Intelligent Government: How Research Can Help Increase Tax Compliance

How can governments and tax authorities best encourage taxpayers to be compliant, i.e. to be more honest in declaring information about their tax obligations and paying what is due? Unfortunately, one common response, rather misleadingly termed ‘education’, is to preach at taxpayers: to tell them that it is their duty to pay taxes, and threaten them with punishment if they fail. This kind of ‘education’ is not very effective, and may even reduce compliance. By contrast, there is a growing range of low-cost research techniques that can help tax authorities understand, for particular taxes and contexts in particular countries, how tax compliance can best be increased through the actions of the tax authorities themselves. It is increasingly possible for tax authorities to understand how their ‘clients’ behave in response to the tax collection procedures that are in place, and then to modify those procedures to increase compliance. These research techniques are increasingly used in low income countries, and by the staff of tax authorities rather than (solely) by external research experts. The paper summarises three research experiments successfully concluded in Africa in recent years by combinations of tax authority staff and external researchers. One of those experiments reveals the value of efforts genuinely to educate taxpayers – rather than to preach at them

How does taxation affect the quality of governance?

This paper summarises the policy implications of a growing debate about the connections between taxation and the quality of governance in developing countries. Taxation – or the absence of tax – impacts on the quality of governance through two main channels. The first relates to the degree of dependence of governments on general taxation for their financial resources. Many governments do not need to make much tax effort because they have large non-tax incomes from oil, gas and mineral exports or from foreign aid. State elites are then financially independent of citizen-taxpayers. This changes the political incentives that they face, and the ways in which they seek to obtain, use and retain power. The long term consequences for governance are malign: state elites are less responsive and accountable to citizens; and, depending on the sources of non-tax revenue, may have less incentive to build up the political and organisational capacities of the state. States are likely to be simultaneously arbitrary and weak. All else being equal, the dependence of governments on general taxation has positive effects on the quality of governance. But that relationship is not automatic. How governments tax also matters. We cannot assume that, because they are fully dependent on taxation for revenues, governments will be capable, accountable, or responsive. They may levy taxes coercively, and thereby damage state-society relations and reinforce poor governance. Public authorities in contemporary poor countries face some incentives to tax coercively. Establishing more consensual taxation practices is an important practical route to improving governance. Aid donors could play a more constructive role. Keywords: taxation, accountability, responsiveness, state capacity, governance, aid, oi

Tax and the Governance Dividend

This paper was originally published in Anne Mette Kjaer, Lars Buur and Lars Engberg-Pedersen (eds) - Perspectives on Politics, Production and Public Administration in Africa - Danish Institute of International Studies, 2015. taxation; politics; public spending; tax exemptions.It is now widely believed that taxation contributes to the quality of governance. There are a number of variants of the broad argument. The most general proposition is that, if governments are dependent on broad general taxation for their incomes, they will, for reasons of self-interest, be more responsive to the needs of their citizens and more likely to allow citizen representatives to share in governance. From a broad historical perspective, that argument is probably valid. The political interactions between states and citizens over tax revenues are however considerably more complicated than this. Governments can proactively use their control over the revenue collection process to divide their citizens into different, competing groups, and thereby increase governments’ own bargaining power relative to their taxpayers. This dimension of the politics of taxation systems has received relatively little attention in the substantial literature on the topic. This paper summarises and illustrates the ways in which governments can use patterns of public spending and tax exemptions to protect themselves from the potential political influence of organised taxpayers.DfID, NORAD

Obstacles to Increasing Tax Revenues in Low Income Countries

tax, tax administration, revenue, politicsThis paper is focused on the question: why do the governments of low income countries not raise more tax revenues? Two different but complementary approaches are used to answer it. The first approach is comparisons: among countries today, and within countries over time. This approach tends to generate relatively conservative answers to the central question. It leads to an emphasis on the ‘sticky’ nature of the taxation. For any individual country in ‘normal times’ – i.e. excluding situations of war, major internal conflict, the collapse or rapid reconstruction of state power - revenue collections, measured as a proportion of GDP, do not change much from year to year. This is partly because effective taxation systems require a great deal of coordination and cooperation between revenue agencies and other organisations, both inside and outside the public sector. It is hard quickly to improve the effectiveness of a complex organisational network. The ‘stickiness’ of tax collections also reflects the fact that the overall tax take – i.e. the proportion of GDP raised as public revenue – is to a significant degree determined by the structure of national economies. For logistical reasons, it is much easier to raise revenue from economies (a) that are high income, urban and non-agricultural and (b) where the ratio of international trade to GDP is high. The government of the average low income country raises less than 20 per cent of GDP in revenue. It makes no sense for such governments to aim to match OECD tax takes of 30-45 per cent of GDP.DfID, NORAD, UNRISD, SD

