Collecting Taxes During an Economic Crisis: Challenges and Policy Options

Abstract

The global financial and economic crisis presents major challenges for tax administration. With the economic downturn, tax agencies are encountering growing compliance risks and greater demands for taxpayer support in the face of prospective budget cuts. This paper examines these challenges and sets out a strategy and measures for responding to them. Theoretical and empirical studies suggest that an economic downturn tends to worsen taxpayer compliance in important aspects. While a drop in compliance may have some countercyclical effects on the economy, tolerating noncompliance is not an appropriate response to the crisis because it is distortionary, inequitable, and, perhaps most importantly, hampers the rebuilding of tax bases over the medium-term. In responding to the crisis, the paper encourages tax agencies to develop a tax compliance strategy that is structured around two objectives: containing the growth in noncompliance and helping taxpayers to cope with the crisis. To achieve these objectives, four sets of measures are identified: (1) expanding assistance to taxpayers, (2) refocusing enforcement on the highest revenue risks, (3) introducing legislative reforms that facilitate administration, and (4) improving communication and outreach programs. Some measures—such as tax amnesties and moratoria on audits—are counterproductive and should be avoided. In implementing the proposed strategy, countries should keep in mind a number of key points. First, early warning of emerging compliance risks is crucial for their mitigation. Second, a high-level group needs to be established within the tax agency to coordinate the development of the crisis strategy. Third, government support for tax administration is more important than ever during a crisis. Finally, tax agencies should align their near-term compliance strategies and medium-term modernizations plans.