Introduction

To achieve sustainable development in the medium and long term, it is essential that each country has its own resources and management capacity.

These resources, in particular for Argentina, have been insufficient for many years and for this reason, two paths have emerged that so far have provided no definitive solutions in the long term, and neither – for other reasons – in the medium term.

One is to reduce expenses, to decrease the budget requirement. It is not the object of the present work, but we can say that no consensus has been achieved to be able to reduce it and thus reach the desired budgetary balance.

A second one is to raise public revenues although it does not seem, at this time and according to the level of tax pressure (28.8% Argentina – 23.1% average Latin America and the Caribbean / source OECD / CIAT 2020), that this is possible or, better said, recommended.

I also think that any definition of “efficiency” indicates or gives us the idea of “achieving the expected, expected result” (According to the Royal Spanish Efficiency Academy, “1. f. Ability to have someone or something to achieve a determined effect.”). Specifically, for a Tax Administration (hereinafter TA) it would be Collection. Collect how much? Should we collect as much as possible? No. This is beyond the responsibility of the TA. Only what corresponds according to the current tax system, the current tax laws. Of course, the latter will not be easy to achieve either. We could add that, certainly, no TA is capable of achieving this purpose for different reasons that we will see later.

Returning to the idea of the present work, and thinking of improving efficiency levels as a true path that allows, in the medium and long term, to contribute more public resources, we see that …

This is where tax administrations (TA) play a key role.

The ability to collect taxes together with the rule of law constitutes one of the pillars of collective action.

It could be stated, using a well-known phrase … that there is no possible public policy in the absence of a strong economic policy, that there is no economic policy in the absence of a strong fiscal policy, that there is no fiscal policy in the absence of a strong tax administration.

The context

The income inequalities that exist in the world show a strong correlation with the public resources of the different countries: from 31.7% of GDP on average in high-income countries to 17.1% in low-income countries.

These same differences are observed in terms of the tax burden (considering only tax resources and contributions to social security), although there is a certain convergence in favor of less developed economies.

In this century (2000-2016), the tax burden has remained practically stable in the countries of the Organization for Economic Cooperation and Development (OECD). It remained around 34% of GDP after overcoming the initial effects of the 2007 crisis, while in other areas that started with lower levels, it increased, such as in Africa (from 13.1% to 18.2%) or Latin America and the Caribbean (LAC) (from 18% to 22.7%).

Regarding the structure of tax revenues, there are significant differences between the more developed countries and other regions. In OECD countries, the most important figures represent contributions to social security and personal income tax (26% and 24% of the total, respectively) while, in Africa or Latin America, taxes on consumption, with a much lower revenue

than direct taxes (with the exception of corporate income tax) predominate, a growing trend in recent decades.

These differences in the levels of public and structural resources inevitably condition the capacity of governments to act and, in particular, their effects on reducing inequality. According to data from the International Monetary Fund (IMF), the starting point of inequality is similar between advanced and developing economies (0.48 and 0.49, respectively, in terms of Gini coefficients). However, the former manages to reduce the differences through taxes and public transfers by 35% (reducing the Gini coefficient to 0.31), while the latter barely improve inequality by 8% (reaching a Gini coefficient of 0.45).

The tax administrations of the least developed countries face enormous challenges in performing their tasks efficiently. The workload they face is inversely proportional to the level of income.

All this despite the fact that the budgetary effort of the tax administration is greater in the poorest countries. The administration’s budget in high-income countries represents 0.18% of GDP, compared to 0.26% in low-income countries.

To all the above, we must add all the other known factors that characterize developing countries and make tax administration difficult. These are: a high level of informality, lack of basic infrastructure, insufficient enrollment mechanisms, a lower level of banking, greater impact of corruption, greater dependence on the primary sector and natural resources, high level of fraud, and so on.

The cost of collection reflects a reality: every hundred monetary units collected requires an administrative expense of one unit in high-income countries, compared to three times this cost in low-income countries.

What do we need?

We need a modern Administration, an efficient and effective Tax Administration that is capable of administering and improving the tax system.

The primary responsibility of an TA is to collect the appropriate amount of taxes owed to the government at the lowest possible cost to the public.

The most cost-effective ways to collect taxes is through voluntary public compliance with tax laws. The more enforcement activities that are required, the more costly to administer the tax system.

The most dominant element in Mission Statements is probably the achievement of a high level of voluntary compliance.

The European Commission also considers promoting voluntary compliance, as part of a strategic taxpayer compliance model, as a key requirement of an efficient tax administration.

A fair and appropriate treatment of taxpayers is essential to achieve compliance.

To maintain the public’s trust in the fairness of the tax system and its administration, tax officials need to demonstrate the highest standards of integrity in their treatment of citizens and the business community.

Ethics is the cornerstone of integrity. Corruption clearly distorts integrity.

