10 Organizational Structure and Human Resources in Tax Administration

Richard Bird, and Milka Casanegra de Jantscher
Published Date:
September 1992
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Aldo Schlemenson

Achieving good tax compliance involves a variety of factors such as the tax administration’s image, its employees’ credibility, their readiness to serve, and so on, many of which have already been discussed in this volume. In this paper we emphasize two fundamental factors that affect the efficiency and effectiveness of any organization: (1) organizational structure and (2) human resources. These factors are the pillars of any organizational development strategy.

Organizational structure is the formal framework required for an organization to operate as an integrated system that processes information and solves problems. Delineating the responsibilities of each area and its constituent roles and correctly defining the interrelationships among these roles facilitates harmonious operation and allows the entire organization to work toward a common goal. The confusion generated when the responsibilities of the various roles are poorly defined impairs the functioning of the organization. Designing an appropriate organizational structure therefore helps to reduce ambiguity and increase productivity. Employees benefit from a coherent set of rules because they know exactly what is expected of them and what objectives they are supposed to meet. This makes it possible to channel constructively the internal creative energies needed to do a job effectively.

With respect to staffing, placing people in the appropriate positions should be a basic concern of management. However, this is a difficult goal to reach. People seek not only fair wages but also the opportunity to work at a level that allows them to use their abilities fully. Evaluating and correctly placing personnel is a necessary requirement for the proper functioning of any organization. The challenge faced by management staff—and this is a central aspect of their operational responsibilities—is to promote and continuously monitor, at the level of each employee, equilibrium among three basic variables: (1) each employee’s individual ability; (2) the nature of the work he has to do; and (3) the compensation he receives. Proper exercise of this management responsibility will make it possible to increase job satisfaction and, as a result, the productivity of the entire organization.

The problems involved in organizational structures and human resources are essential aspects of any organization, and a considerable amount of literature is devoted to them. However, only in rare instances has this knowledge been applied to the field of tax administration.

I. Organizational Structure


The term “organizational structure” varies in scope. It encompasses the definition of (1) an organizational chart; (2) the mission and functions of the organization and of its various constituent areas and roles; (3) the formal mechanisms linking these areas and roles; (4) the scope of the authority of each role; and (5) the hierarchical levels. All this requires a simple organizational design that integrates the various areas.

Our examination of this topic is based on a study made in 1975 in the General Tax Directorate of Argentina and subsequently revised in 1988. Through analysis and detailed description of the roles that make up the functioning structure, four fundamental aspects of the organization and its structure were examined:

  • Formal organization—as illustrated and explained in official documents.

  • Presumed organization—as assumed by the members of the organization.

  • Existing organization—the one actually applied.

  • Required organization—as it should be to meet current and future tax administration requirements.

The field work consisted of two parts. In the first, 50 senior officials of the organization were interviewed. The second involved interviewing regional, section, and agency managers: a total of over 150 officials.

In the following pages, we will touch specifically on some organizational dysfunctions that are clear examples of structural anomalies that affect an administration’s operational performance. Further on, we will present a proposed organization and structure.

Existing Organization

Vertical Fragmentation

This section deals with organizational problems that affect the line of command. The line of command is composed of the higher levels, which plan and direct, and the operating levels, which are responsible for implementing the plans. In the Argentine tax administration, the highest level corresponds to the role of general director. Immediately subordinate to that role are the specialized directorates: collection, audit, technical and legal affairs, internal inspection, computing systems, research, and administration (Figure 1). In official documents, these directorates are termed advisory areas in order to differentiate them from the operating areas. We will call this the “strategic planning” level, since the plans this level is responsible for formulating presuppose a thorough understanding of general policies and involve the administration’s overall goals.

Figure 1.Argentina: Formal Organization of Tax Administration

Since 1983, under the organizational structure of the Argentine General Tax Directorate, functions assigned to the audit directorate include “coordinating and directing the elaboration and preparation of internal and external audit procedures and programs to be applied by inspection personnel.” Among the functions assigned to the collection directorate are “directing and coordinating the plans, regulations and procedures established and applied by the various offices that perform collection tasks.”

The “operating area,” or area of implementation, is composed of “zones” which, according once again to official documents, have a management function and are directly subordinate to the general director. The zones have the task of “coordinating, supervising and directing, within the limits of the regions for which they are responsible, the plans, regulations and procedures established by the higher authority.”1

The “regions,” which, according to the formal structure, are subordinate to the zones, are the operating units and are established according to geographic criteria. They are responsible for implementing the objectives set by the programs and procedures issued by the advisory areas, particularly the audit and collection areas.

As can be seen from Figure 1, the zones are at the same hierarchical level (decision-making level) as the directorates or advisory areas. In practice, there is also a very close relationship between the planning areas (especially collection and audit) and the regions (Figure 2). This relationship, indicated in the figure by a broken line, is in addition to the link between the regions and zones. This creates a dual formal and functional connection that leads in practice to virtual “dual subordination.”

Figure 2.Argentina: Existing Organization

Note: Broken lines indicate informal functional subordination. Unbroken lines indicate formal subordination.

Discrepancies between what is officially postulated and what actually happens create problems, some of which are described below.

Relationships between the “advisory or regulatory” areas (such as collection and audit), on the one hand, and the “operating or line” areas, on the other, are subject to imprecisions and contradictions with respect to the authority of each area, the power of command of the former over the latter areas, the exercise of control, and so forth. The relationships of subordination are unclear. Because there is a significant degree of ambiguity in the boundaries that separate the areas, their actions are less effective. For example, according to official documents, the collection and audit directorates are responsible for formulating plans and procedures that must then be implemented by the regions. These plans involve objectives in the form of instructions, and these same regulatory areas are responsible for evaluating the execution of the plans at a later date. In any organization, both the responsibility for issuing instructions and that of evaluation are the prerogative of the higher level of authority. Consequently, the advisory area directorates informally assume these powers of higher executive authority with respect to the regions (operating areas). We say “informally” because, formally speaking, the regions are subordinate to the zones. As there is no clear line of command, relationships between the directorates and the regions are not backed by the degree of authority necessary to enforce compliance with the instructions, and, as a result, the regions do not recognize a relationship of subordination. In practice, moreover, the zones lose their real authority. This situation is summarized in Figure 2.

Because it is not clear that issuing instructions to the operating areas (regions) constitutes an act of delegation of objectives and responsibilities for which these areas will be held accountable, the organizational structure itself creates a significant degree of ambiguity in its line of command. This ambiguity is supported by the above-mentioned formal contradiction, which provides a basis for possible resistance to or partial implementation of plans. In both the interviews with regional managers and the interviews with section and agency managers in the interior of the country, officials mentioned this formal contradiction and indicated the various forms of organizational dysfunction it causes. First, they pointed to the phenomenon generally referred to as “multiple subordination.” The regions receive plans from various sources, for example, the collection and audit directorates, that imply mutually incompatible objectives. This can create priority conflicts or various regulatory contradictions.

