Improving Tax Collection, Raising Tax Revenue and Lessons in Tax Reform
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- Authors: BERNARDIN AKITOBY
- Published: March 1, 2018
Context and key problem
- 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 of social services (health and education), critical infrastructure (electricity and roads), and other public goods, putting economic development at risk.
- The content draws on five country case studies (Cambodia, Georgia, Guyana, Liberia and Ukraine) of successful reforms between 2004 and 2015 that achieved some of the largest revenue gains after tax reform.
Georgia: case study summary
- Pre-reform conditions: following the collapse of the Soviet Union, Georgia struggled to collect tax revenue; by 2003 rampant corruption (tax evasion, illegal tax credits, and theft of government tax revenue) had left public finances in shambles and the government unable to honor obligations to public servants and pensioners.
- Political catalyst: the 2003 Rose Revolution gave a new government a mandate to reform the economy and fight widespread corruption; adopted zero tolerance for corruption and changed culture and laws.
- 2004 tax code revision and measures:
- Reduced number of taxes from 21 to 7.
- Progressive personal income tax rates (12 to 20 percent) replaced with a flat rate of 20 percent.
- Social security contribution tax rate reduced from 33 percent to 20 percent and then eliminated altogether.
- Corporate income taxed at a flat rate of 15 percent.
- Value-added tax (VAT) reduced from 20 percent to 18 percent.
- Broadened the tax base, improved compliance, and enforced stricter enforcement to offset revenue loss from lower rates.
- Introduced an electronic tax filing system and technologies to improve efficiency and reduce corruption.
- Lowered the minimum capital required to start a business, generating more tax revenue.
- Outcome:
- 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.
- Georgia automated most processes, including e-filing, instituted information sharing among tax authorities, taxpayers, and banks, and created a one-stop Internet portal.
Cross-cutting tax policy measures across cases
- Simplify the tax system and curb exemptions:
- Simpler tax systems with a limited number of rates foster taxpayer compliance; simplicity is especially critical in fragile states.
- Liberia introduced taxes on turnover or import values (goods and services tax, excises, and customs tariffs) underpinned by simple tax legislation after the civil war.
- Curbing exemptions broadens the tax base and reduces opportunities for corruption; many countries lost sizable revenue through ill-designed exemptions.
- Guyana’s exemption reform included eliminating the finance minister’s power to grant discretionary exemptions, publishing exemptions annually, and limiting income tax holidays to every 5 or 10 years depending on the sector.
- Reform indirect taxes on goods and services:
- VAT is an efficient revenue booster; countries imposing VAT tend to raise more revenue.
- Georgia streamlined its VAT refund mechanism, allowing VAT revenue to rise 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 a limited number of exemptions (financial, medical, educational services).
- Ukraine curbed VAT exemptions and revised the regime for agriculture by reducing the rate and eliminating refunds.
- Excise and sales tax increases can raise revenue quickly; examples:
- Guyana raised fuel excise taxes in 2015 to buoy revenue during an economic slowdown.
- Liberia broadened its goods and services tax scope and raised excise taxes on alcoholic beverages and cigarettes.
Tax administration reforms implemented
- Management, governance, and human resources:
- Four of the five countries implemented management and governance changes.
- Georgia gradually recruited new tax and customs officers and phased out old ones as part of anti-corruption reform.
- Establishment of large taxpayer offices:
- Large taxpayer offices focus compliance efforts on biggest taxpayers and pilot new procedures (example: Cambodia).
- Smart use of information management systems:
- Countries leveraged IT and big data to improve compliance and fight corruption.
- Cambodia, Guyana, Liberia computerized tax and customs administration.
- Modernization of registration, filing, and payment management:
- All five countries sought to establish or modernize rules and processes for registration, filing, and payment obligations.
- Guyana implemented a unique taxpayer identification number system, streamlined processes, and introduced income tax withholding.
- Enhanced audit and verification programs:
- Risk-based audits linking audit likelihood and nature to taxpayer risk were central to compliance strategies.
- Examples:
- Cambodia conducted risk-based audits at customs and of the 150 largest taxpayers and hired some 200 new auditors.
- Ukraine implemented a targeted audit program, improved internal control, fought fraudulent VAT claims, and developed an anti-smuggling program at customs.
Measured outcomes and timelines
- Reform duration ranged from two to seven years; sustained institutional change requires time.
- Revenue increases in each of the five countries averaged at least 1 percent of GDP a year over the reform period.
- Georgia and Ukraine each averaged 2.5 percent of GDP a year in revenue gains over their reform periods.
- All five countries sustained revenue gains in the five years after the reform episodes.
Overarching lessons and policy recommendations
- Have a clear mandate: major reforms are often feasible only after reaching a high degree of dysfunction or crisis that triggers political momentum.
- Secure high-level political commitment and stakeholder buy-in: broad social and political commitment and effective communication are necessary; compensating losers can help win public support.
- Pursue simplicity and limit exemptions: simpler tax systems with fewer rates and fewer discretionary exemptions improve compliance and reduce corruption.
- Combine tax policy and tax administration reforms: pursuing these in tandem tends to yield larger and more sustainable revenue gains.
- Leverage technology and data: use electronic filing, IT systems, and information sharing to improve efficiency and reduce corruption.
- Take the long view: set realistic multi-year revenue objectives and allow institutional changes to mature; one noted benchmark is the quantitative tax revenue objective of at least 1 percent of GDP per year over a four- to six-year horizon.
Source: Improving Tax Collection, Raising Tax Revenue and Lessons in Tax Reform, F&D Magazine.
Content in this bundle
- Improving Tax Collection, Raising Tax Revenue and Lessons in Tax Reform - IMF F&D Magazine
- زيادة الإيرادات
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