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BRIEF April 27, 2020

Innovations in Tax Compliance

Man selling textiles

Yunus Ismail Lambat is the third-generation owner of Lambat's Variety Center, a store in Blantyre, Malawi.

World Bank Group/Arne Hoel


Overview

In many low-income countries, tax revenues remain far below levels needed to provide citizens with basic services or make meaningful progress toward the UN’s sustainable development goals. Meanwhile, tax collection in many countries is characterized by inequity, with high rates of evasion among corporations and the rich and disproportionate burdens on lower-income groups.

The Innovations in Tax Compliance (ITC) program aims to increase tax compliance in low- and middle-income countries through a holistic approach to tax reform. The program has three core pillars—enforcement, facilitation, and trust. Through our work we hope to highlight how strategies to increase trust between taxpayers and tax administrations can lead to higher “tax morale” and, when implemented alongside reforms to boost enforcement and improve facilitation, can trigger higher rates of compliance.

ITC encourages countries to make investments across all three pillars to not only boost compliance and increase revenues, but also to build state capacity, generate political support for further reforms, and ultimately create stronger fiscal contracts between citizens and governments. 

Why Focus on Tax Compliance?

Mobilizing domestic resources by broadening and deepening the tax base can lessen a country's dependence on external funding—such as international aid, development assistance, and foreign borrowing—while also catalyzing broader improvements in government accountability, responsiveness, and institutional capacity.

Focusing on domestic resource mobilization presents a valuable opportunity to support the World Bank’s twin goals of ending extreme poverty and boosting shared prosperity. Yet it also poses new challenges as governments and their partners seek innovative ways to address longstanding barriers to increasing tax compliance.

Our Approach

It has been well-established that strategies to increase tax compliance require improvements in enforcement—that is, credible sanctions for citizens and corporations that avoid paying their full legal obligations. They also require improvements in facilitation—mechanisms and reforms that make it as easy as possible for taxpayers to find out what they owe and make payments, such as e-Filing and paying via SMS.

Yet recent research has shown that a lack of trust in the state’s role as tax collector and service provider remains a powerful disincentive for many would-be taxpayers to enter the formal economy or pay their full tax liability. For this reason, ITC advocates for a holistic approach to tax reform that encompasses all three pillars—enforcement, facilitation, and trust—which we consider to be mutually-reinforcing.

In our approach, trust is comprised of four dimensions, each of which requires special consideration in the design of trust-building strategies:

  1. Fairness: tax systems should be fairly designed and administered.

  2. Equity: tax burdens should be equitably distributed so that everyone pays their share.

  3. Reciprocity: tax revenues should be translated into publicly provided goods and services.

  4. Accountability: the governments administering those tax systems should be responsive to taxpayer concerns.

 

Partners

International Center for Tax and Development (ICTD)

Founded in 2010, the International Center for Tax and Development is a research center with a mission to generate knowledge that will help developing countries mobilize domestic resources efficiently, effectively, and equitably, and develop tax systems that promote good governance and pro-poor economic growth.

Bill & Melinda Gates Foundation

Based in Seattle, Washington, the Bill & Melinda Gates Foundation was launched in 2000 and is the largest private foundation in the world, holding $50.1 billion in assets. The primary goals of the foundation are, globally, to enhance healthcare and reduce extreme poverty, and, in the US, to expand educational opportunities and access to information technology.