A tax liability can be reduced by claiming deductions, exemptions and tax credits. It can also be affected by a range of local taxes.
When multiple levels of government are authorized to levy and collect taxes, administrative complexity increases. Consequently, efficiency and equity may suffer. Corruption can be mitigated only by addressing the political drivers of corruption in tax and revenue collection. Read on J. Gregory PEO for more information.
A central tax administration imposes uniform standards on taxpayers in areas such as assessment, collection, audit, penalties and appeals. This minimizes the time and cost of collecting and enforcing taxes because there is no need to negotiate multiple exchange of information agreements with tax authorities of different levels of government. The central level may also be responsible for establishing and monitoring compliance with tax law, and ensuring that tax rates are set in accordance with the national policy.
This option can work well for large taxes, such as personal income and corporation profits taxes, but is less appropriate for indirect taxes with mobile tax bases (such as the VAT and excise taxes) or for user fees. Such taxes require a broad range of data and the ability to establish and maintain a taxpayer master file. In addition, a central administration can be more effective in fostering voluntary compliance if it focuses on providing high quality services and imposing penalties for noncompliance.
However, it is important to keep in mind that the administrative burden imposed on subnational governments increases when different taxes with differing bases and rates are assigned to them. The administrative complexity of property taxes is the prime example. The required information for administering a property tax is different from that needed for administrating income or consumption taxes. The central tax authority can reduce this burden by limiting the number of taxes to be administered at the local level and providing for effective enforcement.
Moreover, the central level can reduce collection and enforcement costs by establishing a minimum number of taxes, and by providing incentives to lower-level governments through budget allocations and the provision of administrative facilities.
The OECD Tax Administration 2015 series provides a valuable source of detailed information and analysis on tax administration systems and practices in advanced and emerging economies. It updates performance-related and descriptive material contained in previous editions of the report, and adds new information on recent developments and best practices. This edition identifies key issues and challenges in the design, implementation and evaluation of tax administration reforms.
Subnational
Globally, most governments raise the vast majority of their revenue through taxes on income and purchases of goods and services. The choice of tax collection methodologies is as much a political issue as a technical one, and it has important implications for the efficiency, equity, and cost-effectiveness of taxes. There are a wide variety of choices available, each with different implications for the way in which taxes are collected and administered. For example, the knowledge and skills needed to collect property taxes are very different from those required to collect personal income taxes or excise duties. The choice of the most appropriate tools must also be taken into account, since tax administration capabilities are limited in many countries.
A key question in this context is whether or not subnational governments are allowed to choose their own rates and administer the tax system. In some cases, such as in federal countries, revenues are shared downward from the central government to local and provincial authorities. In others, subnational governments are assigned specific tax collection tools (e.g., property taxes, excise duties, user charges) that they are responsible for collecting. Depending on the design of the assignment and allocation formulas, this may have an impact on the performance of certain functions of tax administration (taxpayer services, collection, auditing, penalties, and appeals).
The empirical results in this paper support the hypothesis that vertical assignments of taxing rights affect compliance norms and attitudes. They show that the more a subnational authority has discretion over rate setting and tax administration, the less likely it is to comply with the taxation regime. This is largely due to the fact that it takes time for subnational agencies to learn about new types of payments and to adjust their forms accordingly.
A possible solution to this problem is to ensure that all levels of government share the same information about taxpayers and their transactions, in order to facilitate cross-checking activities and improve enforcement. In addition, it is useful to establish a network of tax administrations to exchange best practices, disseminate information, and provide training to officials. For instance, state tax administrations in the United States have formed a group called the Federation of Tax Administrators that performs a number of coordinating and information-dissemination functions.
Mixed
In some countries, different levels of government are responsible for collecting taxes. Whether these are centralized or decentralized is an important factor in the success of the tax system. It can also determine the ability of governments to provide residents with the desired amount and mix of local public goods (Casanegra de Jantscher, 1986). In addition to ensuring the successful implementation of tax policies, the efficiency and equity of a country’s fiscal systems are dependent on the strength of its institutions and political culture.
One advantage of a mixed model is that it can provide more flexibility with respect to the organizational structure and personnel practices of subnational offices. However, it can also create inconsistencies in the treatment of taxpayers. For example, if one employee is in charge of performing all main tax administration functions for a particular group of state-owned enterprises, their productivity is likely to be lower than if each function were assigned to individual employees.
The most common type of tax is the value added tax (VAT), which is collected by central and subnational governments in many countries. These governments may share the collected revenues or allocate them according to a formula. However, the collection of taxes by different levels of government can create inconsistencies in the treatment of citizens and undermine the effectiveness of the tax system.
Some countries use a hybrid model, with one level of government responsible for collecting all types of taxes. This arrangement maximizes state or local autonomy but can compromise the effectiveness of tax administration. Generally, a country that uses this model will have a strong center and weaker states or provinces.
In general, the complexities of tax administration increase as the number of taxes increases. It is therefore essential that the country has a tax system that is easy to understand for all citizens. Moreover, the process should be as simple as possible and free of any hidden costs.
A good digital tax system should be user-friendly and should be easy to navigate for all users. Several recommendations have been proposed to improve the usability of digital tax systems, including providing universal Internet coverage and connectivity, establishing data points in rural areas, explaining complex issues simply, avoiding technical jargon and making websites more visually accessible for senior citizens. In addition, research is needed on how to evaluate the success of a digital tax system.
Autonomy
The level of autonomy within a tax administration can have important implications for its performance. Specifically, it is a crucial factor in taxpayers’ perceptions of fairness and compliance costs. Autonomy can also affect tax compliance rates and the quality of taxpayer services. Previous research has shown that managers’ ratings of their own agency’s performance are positively influenced by perceived autonomy.
In many developing countries, a major component of reforms to improve the collection of taxes has been the creation of semi-autonomous revenue authorities (ARAs). ARAs operate at arm’s length from the ministry of finance and have separate legal status from conventional tax administrations. The idea behind this model is to ring fence tax collections from political interference and to promote higher compliance and collection. However, it is unclear whether these agencies have had the intended impact.
This technical note investigates how the degree of autonomy in tax administration influences its performance. It reviews key measures and provides country examples of how different levels of autonomy are currently practised. It also discusses how the degree of autonomy impacts the effectiveness and efficiency of tax administration, including through service provision, audit, compliance management and enforcement activities.
In the last decade, a number of countries have adopted radical reforms in how they conduct one of their most pressing national tasks—tax collection. These countries have separated their traditional tax departments from the ministry of finance and granted them the legal status of semi-autonomous revenue authorities (ARAs). This paper explores how these ARAs operate, their effect on taxpayer perceptions, and the factors that can contribute to or detract from their success.
The tax administration field has a long tradition of studying the relationship between structure and performance, but this study is the first to explore the issue in detail by looking at the effects of different types of structural arrangements. The report identifies the main options for organising tax administration: centralisation, subnational or mixed forms. The study also assesses the impact of the different arrangements on the quality and efficiency of tax administration and outlines how they can be improved through the application of good practices.