Title: Tax Administration in Developing Countries: An Economic Perspective
Abstract: This paper surveys tax administration in developing countries from an economic perspective.Until recently economists paid little attention to tax administration and have tended to view the topic as separate from tax policy.Interest in the topic has been growing, however, as economists realize that tax administrators in developing countries in effect make tax policy by deciding how tax legislation should be applied.In fact, tax administration has an important impact on government revenue, the overall fiscal deficit, and the tax burden on different sectors of the economy and on different income classes.In addition, tax administration may play a powerful role in influencing the efficiency of the economy and the equity of the tax system.Tax administration is seen as the link between legal statutes comprising the body of tax legislation and the "real" implemented tax system.A survey of economic literature related to tax administration suggests that formal analysis of tax evasion using the framework of decision making under risk and uncertainty contributes little to an understanding of the topic.Such analysis abstracts from institutional constraints on behavior and ignores different opportunities to evade.Nevertheless, more empirical analysis of the underground economy has shed light on tax evasion, and supply side precepts and claims have made the issue of tax evasion a topical one.A microeconomic approach to tax administration would view administration as one input of a revenue function that also depends on tax bases and tax rates.This approach has its pitfalls, however, because a narrow, short-run concept of revenue maximization leaves out indirect effects on voluntary compliance.In contrast to the normative approach of much tax policy analysis stands a body of literature based on historical and empirical thinking.This literature addresses the question of why countries develop particular tax structures at different stages of growth.It emphasizes administrative constraints on tax structure, arguing that tax structure in low-income economies is largely determined by the availability of suitable tax handles.As countries become richer, these constraints become less binding.The insight that administrative constraints in part determine the tax structure of developing countries appears accurate if we look at a cross section of present-day developing countries and compare their tax structure with that of industrial countries.The tax structure of developing countries is shown to be seriously deficient in terms of stabilization, efficiency, and equity.Tax administrators can improve tax structure by helping to implement broad-based consumption and income taxes rather than concentrating on narrow, short-term revenue objectives.