PFM blog

ICBP 2024/2025: Will trust in tax administrations matter if ” tax just happens?"

29 January 2024
Joana Bento, Par Bjorklund
Voluntary Tax Compliance Q3 Newsletter Revised Pic

Team South Africa 2024 with their coach Jonna Enholm Timén of the Swedish Tax Agency and Joana Bento, Programme Manager at CABRI

The fourth cohort of the International Capability Building Programme (ICBP) was officially launched on the 1st of November, 2023. Four country-teams from Kenya, Nigeria, South Africa and Zambia will participate in this action-learning program that applies the Problem Driven Iterative Adaptation (PDIA) approach to solve complex policy and administration problems.

The focus of the programme, is on voluntary compliance as a strategy for domestic revenue mobilization (DRM). Improving voluntary compliance, or tax morale, holds the potential to increase tax revenues with (relatively) little enforcement effort. Tax morale, generally defined as the intrinsic motivation to pay taxes, is a vital feature that most tax systems rely on to mobilize bulk of their revenues. (OECD 2019: Tax Morale - What drives People and Businesses to Pay Tax). The importance of trust and voluntary compliance is especially important when countries intend to broaden their tax base. It is simply too expensive to rely on control measures, such as audits, to rise enough tax revenues with a broad tax base. There are many actions (i.e. ensuring fair treatment of taxpayers, acting in a transparent way, using power to strengthen trust, communication, cooperation) that tax administrations can take to increase trust in the tax administration and thus strengthening voluntary compliance among citizens and businesses. Taxpayers trust in the public institutions are of particular importance to increase voluntary compliance, and so is trust between taxpayers i.e., trust that other taxpayers are and will be compliant.

Around the world, administrations are currently grappling with the implications of digital transformation to improve tax collection and compliance. To that effect, the OECD has laid out a vision of Tax Administration 3.0 (TA 3.0) under which taxation becomes more of a seamless and frictionless process over time – in other words “tax just happens”. In essence, as more interconnections become possible between the different systems that taxpayers use to run their businesses, undertake transactions and communicate, the more it becomes possible to move taxation processes into these systems. This has the potential to build-in compliance in an increasing number of areas, to move taxation closer to taxable events and to significantly reduce the burdens that can arise from using different processes for taxation to those used in taxpayers’ daily lives and businesses (OECD 2020: Tax Administration 3.0: The Digital Transformation of Tax Administration).

In that context, will trust and voluntary compliance still be relevant in order to raise tax revenues? If tax just happens automatically, will trust in the tax administrations and thus willingness to voluntarily comply be needed? On a first glance, one might be inclined to answer no.

However, even if all the visions of a TA 3.0 do become a reality (which is far from certain), trust and voluntary compliance will still be an important part of a tax administrations’ strategy but for different reasons: tax administrations are a vital part of a state, and trust in the tax administration contributes to trust in the government and the “system” as a whole. By extension, trust in the tax administration is a representation of the trust in the upholding of the social contract. And according to social contract theory, where governments fail to secure or satisfy the best interests of society, citizens can withdraw their obligation to obey or change the leadership through elections or other means including, in extreme circumstances, violence.

Moreover, by moving compliance processes closer to taxpayers, administrations will essentially rely on more “intrusive measures” to enforce tax compliance. The scope of accountability of the state therefore increases: taxpayers will need greater trust that administrations will use their information ethically and capably to determine their tax liabilities and administer tax resources efficiently and effectively.

In conclusion, we argue that in a more digitalized world, tax administrations will need to continue to find different ways to support and maintain public trust, given they play a vital role in the upholding of the social contract and that the scope of their accountability increases with more intrusive measures to enforce compliance.

In January and February, country-teams in the ICBP programme will attend a series of workshops to unpack the different tax policy and administration problems that hinder domestic resource mobilisation in their own countries. The workshops will also allow for inputs and reflections on the key determinants of trust that significantly affect these problems.

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