Tax Administration Strength and Tax Efficiency in Emerging Europe: Lessons for Romania

Abstract

Tax administration reform is a top priority to address large tax compliance gaps in emerging Europe. This paper uses an indicator based on objective criteria to assess the strength of Romania's tax administration relative to peer countries. In doing so, it illustrates various ways in which Romania could boost tax efficiency and thereby tax collection by improving key organizational and operational aspects of its tax administration.

KEYWORDS:

• Tax administration
• tax efficiency
• tax compliance
• emerging Europe
• Romania

JEL CLASSIFICATIONS:

• H26
• O17
• P52

Acknowledgements

We thank two anonymous referees for very helpful suggestions. We are grateful to Jaewoo Lee and seminar participants at the Romanian Ministry of Public Finance for many helpful comments and suggestions on an earlier draft of the paper (IMF, 2018). The views expressed herein are those of the authors and should not be attributed to the IMF, its executive board, or its management.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 The degree to which taxpayers comply with tax laws.

2 This is an improved and extended version of an earlier draft first published in IMF (2016).

3 The overall development of the economy is expected to show a positive correlation with revenue because of a higher degree of economic and institutional sophistication (Ghura, 1998; Sen Gupta, 2007).

4 A ranking of growth-friendly taxes has been proposed in Arnold, 2008 and Johansson, Heady, Arnold, Brys, & Vartia, 2008). See also IMF (2015b) for a review of the literature and an application to emerging Europe.

5 Widely used for evaluating VAT systems, the C-efficiency indicator compares VAT's actual collection with that using the standard rate on all consumption (Ebrill, Bodin, Keen, & Summers, 2001).

6 Several alternative drivers of tax compliance have been presented in the literature (IMF, 2015c) and most of them relate directly to the strength of tax administrations. The use of some basic instruments such as tax withholding and third-party information are generally associated with strong tax compliance. Similarly, taxpayer segmentation (by size and wealth) is increasingly recognized as key for tailoring enforcement actions and the provision of taxpayer services. Policy design is also important: tax compliance seems to deteriorate with higher tax rates, and the proliferation of tax exemptions.

7 Another aspect of the tax system is how much revenue can be raised per unit of resources spent on tax collection (‘cost of collection’).

8 The VAT policy gap is the difference between the potential VAT that could be collected if all final consumption were taxed at the current standard VAT rate and the VAT that is actually collected. The VAT compliance gap is the difference between actual VAT collections and those that could be obtained if the existing VAT laws were perfectly enforced.

9 In addition, Crivelli (2019) also shows a tight association between the strength of tax administration and an indicator of VAT compliance (instead of overall tax efficiency) among EU countries for which data are available. Comparable data on compliance for other taxes are not available to the best of our knowledge.

Additional information

Notes on contributors

Georgia Babici

Georgia Babici is an economist for the IMF office in Romania. Prior to joining the IMF, she worked for the Romanian Ministry of Public Finance, where she was involved in a wide range of fiscal policy issues. She is a graduate of the Romanian Academy of Economic Studies.

Ernesto Crivelli

Ernesto Crivelli is a senior economist in the European Department of the IMF. He received his Ph.D. in economics from the University of Bonn, Germany. He has published on tax policy, aid, and fiscal decentralization issues.

Marina Marinkov

Marina Marinkov is an economist in the European Department of the IMF. She holds a master's degree in economics from the University of the Free State, South Africa. Her research interests include fiscal and monetary policies, as well as open economy macroeconomics.