In some cases, the aforementioned directorates (advisory areas) do not restrict themselves to their planning functions. Instead, they, too, carry out operations with their own staff and, in doing so, intervene in the regions’ geographic and jurisdictional areas. The regions express dissatisfaction with procedures that in some instances mean that the same taxpayer is contacted repeatedly. As for the zones, as has already been mentioned and judging by what actually occurs, it is not clear specifically what this level contributes as a center of authority. The surveys point repeatedly to the marginal position of the zone in contrast to the direct relationship between the directorates—in particular, collection and audit—and the regions. The result is a vacuum of real power in the zones. Nevertheless, they still interfere with the establishment of a clear system of accountability (delegated responsibility). In this case, the regions’ formal and informal multiple subordination to the directorates and the zones creates bureaucratic interference that affects operational efficiency.

As may be gathered from these comments, to function coherently, the strategic command and the operating area should be part of the same line of command. Between these two levels, there should be a clear, functional relationship of subordination in which predetermined responsibilities are backed by authority, and which unequivocally allows the higher level to take responsibility for results. All the officials interviewed called for this definitional transparency. Regional managers would like these relationships clearly defined. Furthermore, heads of directorates, whose authority also appears confused, are equally unable to assume responsibility for the results of what they delegate.

The need to define a clear line of command presents us with a new problem. While at the higher level the principle of specialization predominates (collection, audit, technical and legal affairs, and so on are specialized areas), at the regional level these functions are integrated under a common authority. The regional manager is thus a generalist; he is responsible for bringing together the various functions performed by the sections. What we have here is a contradiction between organizational principles at two distinct levels of the institution. When surveyed, regional and section managers unhesitatingly stated their preference for the integrated regional model, since interdependency solves the problems of overspecialization. It simplifies paperwork and procedures, allows employees to perform multiple functions, and avoids duplication of requests to taxpayers.

With regard to their participation in planning, the managers interviewed said that this participation was slight and should be greater, since they have first-hand information about the taxpayers. Consequently, the people who plan the administration’s actions do so without adequate information concerning regional realities in the broad sense. In general terms, a gap is perceived between the planners and the executors. In the opinion of those interviewed, this leads to unrealistic plans that fail to take regional characteristics into account.

To summarize, in the case analyzed, there is a gap between the advisory and operating areas. This discontinuity creates problems in implementing plans established at the higher level. Strategic planning is too far removed from concrete operations. This isolation produces a break in the line of command, which causes difficulties in enforcing the principle of delegated responsibility and, as a result, reduces managerial effectiveness.

The break in the line of command is basically due to two reasons:

(1) The operating unit managers do not officially report to the advisory and planning areas, from which they nevertheless indirectly receive instructions.

(2) The advisory areas are divided by specialization, while the operating sector is integrated under a single, versatile role: the “regional manager,” who, through his subordinates, takes responsibility for all functions. This contradiction gives rise to situations of multiple authority and multiple subordination that are further complicated by the existence of an additional authority above the regional managers: the zone manager.

Horizontal Fragmentation

Horizontal fragmentation is defined as the lack of integration among offices or regulatory areas at the organization’s higher levels. Although lack of integration is more prominent in the three basic areas—collection, audit, and technical and legal—it affects all of the directorates. Thus, the areas behave internally as if they were independent, isolated organizations. Each has its own systems, its own organizational forms, its own operations technology, and its own “organizational culture.” In turn, each has developed a fragmentary relationship with the taxpayer.

When queried on the subject, 76 percent of regional and section managers advocated greater integration among the different higher level areas. This integration would make it easier to meet the various objectives emanating from the different areas and entrusted to a single management role: that of regional manager. To achieve this, integration must take place at the directorate level. The structure proposed further on reflects this necessity.

Organizational Cultures

The tax administration is marked by the existence of two cultural groups with shared orientations. These groups are strongly conditioned by the structure, that is, the existence of two very different areas: collection and audit.

The organizational culture and orientation fostered by the collection function is based on mass processing and impersonal methods with strong reliance on automated data processing. The collection culture is based on the following values: management efficiency, centralized information, and data objectivity.

The culture or orientation fostered by the audit function is based on personal actions vis-a-vis individual taxpayers. To operate, it requires a large number of employees who are given a wide margin of discretionary power and who are highly specialized and trained in the technical aspects of taxation. The work methodology consists of analyzing the tax compliance of selected taxpayers in order to detect tax evasion and establish corrective measures. This orientation gives auditors a strong sense of identity and pride in belonging. Because of the discretionary power enjoyed by these officials, their ethical conduct is of great importance. This fact makes it necessary to encourage moral values, which have an important impact on the organization’s image.

In the Argentine case, one of these organizational “cultures” has been dominant over time. The results of a survey on job satisfaction among collection and audit employees show that cultural differences are encouraged by the prestige of belonging to one or the other group. Employees indicate a preference for the audit area, which would appear to be confirmed by the number of requests for transfer. This prestige derives from the greater experience and specialized technical knowledge required in this area. Furthermore, greater autonomy and discretionary power is associated with work in this area. Finally, training and experience gained in the area of audit is very highly valued outside the organization, which makes it easier for its employees to make the transition to the private sector.

In brief, the consequences of horizontal fragmentation at the top of the executive pyramid are manifested in the following:

  • Lack of horizontal coordination.

  • Lack of unified criteria among plans.

  • Multiple functional subordination, which is a source of conflict for regions when various directorates formulate plans without prior agreement.

  • Problems in determining work priorities in the regions.

  • Power struggles at the upper levels that can lead to disarray at the top. The different organizational cultures behave like power groups fighting to impose their orientations. The resulting internal politics focus attention away from the real problems of productivity and efficiency.

All these stumbling blocks affect the necessary unity of focus and criteria that should prevail in elaborating plans and dealing with taxpayers. As a result, the organization presents an incoherent image that tends to confuse the taxpayers.

Required Organization

The following sections present organizational proposals aimed at solving the problems described above.

The Principle of Delegated Responsibility

Establishing the concept of responsibility and delegation as a principle of internal organization is essential to managerial efficiency. According to this concept, each level of the organization should be managerial. In other words, it should base its operations on the delegation of explicit objectives in terms of quantity, quality, and time required for compliance. An officer at that level must be accountable for these objectives to the higher authority that delegated them to him. Therefore, the managers of the operating units—in this case, the regional managers—must have a single superior authority to which they are accountable for results. To achieve this it is necessary to create a single directorate of operations to solve the problem of multiple subordination. This proposal is clarified below.

It is also necessary to establish, at every level, systems to evaluate compliance with objectives, taking into account not only the quantitative results for the period but also the quality of the work done and of relations with the taxpayer.

