How administrative reforms boost revenues
Improvements in tax administration are far more effective in increasing tax revenues than simply raising tax rates, suggests a new studyUpdated: Aug 21, 2019, 17:26 IST
As the Indian government seeks new ways to increase tax revenues, research from Indonesia has revealed one potentially cost-effective reform: improving tax administration through dedicated corporate taxpayer offices.
In a new study published by the National Bureau of Economic Research, Chatib Basri of the University of Indonesia and others estimated the impacts of two nationwide reforms to corporate tax policy in Indonesia. These reforms include a large scale administration reform and change in corporate tax rate schedule – both of which affected mid-sized firms differently.
In the administrative reform, the Indonesian government created ‘Medium Taxpayer Offices’ (MTOs), special large-taxpayer offices to focus on the top tax-paying firms in the country. The MTOs are structured identically to the Primary Taxpayer Offices that service all other taxpayers, but with more staff. The staff-to-taxpayer ratio was three times higher than the regular office which allowed for more intensive supervision and improved customer service for corporate taxpayers.
The authors found that this reform more than doubled tax revenue from the impacted firms. Moreover, while this was a large-scale reform, the costs were a fraction of the revenue gains (less than 1%), implying that this is an investment with a considerable overall return.
The authors suggest that tax administration reform is a far more effective way to increase revenues than changes to the tax rate. Using data from changes to Indonesia’s corporate rates, the authors estimate how tax revenues respond to changes in tax rates. They find that to match the increased revenue from improvements in tax administration, the marginal corporate tax rate would need to be increased by as much as 23 percentage points.