Reforming tax administration requires an understanding of its problems. Often, tax laws are exceedingly complex and opaque, making it virtually impossible for taxpayers to comply. Sometimes, the political system does not pursue the public interest in the development of tax legislation, which results in loopholes and other inequities that undermine the integrity of the tax system and taxpayer compliance. Frequently, problems originate in tax administrations themselves where a lack of resources, a lack of professionalism (corruption), and a lack of a clear strategy for reform play a role.
This paper provides some elaboration and examples, based on country experience, of the six essential elements required for successful tax administration reform: an explicit and sustained political commitment; a team of capable, hardworking officials dedicated full-time to tax administration reform; a well-defined and appropriate strategy; relevant training for staff; additional resources for the tax administration or, at least, some reallocation of resources; and changes in incentives for both taxpayers and tax administrators.
Tax administration reform must strive to enhance both the effectiveness and efficiency of tax administration. The paper discusses interventions to improve effectiveness through promotion of taxpayer self-assessment, provision of taxpayer education, adoption of procedures for minimizing the cost of complying for taxpayers, implementation of systems for tax returns processing and accounting that quickly detect noncompliance and take appropriate action, and establishment of an audit plan to detect violations as efficiently as possible. Also needed are adequate penalties for violations that strike at the heart of the tax system, such as failure to file returns and to pay taxes on time.
The paper finds that, along with a strategy for enhancing effectiveness, tax administrations can adopt a number of measures to focus their scarce resources in the most efficient manner for revenue collection and enforcement. These measures include establishment of a large taxpayers unit; adoption of a threshold for tax registration that exempts small enterprises from major taxes; the imposition of an alternative tax on small enterprises with limited revenue potential; use of final withholding of taxes on individual taxes; and use of banks for receiving tax payments.
The measures discussed in the paper for improving the effectiveness and efficiency of tax administration suggest an organization of the tax administration to support five principal functions: taxpayer education; registration, accounting and returns processing; collection enforcement; auditing; and legal services and appeals.