In the operations area, the levels might be structured as shown in Figure 3. Each of the levels in Figure 3 represents a distinct authority, has its own profile, and performs a clearly differentiated function in terms of the responsibilities exercised at that level. Levels IV and V are what we refer to as “strategic’; they deal with the definition of plans and development projects, as well as the organization’s policies. Levels III and II (regional managers and section managers) work directly with the operational level. The regional manager has direct access to both taxpayers and employees. Although he does not handle all the information, he maintains broad personal control over all of the problems specific to his area of responsibility. Note that in this proposal the zones do not constitute an intermediate level between the directorate of operations and the regional manager. Differentiation of this level is considered unnecessary, since it could result in bureaucratic interference.

Figure 3.Operational Responsibilities

Integration at the Top

The directorates would constitute the strategic command. As outlined in the following paragraphs, this level would be made up of the directorates of administration, internal inspection, technical and legal affairs, computerization and systems, and operations, with the directorate of operations integrating the functions of the collection and audit areas.

Integration of this wide range of functions should be approached through a system of coordination and strategic planning, ultimately administered by the general director. His mission would be to facilitate horizontal relationships and the development of shared responsibilities by putting together a team with the goal of elaborating integrated plans for the entire administration.

According to Goldberg and Frost (1985), strategic planning should be formalized and should be a high-level management tool. Its objective is to define a desired future and to establish a process, with defined steps and stages, to make that future happen. Planning allows the organization as a whole to discuss and agree on a basic set of desired orientations, as well as on the collection objectives it wishes to achieve.

Second, the strategic plan would give rise to one or more integrated operational plans. These plans would establish the actions needed to reach objectives, agreed by all the directorates, in a period of about one year. Each of the directorates would be responsible for the development of more detailed programs for implementation in their areas, within the framework of the general plan and on the basis of quantity, quality, and time objectives coordinated with the other areas. The plan should include a centralized system of tracking, evaluation, and management supervision, which would be in addition to the tracking and evaluation carried out by the head of each area.

The Directorate of Operations

As suggested in the preceding section, the conflicts of multiple subordination could be resolved by creating a directorate of operations. This directorate would be implementation-oriented and would work through the decentralized operating units (regions) to achieve the objectives set by the plan. Thus, the director of operations would be responsible to the general director for the results of the plans delegated to the operating areas. The collection and audit functions would be attached to this directorate, to which the collection and audit specialists would be subordinate as advisors.

Establishing and strengthening the advisory nature of the positions in charge of developing collection and audit regulations, procedures, and systems means limiting the powers of these positions to delegate work or objectives to the regions or operating units. Thus, the power of delegation would remain in the hands of a single authority: the director of operations. Creating a directorate of operations not only solves the problem of multiple subordination of regions or decentralized operating units but also makes it possible to unify the criteria used to design the systems.

The desirability of functional interdependence between the two areas makes it necessary to have a single, integrated system of collection and audit. From the standpoint of data processing, the systems are mutually supportive, which means that when conceived as a whole, they acquire functional interdependence. When the functions are integrated at the strategic level, it is easier to create versatile roles at the operational levels, filled by employees who can handle the two aspects of tax administration. Both the ability to substitute and mobility are encouraged, since these foster employee satisfaction and consequently improve productivity.

Creating a unified directorate of operations to which the regional managers are directly subordinate would make it possible to achieve clear, basic linkage between three levels in the line of command: general director, director of operations, and regional manager. As this linkage should be governed by the principle of delegated responsibility, exactly what is expected of each level should be specified in terms of results and which procedures and policies should be followed.

The Region as Basic Operating Unit

The proposal that the region should be the basic operating unit emphasizes the function of the regional administrator or manager as the administration’s representative to the taxpayers and defines his position in the hierarchy (see Figure 4). He is seen as a true manager—entrusted with the required discretionary powers—of a complex operating unit concentrating all the basic functions. He must be responsible for the pace and quality of the work and for meeting the goals set for him in the plans. To increase operational performance, the region headed by the regional manager must be compatible in size with the maintenance of personal ties with both employees and taxpayers. Compatibility of size is a requisite for good structural design. Thus, the regions should have a limited number of employees—between 150 and 200 in all—who work with a limited number of taxpayers—around 50,000, hypothetically—whom they serve and monitor.

Figure 4.Proposed Regional Structure

Regions or operating units that are too big should be split up. A large number of taxpayers registered with a small number of operating units prevents good contact and personalized, efficient taxpayer monitoring. Big regions can hinder the development of effective taxpayer information and assistance programs.

The surveys conducted point to the need to give greater autonomy to the regional manager. First, as has already been mentioned, the regional manager should participate in plan design so that the plans will take actual local social and economic conditions into account. The information contributed by the regional manager is of fundamental importance for the planning level. Periodic meetings for consultation should be scheduled between regional managers and their immediate superior.

The tendency toward centralization in the existing systems must be reversed. Overcentralization accentuates internal rigidity and lessens the effectiveness of monitoring. Reversing this centralizing tendency is a way of bringing the administration closer to the taxpayer. This requires giving the officials in charge of regional units a certain degree of autonomy to monitor operations personally and to bring their ability and experience to bear in dealings with the taxpayers.

While the various divisions that make up the region would be organized according to the principle of specialization, the unit administrator or manager is by training and ability a “generalist,” which means that he can visualize the entire task in an integrated fashion. Furthermore, the administrator should have sufficient autonomy to pursue the objectives set for him by the tax administration’s plan, without bureaucratic hindrance.

Required Hierarchical Levels

The number of hierarchical levels and their proper delimitation and definition is a fundamental aspect of organizational structure.

Generally speaking, tax administration requires about five hierarchical levels, as can be seen from Table 1. Too many hierarchical levels, or imprecise definition of these levels, creates bureaucratic interference and unnecessary supervisory bodies. Table 1 represents a general scheme based on the levels of abstraction of the tasks involved. For a more detailed profile of each level, it would be necessary to define the required technical knowledge, skills, experience, and so forth. Our definition of these levels is based on the proposal by Jaques (1989).

