Chapter 4 | Page 157 entry to the formal sector, thereby increasing the number of firms and individuals in the formal sector. The tax base can also be broadened by bringing presently untaxed activities, goods and services into the tax net and simplifying the tax structure.78 The direct tax base can be broadened by expanding the types of income covered and by reducing tax preferences.79 If governments pay more attention to widening the tax base and including the informal sector, there is a significant potential increase in revenue. While it is often difficult to tax small businesses, evidence shows that withholding taxes and advanced collection schemes help to improve compliance.80 A key challenge, therefore, is to enlarge the size of the taxable economy through appropriate reforms in the tax regime. 4.3.1.2 Legal and institutional arrangements for tax collection and enforcement Tax effort, which is the overall capacity of the State to raise revenue through taxation, is a key factor in the success of governments in raising tax revenue. For many developing countries, tax effort is an area that requires huge improvement. Enhancing a government’s fiscal capacity not only improves the overall effectiveness of the tax regime, but also changes the incentive for individuals to comply with tax requirements. Therefore, investments in fiscal capacity can have high returns for the State and are a key aspect of statebuilding, especially since taxation is a key defining feature of State power.81 The ability of the State to raise adequate revenue is thus instrumental in shaping the relationship between the State and society, and taxation policy strengthens the social contract and social institutions that are driven by the 78 The World Bank, above n 73, 17. 79 Ibid. 80 International Monetary Fund, above n 14. 81 Ibid., 8.