The governance agenda in long term perspective : globalisation, revenues and the differentiation of states

The governance-and-development agenda that has dominated thinking since the collapse of the Soviet Bloc is fast losing credibility. It continues to be associated with a set of countries, ideas and experiences – the ‘West’ – that no longer enjoy global leadership. It has not usefully identified the role of governments in promoting economic growth. And it takes little account of the ways in which states are changing. The growing influence of the BRICs and other emerging powers is now widely appreciated. This paper explores the ways in which late twentieth century globalisation is bringing about more subtle changes in the political constitutions of states that may have considerable implications for the ways in which we are governed and the actions that may be needed to reduce the incidence of bad governance. Contrary to widespread expectations, globalisation does not necessarily lead states to become more like one another, or to converge around the ‘Western’ model of liberal democracy and market capitalism. It also leads states to compete with one another. To the extent that they compete by seeking alternative sources of revenue, this may lead them to diverge politically. The concept of political revenues – the incomes that governments and political elites obtain through the exercise of political power – is central to the analysis. One of the consequences of late twentieth century globalisation is that, in some countries, opportunities for political elites to gather (illicit) elite political revenues have expanded considerably. This helps explain why fragile states have become a normal feature of the global system. A more widespread consequence is that states enjoy a range of new non-tax revenues in addition to ‘normal’ tax revenues. This has significant implications for the accountability of governments to citizens. Keywords: governance, state, globalisation, revenue, fragile state, drugs, oil

Promoting Good Government by Supporting Institutional Development?

Summary Positive support to better government requires aid agencies mainly to engage in ‘institutional development’, or ‘institution building’ activities. The article discusses four sets of problems that arise for aid agencies: the fact that they are not very good at supporting institution building; the frailty of the technical assistance mechanisms available to support institution building; the threat that the newly?fashionable term ‘capacity building’ will confuse the debate and inhibit effective action; and fact that successful promotion of institution building may require aid agency staff to intervene directly and effectively in the internal affairs of recipient nations. RESUME Peut?on promouvoir le bon gouvernement en promouvant le développement institutionnel? Offrir un appui positif à l'amélioration du gouvernement, cela exige que les agences d'aide participent principalement à des activités de ‘développement institutionnel’ ou de ‘création d'institutions’. Le présent article discute quatre catégories de problèmes qui se soulèvent chez les agences d'aide: le fait qu'elles manquent d'expertise pour concourir à la création des institutions; que les mécanismes d'assistance technique disponibles pour encourager la création des institutions restent frêles; que le concept de la ‘majoration des capacités’, expression récemment en vogue, risque de créer une confusion dans le débat et de réduire l'efficacité des actions; et que tout succès dans la promotion de la création des institutions pourrait exiger, que le personnel des agences d'aide intervienne directement et efficacement dans les affaires intérieures des nations donataires. RESUMEN ¿Promoción del buen gobierno por medio del apoyo al desarrollo institucional? El apoyo positivo para un mejor gobierno requiere que las agencias de ayuda, se ocupen principalmente del desarrollo institucional o creación de instituciones. Este artículo considera cuatro tipos de problemas que se les presentan a las agencias: a) su falta de eficiencia en el apoyo a la creación de instituciones; b) la fragilidad de los mecanismos técnicos de asistencia existentes para efectuar ese apoyo; c) el peligro de que el nuevo término ‘construcción capacitadora’ pueda confundir el debate e inhibir la acción efectiva; d) el hecho de que la promoción exitosa de la creación de instituciones puede requerir la intervención directa y efectiva de personal de las agencias de ayuda en los asuntos internos de los países beneficiarios

Will Changes to the international Tax System Benefit Low-income Countries?