Table 1.Proposed Levels of Responsibility for Tax Administration
Level and RoleWorkIncumbent ProfileDiscretionary Decisions
Level V

General director (Plans work over a horizon exceeding five years.)
Manages a unified system in constant interaction with the economic and political environment; establishes general framework; highest level in line of command.Capacity for abstract and conceptual thinking; long-range, broad vision; political flexibility; moral leadership.Defines policies and objectives; determines long-term overall goals and their appropriateness to the situation; coordinates strategic plan.
Level IV

Director of operations Director of legal affairs Director of administration Director of systems and computing Director of internal inspection (Plans work over a two-year horizon.)
Strategic planning; specialized general management; medium-range development projects; defines general work systems; shapes the work culture in his area; generates rules and procedures.Capacity for abstraction and generalization; able to see the whole picture; manages various projects simultaneously; ability to integrate smaller groups; selective perception of relevant information.Supervises broad secondary units; handles emergency situations; provides examples; defines objectives and oversees their fulfillment.
Level III

Regional managers Department managers (Plans work over a one-year horizon.)
Manages broad operating units; generalist; manages smaller groups (various sections performing specialized tasks, such as step-by-step systems); critical path area; manages a program.Direct leadership ability; ability to use relevant information; anticipation of consequences; extrapolation; broad knowledge and experience; management of broad groups; imaginative and step-by-step control; public relations aptitude.Defines a program of work; supervises; implements changes to handle emerging problems; participates in the elaboration of plans.
Level II

Section managers Agency managers (Plans work over a six-month to one-year horizon.)
Manages a set of tasks and objectives; specialist; operational management within a specified set of rules, regulations, and procedures; manages a group of employees.Able to identify significant information and problems; ability to analyze and draw conclusions; acceptance of authority; specific knowledge; face-to-face management of group.Defines priorities; administers simple resources (material and staff) on the basis of a given program.
Level I

Supervisor Employees
Simple tasks; few variables; solves one problem at a time; physical manipulation.Good psychomotor coordination; ability to concentrate; good memory, perception.Decisions affecting work quantity and quality.

Summary of Proposals

At the beginning of this section, we defined simplicity and clarity of structure as required qualities. These qualities are achieved by properly defining roles and by clearly differentiating responsibilities, beginning with the role of the general director. Table 1 shows the added value contributed by each level of the organization.

Clarity is also needed in the relationships of subordination between the various management levels in the line of command: who reports to whom, who decides what, who plans, who executes, who supervises, controls, or evaluates; who formulates plans, what is the level of participation of the others, who advises whom, who provides services, and so forth.

Understandably, relationships among tax administration roles are not limited to the relationship of hierarchical subordination. The various specialized areas (such as collection and audit) should have a strictly advisory function, that is, one accomplished by the staff of an implementation-oriented director, termed a director of operations in this paper. The advisory function is in fact the result of a director’s need for specialists to help him in his own planning. Thus, the advisor has the authority to study and propose options and to define standards and procedures within certain limits relative to his field of specialization. He does not have management authority, that is, authority actually to delegate responsibility for tasks and objectives.

Structural simplification is linked to the number of required hierarchical levels. As has already been said, a typical tax administration probably needs five hierarchical levels. The description of these levels makes clear the levels of authority needed to manage the organization’s operations. Each of these levels is managerial, since the occupant of a given level has the authority to decide on specific questions autonomously and also manages a number of employees who have been assigned to him.

II. Human Resources

The administration of human resources is a fundamental pillar of tax administration. As indicated in Table 1, there are different degrees of complexity in the tasks associated with the various posts or hierarchical levels. The occupants of these posts require a certain level of ability, knowledge, skill, and experience. The descriptions given provide profiles of the roles or posts and of the abilities required to fill them.

States of Disequilibrium

To establish a consistent human resources policy, it is necessary to differentiate three basic variables that should be in equilibrium, as well as to understand the importance of interrelationships among them in the dynamics of the organization. These three variables are (I1) the complexity of the role and the tasks performed at a given level; (2) the individual ability required to do the job; and (3) differential compensation.

In practice, the above-mentioned variables are usually not in equilibrium. Experience in tax administration points to three principal factors that can affect worker satisfaction:

  • Compensation.

  • The work itself and the opportunities it affords for the exercise of individual ability and judgment.

  • Development, advancement, and career opportunities.

Some studies (for instance, Calello and Rovner (1975)) show high levels of worker dissatisfaction in relation to these factors—particularly on the lower rungs of the ladder (levels I and II in Table 1). Excessive, centralized prescription of systems, regulations, and procedures restricts autonomy of action and can for this reason produce dissatisfaction.

The studies reveal significant differences in job satisfaction between collection and audit employees, associated with the tasks specific to the two areas. Because the tasks in the collection area are more highly regulated—owing to the centralized nature of the systems and regulations—they are also simpler, more elementary, and more routine, and, as a result, duller and more tedious for the employees. In contrast, audit tasks offer a chance to observe broader, more complete processes requiring analysis, collection, and interpretation of data—mental operations that suppose greater autonomy and therefore provide a higher degree of satisfaction.

Dissatisfaction is greater among collection employees who have completed a college-level course of study (those with a masters degree in business administration, as well as accountants, and lawyers), specifically because they do not see any opportunity to put their professional abilities to use in the foreseeable future.

On the other hand, professionals in the audit area find opportunities there for training in the technical aspects of taxation that will allow them to opt for well-paid jobs in the private sector at a later date.

Tax administration requires a large number of employees with good college backgrounds, and it invests considerable effort in training them. However, the difficulties of administering these human resources result in a steady flow of talented employees to the private sector, where they find greater opportunities to increase the value and level of their abilities. These factors explain the modest results of programs to attract and develop young professionals. It is necessary for these programs to be based on real possibilities of motivating work and for applicants to be placed in positions in keeping with their current and potential abilities.

Even at the higher levels of the tax administration structure—such as the roles associated with level III—the abilities, experience, and judgment of officials are underutilized, which reduces their autonomy and the amount and quality of what they contribute. Take for example the previously mentioned case of the regional managers, who are limited in their participation in developing collection and audit plans and in providing their local knowledge of taxpayers in their area. This affects the realism and feasibility of the plans and restricts the authority and freedom of decision of the regional managers. The result is a considerable degree of dissatisfaction.

Given the importance of this role—which we consider managerial—it is necessary clearly to establish the required profile, which must include not only knowledge and experience but also ethical values and an impartial attitude toward the taxpayer. These managers must also have the ability to handle different functions in an integrated fashion, since the role in question is that of a “generalist.”

When perspectives for the full development of employee abilities, knowledge, and experience are limited, or when compensation is not commensurate with the individual’s abilities, conflicts arise. Because such situations discourage employee commitment and motivation, they affect the general climate of the organization.

There are also situations in which officials occupy positions that are beyond their abilities, knowledge, or experience. In such cases, there is a decline not only in general management quality but also in the productivity of the area managed and the motivation of the employees.

In government service, the placement of officials frequently is not based on merit. Often promotions are given because of seniority or political influence, which generally brings the supposedly favored officials up against their “level of incompetence.” This situation gives rise to feelings of frustration and dissatisfaction.

The area manager’s ability is the determining factor in successful leadership. A well-qualified director is in a position to handle critical situations successfully, motivate his superiors and employees, and inspire taxpayer confidence. To achieve this, he must have a highly capable and committed operational management staff, trained to deal effectively with the critical situations usually faced.

The organization has a series of managerial tools for ensuring that employees are placed in roles whose levels of responsibility match their individual abilities. One of these is the evaluation of employee performance, efficiency, and effectiveness. This function, which is generally performed routinely without really discriminating among the personal attributes assessed, should ensure and regulate this match. To do so, it must be part of a broader system that includes periodic meetings to evaluate directors and managers. These periodic meetings could support employee promotions and career development and ensure consistency in that regard. Holding periodic competitions also helps to rescue hidden talents from anonymity and is always seen as a guarantee of equity. In short, these procedures help to re-establish the principle of “merit” that should govern job placement.

