Closing the Gap: How Tax Administration Performance Shapes Compliance

IMF Working Papers, October 10, 2025

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Examines the impact of tax administration performance on tax compliance gaps across countries.
Builds on the Allingham and Sandmo framework, emphasizing:
- institutional effectiveness, and
- social acceptability of the tax system

as key determinants of taxpayer behavior.

Uses a novel panel dataset combining:
- VAT gap estimates,
- results of standardized tax administration diagnostic assessments (TADAT), and
- tax administration institutional and operational data (ISORA).
Empirical approach: combines the Hausman-Taylor and Mundlak-Krishnakumar frameworks.

Robust negative relationship between tax administration effectiveness (based on TADAT scores) and VAT compliance gaps.
Specific quantified effects:
- An increase in a tax administration’s TADAT score from 1.85 to 2.32 (approximately D+ to C+) is associated with an 0.6 percentage point increase in VAT revenue as a share of GDP, reflecting reduced VAT noncompliance.
- Including spillover effects on Corporate Income Tax (CIT) compliance, the total revenue gain could reach 1.3 percent of GDP.
Higher social acceptability of the tax system is linked to lower noncompliance.

Strengthening tax administration institutions is critical to improving tax compliance and enhancing tax revenue.
Policies that raise TADAT-assessed effectiveness (moving scores toward and above the 2.32 benchmark reported) can yield measurable VAT revenue gains and additional CIT spillovers.
Enhancing the social acceptability of the tax system should be part of comprehensive tax administration reform to reduce noncompliance.