Why don’t governments collect more tax revenue? This question is particularly relevant to lower income countries as many of their governments collect only a small proportion of their respective GDPs, sometimes less than 10%. But their needs for more development finance seem to be very pressing.

Tax specialists have been wrestling with this question for a long time and yet have not been able to produce thorough or convincing answers. That alone should tell us that the reasons are complex, and that new understanding is more likely to emerge slowly, following careful enquiry, than through sudden revelations.

We have however some new insights into this question. These relate to the existing relationships between the ministries of finance, that oversee national tax policies, and the agencies that actually collect the taxes. Those relationships can be difficult and distanced and may become conflictual. Lack of trust and cooperation may lead ministries to agree to unnecessarily low annual revenue collection targets for tax agencies, and disincentivise tax agencies from doing more than simply hitting the targets they are given.

 

How are tax collection targets set?

There is very little public information on this process. Decisions are typically made by a small number of senior public servants and one or two senior politicians in ministries of finance. The picture we paint below is a generalisation based on a wide variety of sources, including anecdotes and hints from people who have been more closely involved, but details vary from country to country.

We present what we believe to be the typical pattern in lower income countries. To some extent, the ways in which these decisions are made reflect the fragility, or absence, of public fiscal institutions that could contribute to more open and informed debates: the weakness of tax policy units in ministries of finance; the low level of engagement of legislators and legislative committees in the details of fiscal policy; and the absence of either:

(a) routine independent expert analysis of public finances through the equivalent of the (British) Office of Budget Responsibility or

(b) a public audit office with a mandate and capacity to appraise the operations of tax collection agencies (see an example of that here).

This is what we believe often happens:

  • reasons we explain below, the ministry of finance is interested primarily or even solely in the total collection target. That is typically agreed first as a total currency figure, and only later expressed as a percentage of GDP.
  • Like many fiscal targets, this figure is based on incrementalism. The point of departure is the total amount of revenue collected in the previous year. The contentious question is: how much should be added to that?
  • The ministry of finance, representing the government more generally, in most cases presses for a higher target.
  • In contrast, tax collection agencies push for the lowest possible increase having strong incentives to drag their feet. First, they have a natural inclination to make their task as easy as possible. Second, they have a more specific reason to keep the target low: a substantial component of annual staff remuneration comes in the form of the bonuses that are triggered by achieving the collection target. To agree to a high target is to put those bonuses at risk, and therefore to raise the prospect of an actual pay cut.
  • There is a major problem of information inequality between the ministry and the tax agencies regarding the potential to collect more revenue and the costs of doing so. This is partly a matter of organisational slack. Because of their experience and interactions with taxpayers, heads of tax agencies have a better understanding of the actual tax gaps. For example, they have a better sense of how much of the accumulated tax arrears could be collected in the year if they became personally involved in urging payment and perhaps threatening legal action against defaulters. They can also much better estimate:

(a) how much money could be collected if the accounts of 10% of the smaller companies that have declared no taxable profits were subjected to a desk audit and

(b) how they could ensure that their staff would quickly and effectively complete these additional audits.