Wage Policy

Many tax administrations experience problems in connection with salary levels. These problems are usually the main reason why the best employees are lost to the private sector, which provides better compensation. In many cases, wage policy discourages the most able, who become frustrated and dissatisfied with their jobs. When internal competitions are held for management level positions, a significant lack of interest has been noted in some instances. Motivational analysis has demonstrated that the salary difference between the management position in question and, for example, an advisory position at more or less the same level did not compensate for the increased responsibility associated with the position vied for. This fact was the main reason for employee disinterest.

In the Argentine case, surveys on job satisfaction demonstrate that the “incentive fund” does not function as such—it is not a real incentive to productivity—much less as an award for merit. Employees assimilate it with the general concept of compensation, and it is expected as part of salary. Because it does not discriminate individual performance, it does not act as a motivating factor to stimulate individual productivity.

If the tax administration is to be made more effective, its wage policy must be revised. Accurate analysis of individual performance cannot be side-stepped. The opinion of the employee’s immediate superior, corroborated in turn by the area manager, must be given special weight in promotions and pay increases. Unfortunately, under the current system the opinion of the immediate superior has little or no impact, and the area manager is not required to participate in the evaluation of all the employees who report to him indirectly.

It is necessary to define a salary scale that establishes pay differences in keeping with the various levels. To do this, all posts must be adequately categorized. For each level, it should be possible to identify about four wage categories, which would make it possible to reward differences in performance among employees at the same level. The tax administration salary scale should be in accord with the national earnings indices for equivalent positions, both in public administration and in the private sector. Otherwise the desired efficiency and effectiveness cannot be hoped for.

III. Conclusions

These conclusions derive from the study on Argentina referred to in Section I above, but many of them are applicable to tax administrations in other countries.


There are two kinds of basic organizational dysfunction:

(1) Vertical fragmentation

This dysfunction affects the clarity of the line of command. Operationally speaking, fuzziness about the type and degree of authority is evident in some planning areas. There are problems of multiple subordination: different directorates supervising or giving instructions to the same operational manager.

(2) Horizontal fragmentation

Horizontal fragmentation is defined as the lack of interdependence or integration among directorates or regulatory areas (the strategic level) that should constitute a single planning unit.

Another problem is excessive separation between the collection and audit areas, which have different organizational cultures. These two functions need to be structured into integrated systems.

The proposed changes are as follows:

(1) Integration at the top

The first suggestion is to increase integration mechanisms through a unified strategic planning system that ensures the participation of the various areas and tends to establish convergent models and criteria.

The second is to link the collection and audit functions in a single directorate of operations to which specialists working in each of these systems report in the capacity of advisors.

(2) Vertical integration

It is suggested that the lines of command should be clarified. The director of operations would be the immediate superior of the regional manager, to whom the latter would be accountable. The role of regional manager would continue to be that of a versatile generalist.

(3) Hierarchical levels

There should be only five hierarchical levels. Table 1 described the roles that make up each level and the work performed—in terms of complexity and the required abilities.

Human Resources

(1) The conceptual framework defines a desired equilibrium between three variables: ability, complexity of task, and compensation.

(2) The level of compensation is vitally important to job satisfaction. It is followed, in order of importance, by the opportunities the work provides to exercise one’s abilities, motivation, and individual autonomy. Finally, development and career opportunities have considerable impact on employee expectations. Professionals who feel that they have limited career opportunities in the organization tend to go elsewhere.

(3) There are mismatches between employees and positions. Highly complex posts—such as those of director or regional manager—demand a high level of abstract and conceptual thinking, as well as leadership abilities and ethical values. When individuals are not qualified for the position they occupy, the general functioning of the organizational system suffers, as does employee motivation.

(4) This proposal highlights the need to strengthen the position of regional manager. This post is conceived as managerial in nature. Its occupant is a true representative of the administration who exercises dual leadership: outside, in relation to the taxpayers, and inside, in relation to the employees in his area of command.

It is essential to establish a hierarchy of the officials who will occupy these posts. To do so, they must be identified and correctly placed.

(5) Given the characteristics of the work system, there is a tendency to underutilize employees at levels I and II of the organization. The work is routine and promotes a low level of autonomy. Employee mobility and work enrichment systems should be encouraged. It is desirable to increase team work.

(6) The institution must develop mechanisms and systems for correctly evaluating the organization and employee performance. Responsibility for evaluating employees should lie with their immediate superior, assisted in turn by his own superior (the head of the area in question). Mechanisms of this kind would help to re-establish the principle of merit and to reward good employee performance with raises or adequate promotions.

(7) Revision of the wage policy is indispensable. However, this does not necessarily imply higher salary costs, since the current inequitable distribution of pay makes the salary scale more expensive. When the internal system pays the most productive and penalizes the most unproductive, output will increase. This is why a salary scale that establishes equitable differences in pay based on the different levels of task complexity should be adopted. There should be about four categories for each hierarchical level, for a total of 20 groups.


Greaney Francis P.

Mr. Schlemenson’s paper focuses on the organizational aspects of a tax department. He divides his discussion into two parts: (1) organizational structure; and (2) human resources.

His discussion of the organizational structure focuses on the differing roles of the various levels of the organization and the characteristics or abilities of the people assigned to these positions. He also makes the important point that the organization must strive to achieve a balance between the complexity of the work, the capacity of the individual, and the level of compensation, for each employee in the organization in order to establish an environment where the staff will flourish.

While Mr. Schlemenson’s points are all very valid, the discussion is somewhat abstract. Most of the points that he makes can be applied to almost any organization.

More emphasis needs to be placed on the specific characteristics and constraints facing a tax department. In addition, while he outlines the requirements of organizational structure and staffing, he provides little indication of how a tax department suffering from deficiencies in these areas can effect changes. While each organization may take a somewhat different approach to change, it would be useful to provide some examples of how various countries have successfully or unsuccessfully undertaken changes in their organizational structure and personnel.

I would like to emphasize the philosophy of the organization. I believe this point is of primary importance. The structure of the organization and the personnel within it are the means to fulfilling the organization’s objectives.

The first part of my discussion deals with the philosophy of the organization and the image that it attempts to project to the public. The second part deals with the personnel and the methods used to achieve a balance in the staff. The third part deals with the structure of the organization and how changes can be effected in the organization.


In discussing the philosophy of the organization, we should first start by noting the special characteristics of a tax administration organization and how it fits within the context of overall government policies and organization. First of all, the tax department deals with only half of government policy. It is the revenue-gathering arm of the government. As such it has little if any role in providing services and benefits to the citizens. This is the domain of other arms of the government. Being relegated to one sphere, particularly the revenue-gathering one, severely limits what the organization can do to improve its image and profoundly affects how it must deal with the public.

