The design of a country’s tax system plays a critical role in its economic and social development, as recognized by the United Nations: its sustainable development agenda identifies strengthened domestic revenue mobilization as a key priority. Clearly, in developing economies, sufficient tax revenue is necessary to finance spending on health care, education, and infrastructure—all of which are prerequisites for economic growth and development. However, it is not simply the revenue ratio that matters; the quality of the revenue system is also essential for delivering fair and efficient outcomes.
To design a revenue system that fosters sustainable economic and social development and enjoys broad public support, it is essential for tax reform proposals to be carefully assessed, quantitatively analyzed, and openly debated. This requires that decision makers and all stakeholders in the debate have access to the best available facts, data, and independent evidence-based analysis, including about the impact of tax reforms on revenue, the income distribution, and economic performance. The central institutional actor in the decision making process—the executive—is best supported in this process by what is generally called a tax policy unit (TPU). TPUs are tasked to guide and inform the tax policy debate, based on facts, independent data analysis, and multidisciplinary efforts. TPUs also generally maintain oversight to ensure integrity of the tax system, and play a critical role in informing stakeholders along the path towards a coherent, manageable, fair, and efficient design of the tax system.
Many developing economies lack a well-functioning TPU. Some emerging market economies (Brazil, South Africa) and low-income countries (Burundi) have established TPUs or some specialization in tax policy analysis. Yet, in most developing economies, the government lacks such a unit; it also suffers from severe data constraints and/or has limited capacity to perform data analysis.1 This lack of information complicates decision making, hampers the debate about tax reform, and can lead to ill-designed tax policies or a tax system that fails the test of legitimacy in the eyes of the public—which can be detrimental to tax morale and compliance. Under these circumstances, even a small TPU (which could gradually be expanded) can be critical for making progress, not only in supporting good tax policy, but also in identifying the needs for capacity development, and coordinating efforts of donor countries and technical assistance providers.2
Based on several decades of experience in technical assistance on tax policy by IMF staff, this note provides advice and guidance for establishing a TPU. It relies largely on collective experience of tax policy experts, mainly from advanced and some emerging market economies, as well as a sparse literature on the issue, to draw lessons for countries that seek to make progress. The note covers such aspects as the role and functions of a TPU, its organizational structure, its location within government, as well as its relationships with other organs of state and external stakeholders. The analysis here is also informed by a review and comparison of various jurisdictions’ tax policy design function—sometimes organized in a TPU—in 25 high-, middle-, and low-income countries (see Annex 1).
Several lessons about what has worked well, where, and when, emanate from the analysis. Given, however, that institutional structures and processes of tax policy formulation vary significantly across countries, the study concludes that the structure of a TPU should be tailored to the needs, capacity, circumstances, and opportunities of individual countries. The note ends with ten general lessons for countries seeking to establish or further develop a well-functioning TPU.