The Institutional Framework of Tax Administration, deals with cultural, economic, social and legal institutions which aid or hinder tax administration effectiveness.
Sub Themes:
- Norms, customs and attitudes
- General government procedures and the civil service
- Corruption
- Legal Institutions and laws
- Penetration of markets
- Economic institutions
- The level of development
- The commercial environment
- Physical infrastructure
1. Norms, customs and attitudes
Do social and cultural norms matter? Economists who believe in the primacy of economic forces may discount the importance of social and cultural institutions to tax administration. However, observation shows that the make a difference in form if not in substance and empirical studies which shed light on their practical importance are limited in number. Studies which examine the implications of Criminal activity for tax administratrion, whether through black markets, organized crime or smuggling, on the other hand, have attracted the attention of social researchers since at least Adam Smith. Turning to the implications of Tax compliance attitudes for administration and effective tax design, the available pool of research is enormous, though much of it is in the context of developed economies. Taxpayer attitudes and ability not to comply with tax obligations have a major impact on the effectiveness of administrations. The legitimacy of incumbent governments and the Status of the civil service, including the tax administration, in society are also factors which are thought to constrain the effectiveness of tax administration, though the issue has not been systematically studied.
Key Issues: 2. General government procedures and the civil service
Among the major factors shaping the environment in which a tax or customs administration must function are the general rules and procedures of the government and the extent to which they are bound by general civil service regulations and service conditions. This can constrain flexibility in areas ranging from personnel policies, wages and career prospects, to equipment and supplies to operational flexibility to procurement of equipment and supplies. The extent to which such rules affect administrative effectiveness and the desirability of treating tax and customs officials as part of the general civil service has not been subjected to rigorous scrutiny. However, delinking revenue administrations from the civil service has often been recommended, including in several Bank operations. Besides available works, coverage, there are a number of civil service issues which can be found in the Civil Service website.
Key Issues: - What to look for in the Anti-corruption and Civil Service Reform KMS
3. Corruption
Corruption is a pervasive problem in many developing countries, and revenue administrations are often perceived to be among the most corrupt government agencies. See a relevant coverage of corruption issues in the Anti-corruption website. Among the major Corruption inhibiting elements in tax design are transparent and simple tax bases coupled with low rates of tax. However, best practice measures can depend on specific characteristics of countries and their level of development. Equally important in curbing corruption are Anti-corruption measures in tax administration.
Key Issues: - What to look for in the Legal Institutions of the Market KMS site
- Tax design, legal institutions and laws
- Tax administration, legal institutions and laws
5. Penetration of markets
Well developed markets are a key feature affecting the conditions under which tax administrations must operate. At one extreme, in pre- or non- market economies, determination of values of goods and services is difficult or impossible, rendering taxes based on values, especially monetary values, difficult or infeasible to administer. Key markets affecting administrative conditions include factor markets and the financial sector. At the other extreme, the technology of market transactions affects the ability of administrations to keep informed about the extent of economic activity as the ongoing internet revolution demonstrates. Further coverage is in the section on Electronic commerce and internet penetration. There is also coverage of relevant issues in the Institutional Analysis and Assessment website. Further discussion of relevant issues is in Markets and tax design and in Markets and tax administration.
Key Issues:
- What to look for in the Institutional Analysis and Assessment KMS site
- Markets and tax design
- Markets and tax administration
6. Economic institutions
Coverage of relevant institutions in the Institutional Analysis and Assessment is surveyed in What to look for in the Institutional Analysis and Assessment website. Among the key economic institutions for revenue administration are those associated with the level of Financial development and banking. Financial development, on the one hand makes non-compliance more difficult since transactions leave "paper trails" aiding the detection of non-reporting. Furthermore, the development of the banking sector greatly eases the administrative and compliance costs of tax collection. On the other hand, the growing presence of Financially sophisticated taxpayers can greatly complicate the task of tax administration. An increasing degree of Openess of an economy and the relative importance of institutions related to international trade and capital flows are also a source of administration problems that can strain the capacity of developing country administrations. In the presence of high Inflation real tax revenues are likely to be adversely affected, a phenomenon known as the Olivera-Tanzi Effect. Administrative measures to counteract this effect typically impose a significant burden on tax administrations. The distribution of economic activity between sectors dominated, for example, by wage employees and Hard to tax sectors typically consisting of the self-employed, informal sectors and agricultural activity also affect the effectiveness of tax administrations. Even within an economy’s organized sectors, the Size distribution of firms affects the number of taxpayers and, in particular, the number of large taxpayers. This for example, affects the effectiveness of setting up Large Taxpayer Units, a measure frequently advocated by the World Bank and IMF. Overall, despite the probable importance of economic structure and institutions, significant gaps exist in research of their implications for the design of effective tax administrations.
Key Issues: - What to look for in the Institutional Analysis and Assessment KMS site
- Financial development and banking
- Financially sophisticated taxpayers
- Openness
- Inflation
- Hard to tax sectors
- Size distribution of firms
7. The level of development
As the variation of tax structures according to the level of per capita GDP suggests, a key factor affecting both feasible tax policies and administration strategies is the level of development of an economy. The level of Literacy determines the feasible size of the taxpaying population for such desirable but sophisticated taxes as the income tax and the VAT. A high level of Urbanization both changes the nature of economic activities in the tax base and, since it brings with it a concentration of economic activity, eases the geography related costs of effective tax administration. Related to this, the Sectoral distribution of activity, such as between manufacturing and services, influences the range of expertise needed for administration effectiveness and also, the nature and range of non-compliance opportunities taxpayers have. In particular, the extent of The informal sector is an important determinant of administrative effectiveness. Besides these factors, other sections of this site which review the effects of different aspects of development include Legal Institutions and laws, Penetration of markets, Economic institutions, The commercial environment, and Physical infrastructure. Readings: Michael Engelschalk: Creating a Favorable Tax Environment for Small Business Development in Transition Countries Key Issues: - Literacy
- Urbanization,
- Sectoral distribution of activity
- The informal sector
8. The commercial environment
Evidence suggests that both the nature and extent of non-compliance differs between single-owner or partnership business, privately held and publicly held corporations. In particular, there is thought to be a difference in the extent of avoidance versus evasion resorted to. Other relevant organizational factors include whether multinational firms operate through a subsidiary or a branch, whether firms have uni- or multidivisional organizations, the extent of vertical or horizontal integration and the prevalence of conglomerates. While these factors are discussed in the entry on Forms of business organization and taxes, the extent of research on the importance of these factors is limited. Though formal research is, once again, limited there is also an important link, a priori, between the development of The accounting profession and taxation options in mid-level developing countries. Uniform accounting practices and the existence of professional bodies of accountants makes it economically advisable to reduce administrative costs and to shift a greater compliance burden on business than in an economy without a well developed accounting profession. This also affects the range of feasible tax instruments and tax assessment methods in a country.
Key Issues:
9. Physical infrastructure
The development of modern Communications, including roads, shipping, air travel, postal networks and telecommunications, makes geographic dispersion of economic activity less of constraint on effective administration and permits efficient management control and coordination between administrative units. For example, the efficiency of functionally organized revenue administration, for basic taxpayer related functions like taxpayer identification, assessment and tax collection is likely to be hampered if coordination is required for widely dispersed taxpayers in the absence of good communications. A different, more recent, problem facing tax administrations in developed and developing countries alike is the growth of Electronic commerce and internet penetration. This is likely to be a major challenge to tax administrations in the 21st century.
Key Issues:
Communications Electronic commerce and internet penetration |
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