A common complaint heard throughout the world is that “people do not want to pay taxes because they do not believe that the government spends the money wisely” or worse, “the money is lost due to inefficiency and corruption.” While there is often skepticism about these remarks among the international community, I believe that the overall perception of government policies does play an important role in the general public’s willingness to comply with taxes. Carlos Silvani points out in his paper that there is no evidence that changes in governments and government policies result in significant changes in tax compliance. However, I would contend that the effect that government spending policies have on tax compliance can only be seen over the long run. A change in government policies must be given time to take effect, and the public must realize the results of the new policies before they react and more willingly comply with taxes.

The tax department’s unique position as the revenue-gathering arm of the government greatly influences the department’s orientation and philosophy in its dual roles as a producer and as a provider of services. The tax department cannot operate as other organizations, particularly private firms, where the costs and benefits are directly related. By providing quality products and services to its customers, private firms can increase their business as more customers return as a result of satisfaction with the products and service they receive for the money they spend. The tax department, which is in itself unable to provide anything in return for the payments made, cannot follow this approach. It must therefore seek a different balance and emphasis on how it carries out its production functions and its service functions. While this general issue is relevant to all areas of public administration, it is of particular importance in establishing the appropriate philosophy of a tax department.

In the area of tax administration the production function includes collecting tax payments, processing tax returns, undertaking enforcement action against delinquents, and so on, much of which takes on a production-line-like character, as noted by Mr. Schlemenson. (It should be noted however, that Mr. Schlemenson argues that the impersonal, oversystematized and overcentralized processes present in many countries should be changed to place the tax department in closer personal contact with the taxpayers.) The service function, in many ways the more difficult function to appropriately define and provide, includes not only the important functions of taxpayer assistance, as noted in the paper by Robert LeBaube and Charles Vehorn (Chapter 9 in this volume), but also governs all the department’s interactions with the taxpayers.

It is the service function of the tax department that is most restricted by the role of the tax department as the revenue-gathering arm of government. While it is extremely important that the tax department provide quality services to taxpayers to assist them in fulfilling their tax obligations, the effect of quality service in developing “repeat customers” is limited precisely because the tax department cannot provide taxpayers with much, if any, direct benefit in return for their tax payments. Therefore the most that the service function can hope for is to make it as easy and painless as possible for the taxpayer to fulfill his obligations and to project a positive image of the department in all its interactions with the public.

Given the constraints placed on the tax department in terms of providing services to taxpayers, much of the task of establishing and projecting the image of the tax department falls to the production functions. The production functions must establish the department’s image as an efficient and effective operation that is capable of enforcing compliance with the tax system on those that do not voluntary comply. I would therefore place considerable emphasis on improving the department’s ability to promptly identify those that do not comply, establish how much they owe in tax, and enforce compliance through a combination of penalties and legal action.


Another important issue relating to the philosophy of the tax department is: How can the department instill within its employees the philosophy and objectives of the organization? As Mr. Schlemenson pointed out, the employees are an important factor in determining the effectiveness of the organization. I would put it even more strongly and say that “the organization is only as good as its people.” As mentioned above, often important restrictions are placed on the tax department by general government policies. The tax department is often required to conform to broader government policies, in hiring, firing, compensation, and promotion. While the department often has more flexibility in structuring the organization, its ability to appropriately staff the new (or even the current) organizational structure is often very limited. This again highlights the importance of how the tax department relates to the rest of the government.

Mr. Schlemenson’s discussion of the factors concerning personnel, the complexity of the work, the capacity of the employee, and the level of compensation are well laid out. However, the important operational issue of how to achieve a balance between these three factors was neglected. There are several alternatives, but again, they must fit into the context of the overall civil service. The three primary alternatives are (1) hiring new staff; (2) reassigning staff; and (3) training current staff.

The first approach is generally a viable option only if the organization as a whole is understaffed. If the problem is strictly having inappropriate staff, civil service regulations generally would make it impossible, or at least extremely difficult, to hire new people to replace current staff. The paper by Silvani and Radano (Chapter 2 in this volume) mentions that Bolivia contemplated creating an entirely new tax department to operate alongside the current department, in an attempt to get appropriate staff and to instill the desired spirit within the department. This did not prove feasible, but the tax authorities nevertheless were able to reform the department through extensive use of newly hired staff with new attitudes and orientations.

The second approach, reassigning staff, is almost as difficult as the first. In many countries more emphasis is placed on seniority than on ability. In other cases, there are restrictions on how fast a person may be promoted or what academic background he must have to qualify for a particular position. While these restrictions are often an attempt to ensure a certain level of competence and quality in the government service, they severely restrict the tax department’s ability to achieve the proper balance of personnel at the various levels. Mrs. Christian mentioned this as an important constraint in Trinidad and Tobago in her efforts to staff the new VAT Administration Center for the introduction of the value-added tax (VAT). (See Comments to Chapter 5 in this volume.)

Mrs. Christian was able to assemble an exceptional core staff for the VAT because of her firsthand knowledge of individuals and the special attention she placed on establishing a new environment and philosophy by which the VAT would operate. New facilities, approaches, and procedures for the VAT administration helped to effect a significant change in attitude, particularly in the initial stages of the VAT. Unfortunately the most fundamental changes were not possible due to the bureaucratic links with other parts of Inland Revenue and the requirements to assume many senior staff steeped in the traditional modes of operations into the VAT. Greater attention to modernizing the operation of the entire Board of Inland Revenue may have helped to effect a more complete change.

Because of the limitations in the first two approaches, the third approach is almost always used—training. The importance of training is well recognized, though the emphasis tends to focus more on the technical aspects than on the managerial aspects. There are often great deficiencies in staffs technical capabilities, particularly in developing countries, and such training can be an important step toward achieving a balance between the complexity of the job and the capabilities of the staff at the technical level. However, isolating the training efforts to technical issues limits the effects that the training efforts have on the overall operation of the organization and tends to fall well short of providing the necessary backgrounds and skills to those who manage the department. Fortunately, recent training efforts in Costa Rica and Guatemala have recognized this problem and placed a heavier emphasis on managerial and supervisory training. It will take some time before the success of these programs can be evaluated.

The three approaches mentioned above tend to focus on providing a balance between the complexities of the job and the capabilities of the personnel. In order to achieve a true balance, the issue of compensation must also be addressed. This, more so than any other, is greatly influenced by overall government policies. Limitations in compensation seem to affect tax departments more severely than any other area of government. This is no doubt due to the technical nature of many of the positions and the fact that in many cases the very companies that the tax department is trying to control are competing for the department’s most talented personnel. Although the problem of employee compensation is well recognized, and some efforts have been made to provide pay supplements for some categories of personnel (particularly computer personnel), I am unfamiliar with any country that has successfully solved this problem.

