The Design and Implementation of Tax Policy: The Role of the Tax Administration Andrea Lemgruber Fiscal Affairs Department International Monetary Fund

Outline Context of the issue  The interaction between TP and TA  Problems and challenges Addressing the issue  Models of interaction  Role of the TA Constraints and Solutions  Do’s and Don’ts

The Interaction between TP and TA TP and TA are intertwined functions  Why? They are part of the same process: the State revenue financing.  Therefore, should be coordinated However, many problems in practice  Complex issue  No clear “labor division” between TP and TA  Different institutions and interests involved  Weak coordination and reporting lines

The Interaction between TP and TA Problems become aggravated in developing countries:  TA capacity limitation hampers effective implementation  Weak institutional framework (e.g., no clear unit responsible for TP; lack of coordination mechanisms) If the interaction does not work properly: poor results (noncompliance, evasion, costs) “Idealistic TP can complicate TA, while ineffective TA can undermine TP” (Faria and Yucelik)

The Interaction between TP and TA TP + no TA = Nothing No TP + TA = “TA is policy” TP + TA = real system

Issues to be Addressed What is the ideal institutional framework that would allow an effective coordination between tax design and implementation? How a government can ensure a smooth and well-functioning feedback mechanism? What is the role of the tax administration?

Models of Interaction One process divided into conception (TP) and execution (TA)  Large “gray zone” and large externalities between both  Different institutional design and models of interactions across countries  Need of a continuous feedback mechanism The process is exercised at different levels  TP advice (changes in the system)  Policy interpretation (guidance re: existing laws)  Administrative policy (implementation regulations)

Models of Interaction

The Role of the TA All tax administrations do play a role in tax design. Depending on the country (see previous figure):  Smaller role (at least, minimal solid feedback mechanism)  Large role (active voice in tax design) No black-and-white solution: each country should put in place a workable and effective model.  Subject to some minimal institutional requirements (we are going to explore this!).

The Role of the TA Technical expertise Better access to micro- simulations Applicability of design Feedback mechanism Risk of “administrative feasibility” overshadows efficiency and equity Risk of losing focus on implementation Clear separation between design and implementation Lesser political lobbies and influences reaching the TA Lack of insider knowledge of implementation Low level of integration Design lacks the “administrative feasibility” perspective AdvantagesDisadvantages Larger Smaller

The Role of the TA in Developing Countries In developing countries, some TAs have played a larger role in tax design:  TA are the most prepared and solid fiscal institution (resources, HR, credibility)  Administrative capacity is a key concern  Tax reforms are revenue-oriented  High-evasion environment (focus of TP and TA)  TP is largely determined by those who collect the revenue in the absence of clear TP capacity

How the TA can play this role? A country should adopt a solid institutional arrangement for dealing with TP and TA. High-level decision supported by technical inputs TP unit at the MoF (supported by a Specialized Policy Unit at the TA) TA with clear mandate and powers to implement the policy and support its design Institutional feedback mechanism between TA and TP (SPU, working groups, committees, etc.)

Research and Policy Units (RPU) Many TA count with an RPU to support their role in tax design and represent it in the policy debate. Relevance:  Encourage well-informed decisions  Better access to data and simulations (tax secrecy)  Higher applicability of design  Sound and continuous feedback mechanism between TP and TA (high-quality counterpart in the debate)

What is an RPU? A specialized Fiscal Policy Unit dealing with:  tax analysis, producing tax research on revenue impacts, projections and policy recommendations, and taking into account the TA’s perspective/expertise. Some TA play the role without a clear mandate or institutional structure  Undesirable mix of clarity, delegation and responsibility.

What type of work is performed by an RPU? Monitoring and analysis of revenue trends Revenue forecasting Analysis of tax policy impacts on economic variables and tax reform proposals Analysis of the current tax system performance and suggestions for improvements Quantification of tax evasion, tax gap, tax expenditures, etc. Research and paper publication, technical notes Follow-up and feedback on implementation issues Support in drafting tax laws and regulations Representation in economic committees and working groups (e.g., tax committees at the National Congress)

What type of resources should an RPU have? Well-trained and specialized HR State-of-the-art technology Reliable and high-quality database Good institutional framework  Strategic level, clear reporting lines, job description  Transparency and accountability, publications  Insulation from political lobbying (technical staff and decision-making, IT security)  Proper performance reviews

Some Constraints and Solutions Difficulty in representing the TA’s “administrative perspective” without disturbing the trade-off between efficiency, equity and feasibility. The firefighter’s syndrome Low interaction with other TA’s core functions Risk of being under political pressure

Five Do’s Do establish a sound RPU Do institutionalize your RPU within the TA (clear job descriptions, staffing requirements, tasks, annual work plan) Do liaise with other policy units (MoF, Congress) to provide a feedback mechanism and represent the TA Do integrate the RPU with other TA’s functions Do create a culture of transparency and accountability

Five Don’ts Don’t let lobbies or ideological bias dominate the RPU’s work and publications Don’t produce technical justifications for politically- decided issues Don’t push administrative feasibility over economic efficiency and equity Don’t let the TA’s engagement in tax design distort its leading role in implementation Don’t let urgent issues set the RPU’s agenda, overshadowing its long-term analytical capability.

Developing Countries’ Experience Argentina Brazil Chile Guatemala Peru Tanzania others…

Thank You!