Increasing efficiency of mobilization of government revenue

Reducing costs of raising government revenue
Raising public revenue
The cost of raising public revenue is high and includes not only direct administrative costs but also the indirect costs arising from distortions in economic activity. However, since some methods are far more expensive than others, governments need guidance in reforming their revenue systems.
1. Public service costs and benefits should as far as possible be related through user charges, whether linked to consumption (public pricing) when specific consumers can be identified, or to benefits of the public service, when these are concentrated in a particular area. User charges can promote greater economic efficiency, since they encourage beneficiaries to weigh the economic cost of a good or bad service against its benefit. When users have to pay they are more likely to monitor the supplier's performance. However, it often occurs that public services for which charges are both feasible and appropriate are provided to all users free or at highly subsidized prices. In this case there is significant scope for raising additional public revenue - especially by increasing charges for services such as higher education, hospital care, electricity, water supply and urban transport. Evidence suggests that, far from hurting the poor, such cost recovery actually benefits them by producing the financial resources necessary to expand basic service supply. It is still possible to to alleviate poverty and to meet basic needs for education, health and sanitation by targeting to the poorest groups.

2. Despite increasing user charges, it will still be necessary to impose general taxes in order to finance public goods that benefit the citizenry at large. Administrative feasibility and better tax administration should be basic concerns of any tax reform. Reforms are possible that will raise revenue while reducing economic distortions and the burden on the poor, although some tradeoffs among objectives remain unavoidable. Simplicity in design is essential, particularly for developing countries which have severely limited administrative resources. A reformed system will typically include: more streamlined company and personal income taxes; a value added tax (for ease of administration, often at the manufacturer's level only); and a few excise taxes on luxury or socially undesirable goods. If import duties are deemed necessary, these should be low and more uniform and marginal tax rates should also be low so as to minimize distortions and to promote compliance. Taxes should be simply structured, with few rates and few exemptions. Extensive use of tax incentives is undesirable since it severely complicates tax administration and rarely achieves the desired social goal but rather creates or exacerbates economic distortions. Tax on the poor can be reduced while at the same time concentrating administrative resources where they are most productive in raising revenue by implementing high threshold exemptions in individual income tax and exempting unprocessed products from VAT.

Type Classification:
D: Detailed strategies
Related UN Sustainable Development Goals:
GOAL 12: Responsible Consumption and ProductionGOAL 16: Peace and Justice Strong Institutions