensions: disbanding existing organizations; consolidating functions into new entities; internal restructuring; changing systems and procedures; building capacity (additional hiring and retraining); and strengthening ownership of reforms (Das‐Gupta, Ghosh, and Mookherjee ; Fossat and Bua ). Yet Vehorn () rightly cautions that change will not automatically guarantee the desired outcome; it is important to pay attention to implementation. Ownership of the reforms by tax administrators along with incremental approaches as part of a set of comprehensive reforms seem to work better in the views of many scholars (see e.g., Das‐Gupta, Ghosh, and Mookherjee 2004; Vehorn ).…”

“…Yet Vehorn () rightly cautions that change will not automatically guarantee the desired outcome; it is important to pay attention to implementation. Ownership of the reforms by tax administrators along with incremental approaches as part of a set of comprehensive reforms seem to work better in the views of many scholars (see e.g., Das‐Gupta, Ghosh, and Mookherjee 2004; Vehorn ). All of this underlines the importance of understanding the beliefs, motivations, behaviors, and actions of individuals and groups, as these can be critical to successful implementation and the reforms themselves.…”