Robust public finances are one way to create such resilience.
The question is: How can countries build tax capacity to sow the seeds of a healthy and inclusive economy, for the benefit of all citizens?
This, of course, requires a clear and comprehensive strategy that interlinks tax policy reform with revenue administration reform. In other words, what and whom to tax should go hand in hand with how you go about collecting these taxes.
- Tax policy reform
Let us begin by looking at the steps needed to design a comprehensive tax policy. A good first step is establishing a five-to-ten-year revenue target. After that, a comprehensive reform plan is necessary, aiming at long-term institution building rather than short-term fixes. Finally, collecting and disseminating good data is vital for making good decisions.
Why do we need revenue targets to begin with?
Because these are essential goal posts that can help you align your revenues with your spending—both in the short term and the medium term.
Key tax reform priorities
If tax reforms are to be successful and achieve their targets, policymakers will need to focus their tax policy on key priorities.
In the oil-exporting countries, this means diversifying the sources of revenue away from oil and gas.
As a first step, countries are introducing a VAT and other consumption taxes—for example on tobacco and sugar-sweetened beverages. Over time, governments may also consider deriving additional revenue from income and property taxation.
Countries in the Gulf, for example, are working to introduce a harmonized VAT in 2018. These efforts could raise anywhere from 1 to 2 percent of GDP, assuming a VAT rate of 5 percent.
The experiences in other regions underscore the positive impact of diversification. Mexico, for example, was able to boost its non-oil tax revenue by more than 3 percent of GDP by broadening the VAT base and raising energy taxes and personal income tax rates.
In the oil-importing countries the key priority is to generate higher revenue by broadening the base of existing taxes. Such reforms would make tax systems simpler, more efficient, and more equitable.
This requires, for example, rationalizing multiple VAT rates and other tax preferences. Some of the key measures here include simplifying the rate structure and getting rid of exemptions, tax holidays and other carve-outs that benefit only a few and create opportunities for arbitrage.
In some countries, tax reform also means making tax systems more progressive by lifting the top marginal tax rate on personal income. And of course, current tax rules should be applied in a consistent and coherent way.
More broadly, fiscal transparency and the sharing of reliable data are essential for the well-being of all countries. Why? Because they increase the accountability of governments and because they can boost the resilience of their economies—and that includes lower borrowing costs.
- Integrating Tax Policy and Revenue Administration Reforms
The second step in designing a revenue strategy is interlinking tax policy reform with revenue administration reform.
This coordinated, simultaneous effort can help countries avoid some of the time-consuming troubles of the past. Traditionally, policymakers would often start with new tax policies and worry about administrative capacity later. By interlinking the two elements right away, countries can “leapfrog” to a more advanced development stage.
Mauritania, for example, took a series of coordinated actions with the help of the IMF to simplify and improve its tax system while strengthening its tax administration. This strategy contributed to a remarkable increase in total government revenue from about 20 per cent of GDP in 2009 to 28 percent in 2014.
So how can this be achieved?
By boosting the capacity of tax administration early in the reform process. This is essential to ensure both efficiency and compliance. Based on our experiences in other countries, we see two main priorities.
One is to simplify codes and regulations. This involves not only the laws on tax rates, but also the procedural laws establishing the powers of tax agencies and the rights of taxpayers.
The second priority is to upgrade peoples’ skills and technical resources to improve tax compliance and enhance services to taxpayers. This is where your countries can take advantage of technological innovations—to “leapfrog” into the digital age.
Modernizing the IT infrastructure allows for easier filing and payment by taxpayers, including through mobile technology. It also improves the ability to verify compliance using third-party data.
The efforts to build tax capacity are vital to achieving that goal. The economies and societies will reap the benefits of reform.