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Going online to fight corruption

by Tillmann Elliesen
High tax rates do not guarantee high tax revenues. A World Bank report argues that other reforms are needed.

The Financial Times reports that Kenya has more than doubled its tax revenues since 2003. And that is not because it has put up taxes. Most of the increase comes from tackling tax-office corruption. One important measure the country has taken is limiting personal contact between taxpayers and tax officers to a bare minimum, thus cutting out encounters where officials might give taxpayers a tax break for a “fee”. According to Michael Waweru, head of the Kenyan Revenue Authority, that form of corruption has decreased significantly since tax payers were given the option of submitting tax declarations via the Internet and making payments online. “It was a small reform that gave a phenomenal result,” Waweru said.

In the World Bank’s eyes, Kenya has taken exactly the right action. According to the report “Paying Taxes 2008”, a joint publication of the World Bank and auditors PricewaterhouseCoopers, a transparent and unbureaucratic tax system with moderate tax rates is the best way to increase and consolidate tax revenue. In the Democratic Republic of Congo, for example, when all taxes are added together, a business has to hand over 230 % of its profit to the tax man. That is only in theory, however, as can be seen from the country’s low tax ratio, which is just 6.3 % of GNP (2004). In Kenya, by comparison, the tax burden for businesses is 51 % of profits. But the 2004 tax ratio, at 17.2 %, was more than twice as high as that in Congo. Countries with high tax burdens “can potentially increase tax revenue by lowering rates and persuading more businesses to comply with the new tax system,” the report says.

Apart from tax cuts and the introduction of online tax declarations, the World Bank and PricewaterhouseCoopers recommend that all taxes with the same base (e.g. income or profit) should be combined. In El Salvador, a business needs to make 66 tax payments a year; in Malawi the figure is 30, in Bangladesh 17 and in Chile 10. The report’s authors also believe it is important to simplify tax laws and make tax audit rules clearer for the taxpayer. Tax revenue in countries with standardised tax audits, they say, is 18 % higher on average than in other countries, even if they have lower tax rates. (ell)