Pilot study on effect of political influence connections on tax payment compliance

• Limits to fiscal capacity are a major constraint on growth in developing economies.
• This pilot was conducted as a collection of multiple, parallel scoping exercises that explored the viability of using different data streams to answer the question of whether and to what extent connections with influential people in political, military or bureaucratic circles impact tax payment compliance.
• It is important for developing country governments to identify and quantify the impact of political connectivity of citizens on taxpaying behavior, since it can limit scarce revenue-generating opportunities.

Taxpayers’ political connections adversely affect the state’s revenue-generation efforts. This operates directly, via tax evasion and tax avoidance, and indirectly, for example by reducing voluntary tax compliance due to erosion of the tax morale of other citizens.

The government of Pakistan is taking measures to weed out distortionary policy measures that disproportionately benefit connected individuals and influential economic lobbies. This includes the gradual rollback of existing Statutory Regulatory Orders (SROs), which are said to benefit specific individuals and firms, and improvements in the customs auditing and monitoring regime. However, there is significant room for improvement via other channels, such as income and property taxes.

It is important for governments to be able to identify and quantify the impact of connections to influential individuals on taxpaying behaviour. This will enable to state to prepare appropriate policy measures in response. We assessed the available data sources to identify those most useful in answering questions of tax compliance and personal connections.

It can be difficult to cleanly delineate the beneficiaries of SROs, even though the SROs themselves are publicly available. However, this is becoming less important as the government is rationalising its use of SROs as a discretionary taxation instrument, as well as rolling back past SROs.

We found that property tax data is the most promising data source for assessing the extent to which influential contacts affect individuals’ tax compliance. This is particularly the case given the ongoing reforms to property tax in large regions, including the Punjab.