In recent months tax has climbed up the political agenda in ways that would have been unthinkable only a couple of years ago. Creating a fairer international tax system was a central ambition of both the Lough Erne declaration and the Leaders Declaration that came out of the respective G8 and G20 meetings in 2013. Yet several questions remain about how this rhetoric will be translated into reality. Does the political will exist to drive through these proposed changes? Do poorer nations have the resources and capacity to benefit from these initiatives? What more can low-income countries (LICs) do themselves to create national tax systems that are more efficient, effective and fair

What is Wrong with African Tax Administration?

National tax administrations in sub-Saharan Africa have undergone considerable reform in recent decades. In a number of respects, they are, on average, more reformed and more efficient than tax administrations in other low income regions of the world. They have responded effectively to a number of major challenges. However, we now have evidence from benchmarking evaluations organised by the International Monetary Fund (IMF) that overall tax administration performance in the region is unimpressive. This paper assembles a wide range of evidence from recent research on two inter-connected policy issues in African tax administration: the use (under-use, misuse) of digital technologies and a set of questions of who should be taxing small scale business, how, and how much. The first conclusion is that digital technologies are generally under-used and mis-used relative to their potential. They tend to be deployed in a rather fragmented way and for ‘taxpayer facing’ activities, rather than for internal control purposes. They have much under-exploited potential to support additional revenue collection, to make the collection process less unpleasant and fairer and to address the problem of weak oversight and accountability of tax administrations. The second conclusion is that there is a high potential for improving the organisational arrangements for taxing small business in sub-Saharan Africa. The current practice reflects a confluence of several factors. For a number of reasons, tax administration is relatively centralised; nearly all revenues are collected by central government tax agencies, leaving very little for sub-national revenue collectors. In consequence, central government tax agencies have to organise themselves internally to undertake very different types of tasks: to collect revenue both from small numbers of big companies, that typically provide nearly all revenues, and from very large numbers of very small scale businesses. The latter collectively provide a small proportion of total revenue. Further, many if not most national tax administrations have on their books large proportions of inactive taxpayers – people and companies who are registered with the tax administration, but who do not actually pay tax. Taxpayer registers are often inaccurate. A major reason for both the large numbers of inactive taxpayers and the inaccuracy of the registers is that considerable efforts are continually made to register new taxpayers, even though experience indicates that few will actually end up paying tax. I label this the registration obsession. It is closely associated with the idea that the major source of uncollected revenues in sub-Saharan Africa is the so-called informal sector – implicitly, small scale businesses and relatively poor people. This narrative is diversionary. The major sources of uncollected revenues lie elsewhere, including the incomes and assets of the wealthy and the unjustified tax exemptions granted to companies. The informal sector narrative serves the purpose of distracting attention from these real sources of uncollected revenues.UKAIDBill and Melinda Gates Foundatio

Revenue Reform and Statebuilding in Anglophone Africa

Within the development field, tax administration reform is an area of relative success. Over the past two decades, the national revenue systems of most countries in anglophone Africa have undergone major reforms. These comprise, in particular, the introduction of Value Added Tax (VAT), the adoption of ‘advanced’ tax administration practices, and the creation of semiautonomous revenue authorities. What do these reforms imply for emerging patterns of politics and governance in anglophone Africa? The first conclusion is conceptual and theoretical. The impact of these reforms has been shaped by the broad context within which they were being implemented, especially the increasingly transnational character of many important policymaking relationships (Orenstein and Schmitz 2006; Stone 2008; Weiss 2005). Senior African revenue staff feature increasingly in transnational expert networks, and face a wider range of employment opportunities, public and private, both at home and abroad. The second conclusion is that these revenue reforms have contributed only modestly to statebuilding. While the new revenue agencies are in many respects impressive organisations, actual revenue collection has not increased much; improvements in organisational capacity have been concentrated at national and capital city level; potentially synergistic improvements in the capacity to formulate tax policy have not occurred; and some anticipated spillover benefits from improving the revenue collection apparatus have not been realised. The third conclusion is that, while these reforms have made it possible for governments to raise revenue from the organised private sector in a more ‘Weberian’ (institutionalised, rule-bound) and a more consensual manner, they have also increased the possibility that the taxation system will be shaped by private sector interests, making it difficult for governments to raise the revenue that they claim they need.DfID, NORA