## RAISING REVENUE

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**Canonical URL:** [RAISING REVENUE](https://www.imf.org/-/media/files/publications/fandd/article/2018/march/akitoby.pdf)

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### Overview
- A typical developing economy collects just 15 percent of GDP in taxes, compared with the 40 percent collected by a typical advanced economy.
- Low tax collection constrains financing for health, education, electricity, roads, and other public goods.
- Five country cases studied (Cambodia, Georgia, Guyana, Liberia, and Ukraine) achieved some of the largest revenue gains after tax reform between 2004 and 2015.

### Georgia: case study of sweeping reform
- Preconditions and mandate:
  - Rampant corruption, tax evasion, illegal tax credits, and theft left public finances in shambles after the Soviet collapse.
  - The 2003 Rose Revolution provided a mandate to reform the economy and fight corruption.
- Policy and legal changes enacted in 2004:
  - Revised tax code simplified the system, reduced rates, and eliminated many minor local taxes; only 7 of 21 taxes remained.
  - Personal income tax: progressive rates of 12 to 20 percent replaced with a flat rate of 20 percent.
  - Social security contribution: reduced from 33 percent to 20 percent and then eliminated altogether.
  - Corporate income tax: flat rate of 15 percent.
  - VAT: reduced from 20 percent to 18 percent.
- Administration and taxpayer facilitation:
  - Introduced an electronic tax filing system and other automations, automated most processes including e-filing, instituted information sharing among tax authorities, taxpayers, and banks, and created a one-stop Internet portal.
  - Lowered minimum capital required to start a business, generating more tax revenue.
- Results:
  - By 2008, Georgia’s tax-revenue-to-GDP ratio had doubled to 25 percent.
  - Revenue gains in Georgia averaged 2.5 percent of GDP a year over the reform period.

### Key reform measures across the five countries
- Political and social prerequisites:
  - Have a clear mandate (examples: Georgia 2003 Rose Revolution; Ukraine 2004 Orange Revolution; Liberia initiated reform in 2003 after civil war).
  - Secure high-level political commitment and buy-in from stakeholders; social dialogue and compensating losers help implementation and sustainability.
- Simplify the tax system and curb exemptions:
  - Simpler tax systems with a limited number of rates foster compliance.
  - Curbing exemptions broadens the base and reduces corruption opportunities; Guyana eliminated discretionary exemption powers, published exemptions annually, and limited income tax holidays to every 5 or 10 years depending on the sector.
  - Liberia introduced turnover/import-value taxes (goods and services tax), excises, and customs tariffs under simple legislation after the civil war.
- Reform indirect taxes on goods and services:
  - VAT is an efficient revenue booster; Georgia’s VAT revenue rose from 8.5 percent of GDP in 2005 to about 11.5 percent in 2009.
  - Guyana introduced a broad-based VAT on January 1, 2007 with a single rate of 16 percent and limited exemptions for financial, medical, and educational services.
  - Ukraine curbed VAT exemptions and revised the regime for agriculture by reducing the rate and eliminating refunds.
  - Increases in excise and sales taxes can raise revenue quickly (examples: Guyana raised fuel excise taxes in 2015; Liberia broadened its goods and services tax and raised excises on alcoholic beverages and cigarettes).

### Comprehensive tax administration reforms
- Common administrative reforms implemented:
  - Management, governance, and human resources: four of five countries implemented management and governance changes; Georgia recruited new tax and customs officers and phased out old ones as part of anti-corruption reform.
  - Establishment of large taxpayer offices to focus compliance on the biggest taxpayers and pilot new procedures (example: Cambodia).
  - Smart use of information management systems and big data to improve compliance and fight corruption; widespread IT modernization in Georgia, Cambodia, Guyana, and Liberia.
  - Modern registration, filing, and management of payment obligations (example: Guyana implemented unique taxpayer identification numbers and introduced income tax withholding).
  - Enhanced audit and verification programs with risk-based audits; Cambodia hired some 200 new auditors and conducted risk-based audits at customs and of the 150 largest taxpayers; Ukraine implemented targeted audits, improved internal controls, fought fraudulent VAT claims, and developed an anti-smuggling program at customs.

### Results, timing, and sustainability
- Duration and pace:
  - Reform episodes lasted from two to seven years.
  - Revenue increases averaged at least 1 percent of GDP a year over the reform period across the five countries.
- Sustainability:
  - All five countries sustained revenue gains in the five years after the reform episodes, indicating institutional quality of the measures.

### Policy lessons and recommendations
- Tax reform prerequisites:
  - Broad social and political commitment is essential.
  - High-level political commitment and stakeholder buy-in increase chances of implementation and sustainability.
- Strategy and sequencing:
  - Pursue tax policy reform and revenue administration reforms in tandem for larger gains.
  - Simplify taxes, procedures, and structures—especially in fragile states—to make administration feasible given limited security and judicial capacity.
  - Limit ill-designed exemptions and discretionary granting of exemptions to reduce revenue loss and corruption.
- Implementation focus:
  - Leverage IT and information-sharing systems to improve compliance and reduce corruption.
  - Use targeted, risk-based audits and large taxpayer offices to concentrate enforcement where it is most effective.
- Time horizon:
  - Adopt a multi-year perspective; institutional change requires time and reforms typically need a four- to six-year horizon to meet quantitative revenue objectives.

*Bernardin Akitoby, “Five country cases illustrate how best to improve tax collection.”*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2018/march/akitoby.pdf_