A TA has a highly technical component that must be maintained regardless of the political changes that may take place in the government. Autonomy is basic for the good performance of a TA, mainly for reasons of effectiveness and efficiency in its operation and in the distribution of resources. Another reason to support autonomy is to rule out political influence (particularly in specific and individual cases).

Autonomy to define objectives, to design and implement the organizational structure, budgetary autonomy, autonomy in the management of human resources and materials, autonomy in the handling of the individual cases and the interpretation of the tax law.

An autonomous organization, with adequate supervision at the highest levels, allows a greater degree of professionalism in civil servants and a greater measure of efficiency in the management and collection of taxes.

The main objective of autonomy is to achieve greater adaptability and flexibility in the management of human and material resources and, as a result, a more efficient TA.  However, this greater autonomy carries its own risks and must be accompanied by a retrospective control mechanism to ensure that flexibility does not mean unnecessary expenses as well as to guarantee that the public interest is protected at all times.

TAs must maintain and strengthen the willingness and ability of taxpayers to meet their tax obligations. Non-compliant taxpayers’ risk being controlled and punished

TAs should then seek other strategies to improve taxpayers’ compliance, in addition to auditing and other compliance and enforcement activities. These strategies should have a preventive effect on the behavior of taxpayers and limit their ability and willingness to avoid taxes.

Why do taxpayers comply?

Benjamin Franklin once said, “The only certain thing in this world is death and taxes.” We could easily add that “as long as the taxes exist, there will be non-compliance as well.” Non-compliance with taxes is as old as the world and happens in every society in the world that has a tax system.

Studies on taxpayer behavior have identified a large number of possible determinants of compliance and non-compliance.

Research on tax morality (defined as the intrinsic motivation to pay taxes) and on tax ethics (defined as the norms of behavior that govern citizens as taxpayers in their relationship with TA) shows that societies with higher levels of morals and tax ethics have lower rates of tax evasion. The good qualities of the relationships between citizens and their governments shape a high tax morale. Therefore, trust in the government and perceptions of fairness in the tax system are required.

Social standards are important because most people tend to go with the flow, think, and do what other people do, especially those people with whom they identify primarily because they are similar to themselves.

Economic circumstances can also influence the behavior of taxpayers. When someone’s trade or existence is being threatened, the person may be motivated not to comply to safeguard their cash position. Once a taxpayer has taken that step, they will tend to continue with this behavior.

TAs have the responsibility to report on their performance and achievements related to the organization’s objectives. This includes the responsibility to monitor and report on taxpayer compliance and the impact of efforts made to improve taxpayers’ compliance behavior.

Monitoring taxpayers’ compliance behavior and assessing their level of compliance can include or estimate the overall tax gap. The tax gap is the difference between the tax that would have been estimated and paid (potential collection) if all citizens and companies that may be subject to the tax had registered with the tax authority, had reported all their activities, operations, assets, and liabilities correctly and would have paid all the taxes due and the estimated taxes (collection achieved).

The cash economy is an important and complex problem for Tax Administrations in many countries.

An increasing informality reduces tax revenues and requires honest taxpayers to pay more taxes, increases the national deficit (which drives taxes higher); it reduces the level and quality of the public services, and generally reduces the legitimacy of the tax system.

A modern TA that tries to be efficient and effective needs to work on a risk management platform defined as a systematic process in which people and resources are deployed, based on a risk analysis, in order to achieve an optimal result.

Risk management involves taking deliberate steps to improve the chances of a positive outcome and reduce the chances of a negative outcome.

The compliance risk management can be defined as a systematic process to identify, analyze, determine, prioritize, and treat and evaluate the risks of non-compliance of taxpayers with their tax obligations, in order to allow TAs to achieve the key strategic goal of the organization and thus achieve the highest level of (voluntary) compliance.

The central task of a Tax Administration is to collect the taxes levied in accordance with the law. For this, they need taxpayers to comply with certain obligations.

Failure to comply with one of these obligations on the part of the taxpayer should be classified as a breach. However, non-compliance can be due to different reasons and take various forms. This requires that the Tax Administration prioritize, analyze, and determine the risk and choose an appropriate treatment strategy.

Based on the perception that taxpayer compliance behavior cannot be understood solely in terms of economic rationality, but rather broader issues of conduct must be considered, the so-called “BISEP Model” was created to describe the connection between the possible factors influencing the taxpayer’s behavior and attitudes regarding the compliance with their tax obligations.

If taxpayers perceive the tax system and public spending policy as fair, and if they perceive that the way taxes are administered is fair, they are likely to be more willing to comply.

Tax officials should be aware that non-compliant taxpayers are tax evaders and do not submit tax returns. Analyze primarily the person and his motives, rather than a particular error within the tax return.

It is a challenge, but also a need, for Latin American TAs to be efficient, effective, enforcing the rules and leading citizens to respect the State of Law.

References:

• ciat.org
• IBFD / CIAT Tax Administration Manual
• ICT as a strategic tool to enhance the efficiency of tax administrations. CIAT

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