Summary – Research is vital but works slowly through small incremental steps over the long term. Deep and constant collaboration between researchers and tax authorities essential for leveraging research and data to its full potential to inform, evaluate and monitor tax policy and better understand and address issues of the taxpayers.
Automation and large volumes of data have enabled data-driven decision-making amongst tax administrations and policymakers of the Commonwealth. In such an environment, academia highlighted the need for the presence of research at all stages of a digitised tax system. Research could play a critical role to shape evidence-based policymaking, enhancing compliance and improving the tax administration architecture.
“Research can open new ways of thinking about the problem.”
The presence of researchers on ground closer to the taxpayer could help diagnose underlying causes for the issues that taxpayers face. This in turn enables better design of policy interventions and better inform innovations/process improvements of tax authorities to address emerging challenges.
Research and academia can use various tools such as randomised controlled trials which are able to study and generate evidence-backed trends, analyse policy interventions that have worked or study why they faced challenges. Thus, research plays a critical role in monitoring and evaluation of a policy measure. It establishes a feedback loop and brings accountability into the system enabling policymakers to take evidence-backed informed decisions, allows for course correction in real time. Electronics Billing Machines (EBM) and its implementation in Dar-es-salaam were cited as a successful example where research aided policy for bringing about change.
Policy decisions and initiatives based on economic principles such as the Laffer’s curve analysis were a reasonable basis to drive changes in tax policy. Lower tax rates reduce revenues in the short run but drives compliance. Over the longer-term higher compliance means more tax revenues for the tax authority.
While tax administrations are open to leveraging research in principle, there remain concerns of data safety while sharing data with external parties citing the risk of taxpayer data being leaked, systems being compromised.
The dialogue discussed the importance of political will and backing of the government for successful implementation of initiatives by tax authorities. Research could generate the evidence to back the policy initiative to help drive political support and approvals was discussed.
The dialogue also raised the question on whether the expertise that lies in the private sector that could be harnessed for in-house solutions built by tax administrations.
Two successful examples were cited during the discussion. In the UK, HMRC set up data labs where researchers are invited into HMRC offices to work on their systems and data within HMRC premises, thereby achieving the twin goals of data protection and bringing in the research expertise to inform tax policy, compliance including enforcement operations.
The Indian tax authority shared their experience of introducing the new tax regime which enjoyed strong political and government backing. The new simplified tax regime offered lower tax rates but also few or no exemptions. Taxpayers were given a choice to file taxes under either of the two old and new tax regimes. Over the last four years, since the new tax regime was introduced a larger number of taxpayers (over 74% of taxpayer base) have migrated to the new regime. Reduced tax rates increased compliance and had a positive impact on overall direct tax revenues. Careful study of a balance between reduction of tax rates and economic growth aided by a tax buoyancy of >1 helped this initiative.
There was consensus that research works through incremental and cumulative changes over time and is a slow process, also researchers are an essential stakeholder for tax growth and policy. Therefore, there is scope and merit for deeper collaboration between tax administrations and researchers/ academia.
Recommendations: The role of research
Partnerships can be forged between research entities and tax authorities in a safe environment that assures data protection. Academics who specifically work on public finance and taxation could be engaged for such partnerships to work with data analytics units within tax administrations for collective capability development.
- Setting up a learning and research platform or hub for Commonwealth countries, with support from organisations such as CATA/ FCDO was discussed as enabling mechanism for collaboration, connecting interested partners.
- The UK has experience of data labs and could share their experience with peers through a knowledge-share workshop.