Creating Value for Taxpayers

Source details

Low-income developing countries need "$3 trillion annually through 2030" to finance development goals and the climate transition.
Global debt is projected to reach "100 percent of GDP before the end of this decade".
Many developing countries have an untapped tax potential of "8–9 percent of GDP".
Structural constraints to raising revenue:
- Large share of population in difficult-to-tax activities (small-holder farming, informal service providers).
- Cash-based transactions that are hard to track.
- Perception that formalization increases tax liability with limited benefits, incentivizing informality.
- Use of tax exemptions to attract investment that erodes the corporate tax base.
- Reliance on taxes on goods and services, which place a heavier burden on the poor.
- Enforcement that is weak for the rich and punitive for the working class and the poor.

Core premise: how governments drive increases in tax collection affects how much tax they can collect; strengthening the social contract and delivering social value encourages formalization and compliance.
Alternative to enforcement-first reforms: place greater emphasis on fostering trust by delivering value to taxpayers so that paying taxes yields tangible benefits.
Digital public infrastructure (DPI) can be a central mechanism to deliver value, combining interoperable, open-access, and reusable building blocks into a network of digital systems with data security, privacy, and consent at its heart.

Definition and role:
- DPI is comparable to roads and physical infrastructure in connecting people to goods and services; it pairs technology with policy frameworks and private participation incentives.
Three implementation steps to broaden the tax base and increase revenue:

1. Introduce digitally verifiable assets and credentials to reduce the attractiveness of operating outside the formal economy.

Examples: Aadhaar enabling bank account access and seamless social benefit payments; Brazil’s Pix; Thailand’s PromptPay; India’s Unified Payments Interface; digitally signed documents and certificates for licenses and permits.

2. Align incentives for individuals and businesses to join the formal sector by ensuring formalization generates value for them.

Digital payment footprints and verifiable business credentials can reduce cost of business verification and improve access to formal credit.
Caveat: payment networks should not be launched with the explicit objective of linking all transactions to tax reporting, which could discourage adoption.

3. Generate value for taxpayers through the tax system to encourage engagement with filing:

Give data back to taxpayers in trustworthy, reusable formats (example: digitally signed business IDs and a public verification mechanism for GST ID numbers in India).
Create incentives for filing throughout the supply chain (example: India’s GST offers an income tax credit discount of "up to 20 percent" if purchases are from registered, tax-paying suppliers; discount shared as credit toward next tax payment).
Allow private ecosystem to build seamless filing and value-added services by opening API access (more than "55 licensed third-party platforms" have been used to file taxes since India opened API access).

Revenue collection:
- Revenue from the goods and services tax has grown by "more than 50 basis points of GDP since 2018", showing a marked increase over projected collections under the previous tax regime.
Operational efficiency:
- The time to process electronic returns and refunds for taxpayers has fallen significantly (see Chart 2 in the source).
Tax base:
- The tax base has broadened, with a marked and sustained rise in noncorporate taxpayers, including small businesses and individuals (see Chart 3 in the source).
Critical enablers:
- Robust security and privacy controls in the system, ensuring confidential and ethical use of taxpayer data.
- Governance and policy reforms (example: Goods and Services Tax Network as a unified collection mechanism).

Trust and government effectiveness are reciprocal: trust improves compliance and enables effective policy implementation; effective institutions build trust when aligned with public interest and improve daily lives.
DPI contributes to trust by providing tamper-proof identity, payments, and security components that reduce explicit and implicit costs for citizens and businesses interacting with government and each other.
Trust must be built beyond digital platforms via reliable functioning and swift, transparent dispute resolution; sustained progress required in digital systems and broader policy and institutional frameworks.
Expected macroeconomic benefits: increased confidence, higher investment, innovation, productivity, and ultimately growth as part of a virtuous cycle.

Adopt a value-first lens in tax reform that prioritizes delivering social and economic value to taxpayers, with revenue gains as a derivative benefit.
Invest in interoperable digital public infrastructure with strong data security, privacy, and consent frameworks.
Design DPI to:
- Enable digitally verifiable IDs and credentials to facilitate formalization.
- Align incentives for formalization (credit access, lower verification costs).
- Return useful data and credentials to compliant taxpayers (e.g., digitally signed business IDs, public verification mechanisms).
- Promote API openness to allow private-sector innovation in tax filing and value-added services.
Ensure governance and policy reforms accompany technological solutions (for example, unified tax administration mechanisms).
Maintain careful sequencing and communication so that payment and identity infrastructure are seen primarily as value-creating, not primarily as surveillance or tax-enforcement tools.

IMF F&D Magazine, "Creating Value for Taxpayers", Kamya Chandra, Tanushka Vaid, Pramod Varma, September 2024.

Creating Value for Taxpayers
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