Chapter 4 | Page 156
indicators are validated using a case study and a qualitative review of State
reports.
4.3.1 Structural challenges and policy options: Institutional capacity in
revenue management
Structural challenges for States in maximising revenue include: the size and
composition of the economy; legal and institutional arrangements for tax
collection and enforcement; and fiscal management capacity. Each is
discussed below.
4.3.1.1 Size and composition of the economy
The size of the informal sector plays a key role in determining the amount of
tax revenue the government can raise, especially in poor countries. Because
of entry barriers, only a few firms make it to the formal economy; the vast
majority remain in the informal sector. Those few who make it are easily taxed
by the government because they are visible and receive larger economic
rents.75 In these States, therefore, a relatively small number of medium to large
formal sector businesses are targeted by tax administrators, while a significant
number of informal sector businesses escape ‘tax coercion’.76 This has
significant revenue implications for the State.
While this situation allows for the State to raise a substantial amount of
revenue from fewer sources, expanding the revenue base by increasing the
number of firms in the formal sector can be more beneficial. Oxfam estimates
that, by addressing the informal economy, the 52 countries included in their
study could collect additional revenue of between US$50.5 and 101billion per
year.77 Maximisation of revenue would, thus, require lowering the barriers to
75
Emmanuelle Auriol and Michael Warlt, 'Taxation base in developing countries' (2005)
89(3) Journal of Public Economics 625-646, 18.
76
Mick Moore, 'How Does Taxation Affect the Quality of Governance?' (IDS Working Paper
No. 280, Institute of Development Studies, April 2007), 29.
77
Itriago, above n 18, 7.
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