Reforming Taxes and Customs

Abstract

This chapter describes how Georgia’s government ended the rule of the shadow economy with the help of tax and customs reforms. The key was simplicity. The number of general taxes was cut from 21 to 6, all of them low, flat, and simple, and despite this action tax collections increased tenfold in the period of nine years (2003–2011) in nominal terms and from 7 to 24 percent in terms of percent to GDP. The number of customs duties was reduced from 16 to 3. More than 90 percent of all imported goods were allowed into the country without any customs duty, making Georgia one of the most open economies in the region. The author also outlines some innovative approaches to tax administration such as outsourcing of tax audits to private sector, using lottery for improved tax compliance, etc. The chapter concludes with a discussion of the Estonian model of profit taxation.