Organizational Reforms

Closely related to the issue of personnel is the establishment of an appropriate organizational structure. The two must be complementary. In order to establish the appropriate divisions and hierarchy as outlined by Mr. Schlemenson, it is critically important that appropriate personnel be assigned to the relevant positions. Without the proper staffing, the organization will not function properly. In addition, care must be taken to ensure that the design of the organizational structure is effectively converted into actual operation. While there must be sufficient flexibility in the organization to allow it to adapt to varying needs, too often the actual operation of the organization is quite different from the design on paper.

The differences can be attributed to two factors. The first factor, as mentioned by Mr. Schlemenson and with which I wholeheartedly agree, is that there is often a breach between the advisory and the operational sectors of the department. Great care needs to be taken to ensure that the advisory sectors are adequately in tune with the realities of the tax department, just as the design of tax policies must be in tune with tax administration. The second factor, somewhat related to the first, is that insufficient attention is given to overcoming bureaucratic inertia. This is an area that requires great attention in order to successfully implement reforms and modernization of a tax department.

In some ways it may seem easier to establish a new organizational structure within the institution, for example, establishing a new department to administer a new tax (much like was done in Trinidad for the VAT), than to change the current organization. The preparations can begin with a clean slate and establish a well-designed and coherent structure. However, this approach presents a huge undertaking and is very costly in terms of time, energy, and resources. This approach is probably only possible in conjunction with a significant overall tax reform effort where the political support is strong enough to marshal the required resources.

The importance of linking tax policy and tax administration reforms is not adequately recognized in this regard. Most people in the taxation community recognize the importance of balancing tax policies with administrative realities to ensure that they can successfully achieve policy goals (whether or not they actually succeed in coordinating the two in practice). However, not enough attention has been placed on the importance of linking administrative reforms with policy reforms as a means of providing adequate access and support from the policymakers in terms of resources and commitment to administrative reform. I think reflection on the successful administrative reform efforts presented at this conference supports this view.


In conclusion, I would like to encourage more emphasis and work to be placed on precisely how countries have successfully and unsuccessfully implemented reforms in tax administration. I am interested specifically in how a tax department can instill the proper philosophy and orientation within its organization; how a tax department should approach implementing structural changes; and how a tax department should go about trying to achieve the proper balance between the technical requirements, capabilities, and compensation among its staff.

Edgar Gutiérrez

My thoughts on the subject treated by Aldo Schlemenson are based on my experience of many years as a tax administrator in Costa Rica. Mr. Schlemenson’s conclusions are distilled from consulting experiences in three countries—Argentina, Peru, and Venezuela—and may point to an organizational strategy applicable to tax administration in general.

The first issue is whether this strategy is valid in countries whose size and population are different, as are Costa Rica’s, where socioeconomic indicators are also different (for instance with respect to literacy and public services), and where the state is a small, concentrated geographical entity.

In my view, Mr. Schlemenson’s strategy is applicable even under those conditions. Of course a few adaptations or adjustments would probably be necessary, especially because public administration in countries such as my own is highly centralized, and the tax authority assumes an excessively distant attitude in its dealings with taxpayers.

The following comments concern the approaches, policies, and objectives outlined by Mr. Schlemenson.

The administration of a tax system can, like the administration of any endeavor, be planned and executed in very different ways, all of which may be more or less efficient. By and large the organization of a tax authority evolves in response to various and complex causes, some historical, some legal, some political, and, of course, some that are purely technical. When we examine the entity responsible for administering taxes in a given country, we must keep in mind that the institutions of that country—not only socioeconomic but also legal and administrative—constitute a mirror image of the country. The tax authority is and always will be a reflection of the country’s overall public administration, which in turn is influenced by the general state of education and the level of development of the economic and social institutions, whether public or private.

According to Mr. Schlemenson, tax administration exists because the taxpayer exists. The latter is the epicenter around which all administration activity revolves, either to persuade him or to compel him. In this model, an effective tax administration eschews coercion in favor of seeking voluntary compliance with tax obligations. It stresses the limitations of legal coercion to induce desirable tax conduct, and the need to provide the tax authorities with modern methods, developed in other technical or scientific fields (areas), for persuading the taxpayer to comply voluntarily.

Changing the emphasis from coercion to persuasion implies the abandonment of an administrative style that prevails in almost all areas of public administration, which probably has strong legal backing and which, in the fiscal realm, is extremely rigid. Many difficulties arise in putting this strategy into practice in the context of an essentially coercive tradition.

The Perception of Government and Its Efficiency

Taxpayers will be more willing to pay taxes if they have a reasonably favorable view of government. This has to do in large measure with the problem of the legitimacy of governments, that is, with the extent to which they are acknowledged to have the authority to give orders that should be obeyed. Regardless of whether a tax system relies on coercion or persuasion, it is imperative for the system’s effectiveness that it be legitimate. Orders from a legitimate authority are more persuasive than those from one whose legitimacy is disputed. In some countries of Latin America this has been an important factor for a long time.

Another issue is whether people are generally in agreement with the government’s spending policy. The image that the taxpayer has of the government is determined by elements ranging from the personality of its leaders to the treatment the taxpayer receives when he has to go to a tax collection office. Although it is true that many factors that lead to a less than favorable image of the government are outside the tax administrator’s control, the administrator’s activities do offer considerable scope for improving that image. Tax administration is actually one of the most important public services, a service which by its nature, quality, efficiency, and cost has a major influence on the attitude of the taxpayer.

Unfair Tax Systems

When the tax system is not designed to work in a just and equitable manner, or administrative weakness allows important sectors of the population not to pay the taxes they owe, nagging irritation is added to the image of an inefficient government. Tax equity must be measured not only in terms of the ability to pay taxes but also by whether most taxpayers pay what they owe.

Conditions making for inequities in the tax system are apt, all too often, to spring from the very heart of that system: tax law. More specifically, they spring from two features of the law: exemptions created by the legislature and the quality of the legal text.

In countries such as Costa Rica, the exemption regime has grown in an arbitrary and haphazard fashion. Exemptions of the type found in Costa Rica distort forecasts regarding the productivity of the taxes, because they are not based on consideration of their economic and revenue impact but are blindly passed into law. At the same time, they create the impression of a system whose components can be removed at will, thus inciting taxpayers to evasion by raising doubt as to the need for any taxes.

The poor quality of tax legislation does the tax system further disservice and makes the taxpayer even less inclined to abide by the law. This problem stems from several factors: in general, the low level of legislative skill found in our countries and, in particular, inconsistencies written into the law as a result of the political wrangling that usually accompanies attempts to create new taxes or modify existing ones. The resulting poor quality of the law can confuse the tax authority with ambiguities that make evasion or avoidance possible, which again creates the impression of an irrelevant system subject to endless manipulation.

