Key message 4 – Motivating tax collectors could bridge wider enforcement gaps
While the administration of public service delivery (e.g. healthcare and education) has been widely studied, tax administration has remained largely underexplored. Despite this, good administration is central to effective tax collection. In countries where tax morale and enforcement are weak, tax administrators may exert low effort and/ or be susceptible to corruption.
One of the key reasons for this is that, in many developing countries, incentives for civil servants are poor: pay is relatively low and not tied to performance, career advancement opportunities are limited or uncertain, and there is substantial scope for corruption or abuse of power. Yet the effectiveness of tax systems depends substantially on the motivation of the tax staff responsible for providing public services.
Low motivation among tax collectors contributes to low tax collection and reduced funding for public services, which in turn undermines tax morale. Citizens that fail to receive adequate public services see no reciprocal benefits to paying their taxes. This creates a vicious cycle that inhibits economic growth.
Providing performance-based incentives to tax collectors produced substantial increases in revenue collection.
To address this problem, the Excise and Taxation Department of the Punjab province in Pakistan tested several innovative schemes focused on improving tax collector performance as part of a multi-year collaboration with IGC researchers.
The goal was to increase revenues for government by incentivising tax collectors to bring in more taxes without over-taxing citizens. The study finds that providing performance-based incentives to tax collectors produced substantial increases in revenue collection. Treatment areas where incentives were introduced outperformed control areas by a margin of over 13 percentage points in total revenue collections over the two-year study period. Importantly, the increase in revenue more than paid for the cost of the incentive reward scheme.
The study also found that more transparent, simpler schemes work best, such as explicitly linking incentives to clearly defined performance measures that leave limited room for subjectivity. However, the research also found that in cases where collusion is possible, performance-based pay can lead to undesirable outcomes by enhancing the tax collectors’ bargaining power to extract side payments. In such cases, complementary efforts are needed to raise the costs of collusion and increase the perceived returns to paying taxes.
Strengthening tax administration is crucial for improving the government’s ability to enforce its tax policies and collect revenues. New research is testing the effectiveness of offering non-financial incentives to tax collectors, including transfers to more desirable posting locations as a reward for strong performance.