To raise more tax revenue, first build up taxpayers’ trust

The sustainable development agenda has been severely threatened by the advent of the COVID-19 pandemic. Not only did the crisis set the world’s progress on eliminating extreme poverty back by several years, it also required a significant expansion of spending by governments looking to buffer their populations from the worst of the economic shock. As the struggle with the pandemic continues, new challenges loom for developing countries: the ongoing climate crisis, the evolving demands of populations undergoing demographic transitions, and the urgent need to resume progress on reducing poverty. This constellation of challenges demands that governments find responsible ways to spend more.

An expansion of fiscal space must be met with a commensurate increase in revenues. Yet even prior to the pandemic, many developing countries struggled to maintain tax revenues sufficient to meet their basic needs. The threat of rising public debt in lower-and-middle-income countries, on an upward trajectory even prior to the pandemic, makes the fiscal position of many countries even more dire.

Raising more revenue, and doing so in a way that is equitable, will require a host of new approaches to tax policy and administration. Many of these are actively being grappled with through ongoing international tax reforms, an increased focus on taxing wealth and property, or improving efficiency through digitalization. However, it has become increasingly clear that the solution to raising more and better revenues cannot solely depend on expanding the taxable base or making it easier to pay taxes, it also requires taking the relationship between the taxpayer and tax authorities more seriously.

To address this, “Innovations in Tax Compliance: Building Trust, Navigating Politics, and Tailoring Reform,” a report by the World Bank, supported by the Bill & Melinda Gates Foundation, develops a new avenue for delivering country tax reform by setting out a novel, integrated framework for strengthening tax compliance and reform, especially in lower-income countries.

In the past, tax reform leaned heavily toward strengthening tax enforcement and enabling tax compliance. This report makes clear that improving the trustworthiness of the tax system is equally important to strengthening tax compliance. Building trust also helps mobilize public support for tax reform, prompting initially skeptical citizens to demand the changes to the tax system needed to ensure that everyone pays their fair share.

Substantial evidence across countries and regions indicates that the willingness to pay taxes and support reform is higher when trust in the state is strong.  But inequitable tax burdens, questionable interactions with tax officials, and the poor translation of revenue into services are reflected in the limited public trust in tax systems that exists in developing countries. In most African countries, for example, less than half of taxpayers trust their tax administration, with levels of trust falling below 30% in some countries. Across Latin America and the Caribbean, trust in government can be as low as 26% (Argentina) and 17% (Brazil).

A holistic approach to tax reform

Citizens are more willing to pay when they know that their money is being well spent on services they want.  Still, many governments have not made building citizens’ trust a central plank of their compliance strategies. In fact, perception surveys indicate that many citizens of lower-income countries, particularly across Africa, think the taxes they pay do not improve public services. Building trust and boosting accountability are fundamental to providing countries with a stable, predictable, and sustainable fiscal environment and to promoting inclusive growth.

How governments go about collecting taxes is integral to how the state is financed. But it also determines how taxpayers view their institutions, since paying taxes is a major point of interaction between citizens and the state. That means governments face consequences from how well citizens believe their taxes are being spent, whether they feel they are treated fairly by tax officials, how well tax laws and decisions are communicated, and how equitable the tax system is.

Despite important successes, efforts to strengthen enforcement and facilitation have not been sufficient to consistently deliver more effective, equitable, and accountable tax systems. In general, taxation of the wealthy remains highly ineffective in many low- and middle-income countries, where the share of revenue from personal income taxes is less than half of the share of similar revenue in high-income countries.

To make progress, tax reforms should be better tailored to the specific needs and circumstances of different countries. They should also be considerate of politics and tackle issues of trust. This more holistic approach could achieve more sustainable improvements in revenue that are fair and equitable and translate into more benefits for citizens.

Four drivers — fairness, equity, reciprocity, and accountability — help foster trust-building in the tax system.  Reformers need to focus on how to more effectively tailor reform strategies to local contexts and constraints, reflecting the distinctive technical capacity and political challenges policymakers face when building trust with taxpayers.

Revenue collection is not an end in itself. It only becomes socially desirable if it results in efficient, productive spending. Adoption of the framework outlined in “Innovations in Tax Compliance” will help shift the paradigm from taxing more to taxing better.