  • The heads of tax agencies have another bargaining chip: requests for large capital grants from the ministry of finance for IT system improvements or replacements that can easily be presented as essential for improved performance. Almost any tax agency can make the case that it is behind the IT curve and link the need for urgent investment to the possibility of meeting increased collection targets.
  • Ultimately, the balance of bargaining power typically tips in favour of the heads of tax agencies, giving them the leverage to demand a high price for agreeing to an increase in the collection target. And while ministries can threaten to replace them with more capable and compliant substitutes, there are limitations on the plausibility of that move. For that information inequality between tax agency heads and ministries that we summarised above also exists within tax agencies themselves. The bosses do not know everything about the informal processes and relationships that influence how and how much taxes are actually collected, or about how much organisational slack exists at different levels and in different units of the organisation. The newly appointed substitute may find themselves frustrated at every turn because they cannot get the information they need. This status quo limits the possibility of replacing current bosses with outsiders who are unfamiliar to existing arrangements
  • In addition to all this, relationships can become strained as  tax agency staff are widely viewed as being very well remunerated, whether through official or unofficial revenue streams. In about half the countries in the world, taxes are collected by semi-autonomous revenue agencies (SARAs) that are under the direct operational control of a chief executive and a management board, rather than the minister of finance. In (Anglophone) Africa and Latin America in particular, SARAs are relatively new and their staff is officially well-remunerated, in addition, they are, in many countries, believed to enjoy large informal earnings. Senior public servants in ministries of finance may therefore perceive the staff of tax agencies as over-remunerated and greedily uncooperative with national needs. They may then be reluctant to agree to requests for more funding to improve agency performance, at least not without detailed scrutiny. As one can imagine, their attempts to exert more control over tax agencies are not welcomed. In retaliation, heads of tax agencies can resist sharing the information needed to make and update revenue forecasts or make technical modifications to tax legislation only with the intent of making the lives of the ministry of finance more difficult.
  • Entrenched distrust makes change difficult. For example, tax agencies could probably often generate sustained and large increases in tax collection if offered unusually large bonuses. But what assures these bonuses would be maintained in a year or two, once staff has revealed that a much improved performance is in fact possible?

 

How do we know all this?

Our interpretation is based more on hint and anecdote than on consistent testimony but here is one specific and recent piece of evidence:

In 2023, a senior staff member of the Malawi Revenue Authority (MRA) was responding to a confidential research questionnaire about how the Authority could collect more revenue. Her answer to the question about the priority that should be given to registering additional taxpayers was:

“Registering more taxpayers is not necessary. Taxpayers on the tax register don’t pay taxes because MRA takes time to contact registered taxpayers after registration due to [the large] number of taxpayers; and most of the time we concentrate on those who pay rather than those who don’t pay, as we already beat our [revenue collection] targets most times” (Sulu and Moore, forthcoming paper).

This behaviour is not specific to Malawi. Indeed, many tax agencies seem to focus on compliant taxpayers and make little effort to actually extend the tax net more widely.

At a different level, the recent history of the Rwanda Revenue Authority is fully consistent with what we have to say here. The Authority is distinctive in the African context for having achieved a consistent and steady increase in tax collection as a proportion of GDP over two decades and is a leader in the digitisation of tax operations in Africa, regularly publishing detailed statistics on revenue collection and on its own collection performance. That performance is examined annually, and sometimes critically, by the Office of the Auditor General. Relationships with the ministry of finance and other government agencies are generally close and collaborative. Authority staff cooperate closely with external researchers. In this case at least, transparency, cooperative relationships with other organisations and good performance go together.

 

What is to be done?

We need first to disabuse ourselves of the notion that it is ‘governments’ alone that decide how much revenue will be raised. ‘Governments’ in the standard sense of the term – presidents, prime ministers and cabinet ministers – obviously have a considerable influence. But they do not actually collect the money, and do not have total control over the agencies that collect it on their behalf. A better understanding of relationships between ‘governments’ and tax agencies is needed. We strongly suspect that it will point us to a significant constraint on increasing revenue, especially in lower income countries. We also suspect that solutions to the problem will likely lie in more openness, better information, and the involvement of more organisations in the debate about setting tax targets.

Bernard Baimwera

Dr Bernard Baimwera is currently the Dean at the Kenya School of Revenue Administration, Kenya Revenue Authority. Previously, he was a Senior Lecturer in Sustainability and Public Finance at Strathmore Business School, Strathmore University, Kenya. He has over 20 years’ experience in teaching and research in public finance and taxation. He is currently involved in Tax Research to inform policy at the Kenya Revenue Authority. His current research interests are in environmental finance and taxation.

Mick Moore

Mick Moore is a Professorial Fellow at the Institute of Development Studies and the founding CEO of the International Centre for Tax and Development. He is a political economist whose broad research interests are in the domestic and international dimensions of good and bad governance in poor countries, focusing specifically on taxation in Asia and Africa.