Improving tax collection

The revenue yield of the tax system cannot readily be increased unless ways are found to improve collection.

In some countries the problem of tax arrears has become so critical that governments have taken emergency measures such as tax amnesties and provisions for rescheduling tax payments. These may make it easier to collect delinquent taxes but, if used frequently, they can undermine voluntary compliance.

In most developing countries, especially the poorer ones, simplicity is essential. In particular, progressive income taxes are hard to collect. However, modern techniques, such as the use of computers and tax identification codes, can make it easier to collect most taxes. In fact, despite the technical problems, automation may eventually offer the most effective way to deal with expanded workloads in customs departments (with the growing volume and complexity of international trade), income tax departments (with the growing number of taxpayers) and treasuries (which need to forecast and monitor revenues). Such systems are currently being set up in Indonesia, Jamaica, Malawi and Morocco and are already partially or fully operational in Brazil, Ecuador, Honduras, Korea, and Nigeria. Experience suggests that automation can increase the efficiency of well-run operations, but it can exacerbate problems if superimposed on badly organized administrations.

Because of their limited resources, tax administrations of most developing countries are able to audit only a small percentage of taxpayers. Therefore, to prevent delinquency and evasion, an effective technique is to withhold money from current income. This system is most commonly applied to wage income, as in the pay-as-you-earn (PAYE) systems in Jamaica, Malawi and other countries. Some countries, such as Colombia and Indonesia, also apply withholding to interest and dividends. However, an effective withholding scheme requires a relatively small number of easily identifiable payers of income. It is hard to apply to rental income, professional income and small business income, where there are as many payers as receivers.

Another approach is to improve information exchange among tax-collecting agencies. Exchange of information between revenue departments is highly advisable because gross sales figures are important in determining income tax liabilities, and valuations of sales for income tax purposes make it easier to implement ad valorem excises and duties. However, in both developing and industrial countries, import duties and taxes on domestic transactions or sales and income taxes may be administered by separate departments, with little or no exchange of information. Although a totally linked, self-checking system of taxes is still not possible, the availability of personal and mini-computers makes the use of self-enforcing taxes, matching information from different sources, more feasible. It is now possible for information furnished by one taxpayer to reveal the receipts and gains made by other taxpayers, as, for example, in a VAT.