My experience of many years in Costa Rican tax administration allows me to state that tax administration in developing countries is not geared, as one would wish, to voluntary compliance; it is not designed to offer taxpayers the best possible service. Efforts to boost revenues by reorganizing tax administration have often been postponed. Instead, increased revenues have been sought by raising tax rates and adding new elements to the tax base. A revision of administrative strategies is seen as a medium- or long-term process, whereas fiscal needs are immediate. The short-term view predominates in political circles, and the tax authority has scant power to persuade politicians to undertake changes in strategy.

Making tax administration more efficient and maximizing voluntary compliance is a very difficult task. In Costa Rica at the present time there are 165 different taxes, which makes the system very complex and inefficient. Earlier I said the administration of any endeavor could be defined and pursued in different ways, all more or less efficient, but what really matters is that the means used be reasonable and produce useful results at the lowest cost. Tax administration is no exception to this general rule.

Taxpayers should be able to fulfill their obligations without excessive compliance costs. For this purpose it is necessary to offer taxpayers considerable assistance, especially in dealing with new taxes or substantial tax reforms. Such assistance will take many forms—counseling, distribution of information, preparation of simple forms, and so forth, as well as offices where they can make their payments with a minimum of inconvenience and delay. All those items should be part of a system that encourages voluntary compliance. However, while furthering voluntary compliance, the authorities must make sure that delinquent or manifestly dishonest taxpayers are not given the opportunity to circumvent the law with impunity. To do otherwise would be to discourage voluntary compliance and consequently increase the administrative burden and costs.

To bring about the restructuring of tax administration according to the model designed by Mr. Schlemenson, coordination between tax policy and the country’s political system is very desirable. In countries with developing economies such coordination does not always exist. What happens is that as social objectives and economic aspirations expand, tax policy fails to keep up and the tax system no longer reflects the country’s social and economic objectives. A study by the IMF on Costa Rica notes, “In Costa Rica, for instance, and the same may be true of other developing countries, public finances are surprisingly complex considering the nation’s small size. That complexity arises from the high number of taxes as well as an elaborate system of very specific incentives, combined with a formidable number of public sector activities. Many of the public sector activities seem to be guided not by clear objectives but by political pressures exerted by special interest groups, or else by a sort of inertia that develops over the years and is reflected in legislation.”

Important consequences derive from this complexity. First, it becomes very difficult to evaluate the tax system or public expenditure in terms of the traditional criteria of public finance, such as equity and efficiency. For example, it would be almost impossible to estimate the impact of public expenditure and taxes on the various types of income. Who gains and who loses because of this expenditure or that tax cannot be determined. Consequently, it is impossible to ascertain the extent to which the current structure of public finances works for or against the goal of equity. What appears likely is that the finances of the public sector affect different people in different ways, depending on the incentives to which they have access, the pension scheme to which they belong, and so on down the line. Inevitably, differences in treatment generate pressures by groups to improve their relative positions. It is equally important to note that it is not clear how much commitment there is to the goal of neutrality in resource allocation. In sum, what impact does the public sector, given all its activities, have on the allocation of resources?

Second, it is difficult to determine whether fiscal policy measures (for example, a change in the tax rate, or a public spending cut) bring the system closer to meeting the government’s objectives. The lack of transparency obscures the relationship between changes in approach and changes in policy objectives.

Third, and largely as a consequence of the previous two points, it is politically difficult to reach a consensus on the necessary tax measures. Policy changes cannot be sold to the electorate purely on the basis of their technical virtues. The thrust of the debate shifts from technical to political issues.

The foregoing considerations would make it highly desirable, in the case of Costa Rica, for the national authorities to initiate a process aimed at eventually bringing about a simpler and more open public sector. Among the steps taken in such a process—which would undoubtedly take several years—would be the elimination of many taxes and special treatments (such as tax incentives) and of many expenditure programs, and the consolidation of others. The fiscal objective would be a more efficient public sector, whose impact, in terms of equity and efficiency, would be easier to measure.

While in the more advanced countries a mere handful of taxes are used to produce the necessary revenue, in Costa Rica—and no doubt the same is true in other developing countries—the system spawns large numbers of taxes. Many of them produce very little revenue, and some taxes actually cost more to administer than they bring in. Add the expenses incurred by taxpayers in the course of fulfilling their tax obligations, and the cost of generating revenue through these low-performance taxes rises further. An excessive number of taxes absorbs administrative resources, creates confusion in the tax system, increases opportunities for tax evasion, and leaves taxpayers with the impression that the tax burden is greater than it really is.

When a tax system is based on poorly conceived taxes it is useless to speak of neutrality or equity. A system of this kind does not provide an appropriate foundation for an administrative strategy based on voluntary compliance. It is impossible to know, moreover, the impact of such a tax system on income distribution or resource allocation.

The first step that a country must take under those circumstances is to reform its tax system and rationalize its taxes. This will enable policymakers, the tax administration, and taxpayers to concentrate their attention on a smaller number of more productive taxes. The government should undertake the task of trimming the tax system, ridding it of unproductive levies. The country would then have a more rational, better administered tax system. This would be a gradual process requiring a few years for completion, but it should commence without delay.

The organizational structure model set out by Mr. Schlemenson should prove very useful for the reorganization and design of tax administration, but it will be impossible to attain the hoped-for efficiency if the complexity of public finance systems is not attacked first.


    CalelloEstela and Susana RovnerEncuesta de Satisfactión Laboral en Empleados de Recaudación y Fiscalización (Buenos Aires: Dirección de Estudios, Dirección General Impositiva1975).

    CalelloEstela J.Colombo M.Rosales Creo and I.Scocco “Análisis Sociológico de la Evasión Fiscal,”Boletín de la Direction General ImpositivaNo. 398 (Buenos Aires).February1987.

    Casanegra de JantscherMilkaCarlos Silvani and Charles L. Vehorn “Modernizing Tax Administration,” in Fiscal Policies in Economies in Transitioned. by Vito Tanzi (Washington: International Monetary Fund1992).

    GoldbergGeraldH. and Lorraine Frost “Towards a Simplified Organic and Functional Structure of Tax Administration” (New York1985).

    JaquesElliottRequisite Organization (Arlington, Virginia: Cason Hall1989).

    RovnerSusana and Estela Calello “Encuesta a Funcionarios de Regiones” (unpublished; Buenos Aires: Dirección de Estudios, Direccion General Impositiva, 1975; updated 1987).

    SilvaniCarlos and Aldo Schlemenson “Analisis Organizacional y Cambio Planificado,”Cuaderno No. 16 (Panama: Inter-American Center of Tax Administrators1975).

    SchlemensonAldo “Lineamientos Generales para el Cambio de Estructura” (unpublished; Buenos Aires: Dirección General ImpositivaJanuary1987).

See General Tax Directorate, Estructura Orgánico Funcional; Decree No. 453 of February 28, 1980; Ministry of Economy Resolution No. 243 of March 2, 1981, and Decree No. 641 of March 26, 1982.

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