While any evaluation of tax policy and tax administration is naturally centred around revenue, due consideration must also be paid to the public expenditure environment, particularly with respect to whether expenditure leads revenue or vice versa. It is possible to have both good tax policy and good tax administration, with public expenditures being spent on dubious projects - which ultimately equals poor policy. Potential conflict between tax policy and tax administration is important to anticipate. In this regard, the forum within which tax policy is set is significant. Experience has shown, for example, that policy should not be determined by the institution responsible for administration (a conflict of interest exists between achieving revenue targets and establishing good policy).
Both tax policy and tax administration can be assessed against the norms of good practice. The combination of the "good" tax and the "good" tax administration provides a basis for an evaluation of the way taxation is conducted in any country.
Taxes are unrequited, compulsory payments collected primarily by central government, in contrast to user charges that are payments in exchange for specific publicly provided goods. In principle, charges should be used wherever a publicly produced good or service can be sold and should reflect some measure of the cost - preferably, the incremental cost. Tax financing should be reserved for cases where user charges are not appropriate to pay for public goods. These include goods whose costs or benefits cannot be assigned to individuals; compensation for market failures (such as externalities); or for the achievement of distributional goals (such as alleviating poverty).
Since the primary function of the tax system is to generate revenue, its first goal is to ensure that this function is discharged effectively. A second goal is to raise the economic efficiency of the taxation system. This requires that, for a given level of revenue, it interferes as little as possible in decisions made by firms (about production, trade and investment) and by households (about consumption and savings). A third goal is to lift the tax burden off the poorest households and to ensure that actual tax structures are both horizontally and vertically equitable. This is likely to be carried out with some degree of progression.
Any reform or redirection of the tax system is likely, as its main aim to simplify tax policy and strengthen tax administration to achieve these objectives in the most efficient manner. The imposition of individual taxes in any country should ultimately be determined by the capacity of the tax authorities to administer the tax system efficiently and effectively. Some taxes, while theoretically sound, should not be contemplated as the cost of collection may be too great in relation to tax yield and the imposition of the tax may not be equitably applied to all the taxpayers that should come under that tax’s net. In addition to this a widespread use of exemptions ensures that the tax system deviates from the "good" tax model from the principles of both equity and administrative efficiency. The proliferation of exemptions is a condemnation of the basic principles underlying the tax that is being exempted. The granting of exemptions creates a culture of expecting and seeking exemptions. It is better to reform the system rather than continue to allow the undermining of good tax administration by creating the conditions for the continuation of an exemption culture.
There is also one important feature of a tax system that has to be added to the above: that of stability. Unfortunately, a stable "bad" tax system is not desirable. Stability can only be justified when the system has been adequately established and/or reformed. Once the system has been through an appropriate and adequate reform process, then it should be left substantially unchanged.
Assignments in Tax policy and Tax Administration
In addition to the work carried out in tariff reform detailed under private sector development and revenue estimation relating to budget formulation work, REPIM has had the following assignments in this field.
ALBANIA As part of the Strengthening Public Expenditure Management Team, REPIM has worked with the General Directorate of Macroeconomic and Fiscal Policies on issues relating to tax administration and policy and revenue forecasting. For the National Strategy for Development and Integration (2013-2020). REPIM assisted in developing revenue forecasts.
JORDAN REPIM applied the taxation indicators as part of the PEFA assessment.
TANZANIA REPIM carried out a review of tax policy in conjunction with an IMF Team reviewing tax administration. Recommendations for reform were presented along with revenue projections for the medium term. Prior to this work REPIM had conducted some ten years earlier a diagnostic review of the tax and incentive system for the Government and the World Bank.
MOLDOVA REPIM applied the taxation indicators as part of the two PEFA assessments.
SERBIA REPIM applied the taxation indicators as part of the CG and SN PEFA assessments.
UGANDA (1) An analysis of the impact of zero-rating imported inputs on effective protection and government revenue was carried out as part of the 2000/01-budget preparation. (2) A diagnostic review of the tax and incentive system was carried out for the Government and the World Bank. A detailed examination of tax exemptions was undertaken. (3) Output to Purpose Review of DFID’s support to Uganda Revenue Authority through an analysis of the achievement of support to the URA in terms of the original goals and activities as expressed in the logframe. (4) Review of the URA’s 2006 Modernisation Plan.
SIERRA LEONE (1) Reform of the structure of indirect taxation leading to new sales and excise tax rates, and import tariffs in the 1993/94 Budget. The work involved extensive consultation with the private sector (manufacturing associations and individual companies) (2). REPIM applied the taxation indicators as part of the CG and SN PEFA assessments.
ETHIOPIA (1) Changing the structure of indirect taxes and tariffs and the rates with revenue implications and incentive analysis. (2) Assessment of the impact of tax reform on the poor and other income groups.
SEYCHELLES REPIM examined the tax revenue implications of the country's accession to COMESA and provided recommendations for changes in tax policy. The conclusions of the report were presented in a one-day workshop to senior government officials and representatives of the private sector
RWANDA (1) Diagnostic review of the tax system, tax policy and incentive system was carried out in with impact assessment on different income groups. This work also included an assessment of the relationship between tax collection and GDP in an examination of the real sector and GDP composition. Recommendations on tax policy and administration were made for consideration by government. (2) REPIM applied the taxation indicators as part of the PEFA assessment.
MOZAMBIQUE REPIM mentored a team of international and local consultants on the Domestic Resource Mobilisation study carried out for the African Development Bank.
PALESTINE As part of the PGF project REPIM has worked with the Fiscal Department in developing a revenue forecasting model.