Optimal Tax Administration

IMF Working Papers, January 20, 2017

Source details

Sets out a framework for analyzing optimal interventions by a tax administration, parallel to and integrable with established frameworks for optimal tax policy.
Develops a summary measure of the impact of administrative interventions — the “enforcement elasticity of tax revenue” — which is a sufficient statistic for the behavioral response to such interventions, analogous to the elasticity of taxable income as a sufficient statistic for the response to tax rates.
Applications include characterizations of:
- the optimal balance between policy and administrative measures, and
- the optimal compliance gap.

Enforcement elasticity of tax revenue introduced as a unifying sufficient statistic for administrative intervention effects.
Framework links administrative action and standard optimal tax theory via sufficient-statistic approach.
Behavioral responses to administrative interventions can be summarized by a single elasticity measure, facilitating comparative statics and policy design.

Use the enforcement elasticity of tax revenue to guide resource allocation between:
- changes in tax policy (rates, bases), and
- administrative measures (enforcement, compliance efforts).
Characterize and target the optimal compliance gap using the framework’s sufficient-statistic summaries.
Evaluate marginal revenue-cost ratios of administrative interventions using the enforcement elasticity as the key parameter.

Subject: Compliance costs, National accounts, Personal income, Revenue administration, Revenue performance assessment, Tax administration core functions, Tax gap
Keywords: administration cost, Compliance costs, cost-revenue ratio, elasticity rule, enforcement elasticity, implementation cost, IRS initiative, marginal revenue-cost ratio, optimal taxation, Personal income, Tax administration, Tax administration core functions, tax compliance, Tax gap, tax rate, taxable income, WP