Taxes are a critical source of revenue for governments. They provide money to repair roads and fund social programs. The structure and quality of tax administrations determine whether or not people pay their taxes.
On the individual taxpayer level, power and trust define different interaction climates between tax authorities and taxpayers. Coercive power and low legitimacy foster an antagonistic climate, whereas high legitimate power and high trust lead to a service climate with voluntary cooperation. Read on J. Gregory PEO for more information.
The law is interpreted and applied through various regulations and rulings, which can be either general or specific in application. They can be issued before a transaction takes place or following it, and they can cover all types of transactions from income to property taxes. Regulations are generally published in advance as a Notice of Proposed Rulemaking, after which there is usually some sort of public comment period and public hearing before the rules are finalized and issued as Treasury Decisions. Rulings are more like legal opinions, and they can be of either general or specific application.
Tax administration can be made more efficient by having a single administrative process and procedures for all taxes collected in a country, as well as by ensuring that taxpayer records are consolidated into one database or master file so that stop-filers and delinquents can be easily detected and addressed. It is also important to make sure that all tax laws, regulations and court decisions are compiled and generally available, making it easier for taxpayers and tax administrators alike to research and find the information they need.
Keeping the number of taxes and governmental levels to a minimum is also a good idea, as this makes it easier for taxpayers to follow the rules. However, it is not unusual for a country to have different models of tax administration at different levels of government, which can cause confusion and inefficiencies for both taxpayers and officials.
For example, an individual in locality A who receives interest income from a bank in locality B is likely to have his or her withholding rate set differently by each of the three levels of government, causing compliance problems for withholders and verification problems for tax departments. One way to address this is for the central government to set the withholding rates early enough in the budget preparation cycle to ensure that the subnational governments will have time to do the same.
Another issue is where taxation is centralized and the revenue base is mobile, as in sales taxes, value-added taxes (VAT), and income taxes, but the tax rates and structures are set by subnational levels of government. This model is popular in unitary countries and many formerly socialist or communist countries, as well as in some federative countries.
Taxpayer Definitions
As the world’s population grows and economies become more complex, governments are increasingly turning to taxation as an effective way of raising the necessary resources for social programs and infrastructure projects. In addition to raising revenue, taxes can also provide incentives for individuals to comply with laws, a key ingredient in successful tax administration.
In order to collect taxes effectively, governments must have clear definitions of taxpayers, which in turn are used by the taxation authority to identify who is liable for particular taxes and to assess a person’s compliance with them. A taxpayer can be any individual, partnership, corporation, estate, trust, receiver, liquidator, fiduciary or other entity that is liable under law for the payment of a tax.
The definition of a taxpayer can be further complicated by the way in which a particular tax is collected. Some taxes are collected only at the central government level while others, such as value added taxes (VAT) and income taxes, are levied at both a national and subnational level with varying levels of revenues or revenue sharing. This leads to an increase in administrative complexity.
It is possible to simplify this complexity by ensuring that the definitions of taxpayers are uniformly applied and, where appropriate, aligned with the country’s legal system. It is also advisable to separate the different departments in the taxation authority, so that each one can concentrate on a specific aspect of the law. This allows for greater efficiency in collecting tax and reduces the risk of misunderstandings between departments.
Another important issue in the context of tax administration is how a country chooses to assign its tax collection responsibilities among various levels of government. There are four basic conceptual models: central government collection only; central government tax administration with transfer of taxes to subnational levels; centralized collection, but with legislative control at lower levels over the bases and rates; and multilevel administration.
The choice of a model influences many aspects of the design and implementation of tax administration, including the choice of the definitions and taxpayer rights discussed above. It also affects the types of safeguards that need to be in place, for example comprehensive training for all levels of tax officials and strict adherence to audit guidelines, to prevent nonuniform application of the law.
Compliance Failures
Many reasons exist for taxpayer noncompliance, including deliberate evasion by a small proportion of the population, carelessness, misunderstanding of tax obligations and weak design and administration. However, the overall level of compliance is determined by the extent to which a large proportion of the population feels that the state’s tax regime is fair and well administered.
The main factors that contribute to a feeling of fairness include transparency, consistency, and timeliness. Transparency can be achieved by the availability of complete and accurate information, which must be processed quickly and reliably. Timeliness is achieved by ensuring that data processing and collection activities are completed on time, and by using modern technology to enable the production of timely reports. In addition, consistency is achieved by establishing a clear policy in which the same rules apply to all taxpayers and by ensuring that the correct interpretation of the law is applied consistently to all cases.
In a tax system, ensuring consistency requires close coordination among the various departments involved in the production of information and in the processing of returns and payments. It also involves the use of incentives and penalties to encourage compliance. However, it is important to maintain a high degree of integrity in the application of these incentives and penalties. An excessive application of penalties can have the opposite effect and discourage participation in tax compliance (see Beavers, “IRS Cannot Defend Sec. 6038 Penalties Administratively,” 54-7 The Tax Adviser 2023).
Introducing modernization in tax administration is not an easy task, and it can be difficult to measure its effectiveness. It usually involves changing administrative practices that have been in place for many years, and it can take a long time to achieve significant results. In this regard, it is important to make the effort to diagnose the situation properly and to develop an adequate strategy before making decisions regarding the purchase of computers.
In particular, a good strategy must be developed for dealing with the problem of overregistration and avoiding duplications in the database. It is advisable to have the tax administration make available preprinted identification labels that can be used by taxpayers to update their domicile addresses.
Organization
The success of a tax administration is determined to a large degree by its organization. While much of what makes a tax administration successful is not within the scope of its control, there are a number of areas in which administrative agencies can improve their performance and the image they present to taxpayers.
To do this, they must rethink their organizational structure and look at new ways to monitor taxpayer behavior and to deal with them in a reasonable manner. To this end, they should use tools like the OECD’s Tax Administration Diagnostic Assessment Tool (TADAT), which allows them to evaluate their policies, procedures, and people.
Traditionally, the tax department is organized into two major areas: collection and audit. Both of these areas need to be viewed as a whole in order to establish functional interdependence. This will facilitate data processing, simplify paperwork, and help officials be more efficient in their day-to-day activities.
This is particularly important in a period when economic models are changing, and taxpayers expect more from their governments in terms of responsive customer service and ease of doing business. The challenge is to achieve a balance between the need for efficiency and the need to treat taxpayers fairly.
One approach to this problem is to create a separate, independent tax department in addition to the existing one, with the goal of establishing a new culture in the existing organization. However, civil service regulations may make this impossible, and even if it were feasible to do so, the new department would need to be properly staffed.
Another approach is to introduce more flexibility in staffing at the lower level, and to allow more mobility amongst employees. This will make it easier to meet the different objectives of each area and to avoid duplication of requests made to the same taxpayer. However, such measures will require a change in the way that salaries are structured.
In many cases, the low salaries offered in the tax departments have discouraged the most qualified and talented employees from pursuing careers with the agencies, which has resulted in an inefficient and ineffective organization. Wage policy has to be changed to reflect the importance of this role, and to provide a proper incentive for employees.