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Convergence in tax services through online technology

Summary:
The advent of online technology in public services has made one ingredient of effective state building – easy taxes – possible to achieve in developing economies. This column describes how, fuelled by new technology, the time that it takes businesses to comply with tax requirements has fallen on average by 91 hours a year and the average number of payments was cut by 11 in the past 15 years. Accommodating policies for expanding the tax base are also needed, so everyone sees the upside from online tax services. Adam Smith memorably stated in 1755 that “[l]ittle else is required to carry the state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice, all the rest being brought about by the

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The advent of online technology in public services has made one ingredient of effective state building – easy taxes – possible to achieve in developing economies. This column describes how, fuelled by new technology, the time that it takes businesses to comply with tax requirements has fallen on average by 91 hours a year and the average number of payments was cut by 11 in the past 15 years. Accommodating policies for expanding the tax base are also needed, so everyone sees the upside from online tax services.

Adam Smith memorably stated in 1755 that “[l]ittle else is required to carry the state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice, all the rest being brought about by the natural course of things.” Thus begins a recent Vox column (Besley et al. 2021) that investigates the ingredients of an effective state. A related strand in the economic growth literature studies failed states (e.g. Acemoglu et al. 2016).

The advent of online technology in public services has made one ingredient of Adam Smith’s dictum – easy taxes – possible to achieve for advanced and developing economies alike. In the past 15 years, the time that it takes businesses to comply with tax requirements has fallen on average by 91 hours a year and the average number of payments was cut by 11, for a sample of 190 economies (Figure 1). These changes are primarily driven by the advent of online technology. In particular, the use of electronic tax filing and payment systems has risen sharply since 2004, when only 43 economies measured by the World Bank had an online tax system. By 2019, this number had more than doubled (to 106) as economies shifted from filing taxes manually and paying them in person to filing tax returns electronically. 

Figure 1 Time and number of tax payments over time 

Convergence in tax services through online technology

Note: Time is recorded in hours per year. The indicator measures the time to prepare, file and pay (or withhold) three major types of taxes: the corporate income tax, value added or sales tax, and labour taxes, including payroll taxes and social security contributions. The tax payments indicator reflects the total number of taxes paid, the method of payment, the frequency of payment, and the number of agencies involved for a standardized domestically owned company during its second year of operation. It includes payments made by the company on consumption taxes, such as sales tax or value added tax. 
Source: World Bank Doing Business database, www.doingbusiness.org, last accessed 20 June 2021. 

Using a 2008 cross-section of the same World Bank data set, Djankov et al. (2010) recorded large differences in the efficiency of paying taxes between advanced and low-income economies. In particular, Table 3 in Djankov et al. (2010) shows a t-test of difference in means between high-income and low-income countries of -6.9 in the number of payments and -2.5 in the time required to deal with taxes, respectively. By 2019, due to online technology, the difference in tax compliance time had diminished from a gap of 105 hours to 50 hours between the upper and lower 50% income groups. The gap in average tax payments per year dropped from 17 payments to 11 payments as countries with lower income per capita also started moving toward e-filing and e-payment (Figure 2). 

A statistical test (the t-statistic of difference in means between lower and upper 50% income countries) shows that the difference in time between advanced and developing economies declined so much from 2005 to 2019 that it is no longer significant. The difference is still statistically significant for the number of payments, but smaller in economic terms. Developing countries are, in other words, catching up in the efficiency of tax services.

Figure 2 Difference between high-income and low-income countries 

Convergence in tax services through online technology

Note: Time is recorded in hours per year. The indicator measures the time to prepare, file and pay (or withhold) three major types of taxes: the corporate income tax, value added or sales tax, and labour taxes, including payroll taxes and social security contributions. The tax payments indicator reflects the total number of taxes paid, the method of payment, the frequency of payment, and the number of agencies involved for a standardized domestically owned company during its second year of operation. It includes payments made by the company on consumption taxes, such as sales tax or value added tax. Economies are put into upper 50% and lower 50% groups based on countries’ 2005 GNI.
Source: World Bank Doing Business database, www.doingbusiness.org, last accessed 20 June 2021.
 

There are several ways in which technology eases the tax compliance process. For example, tax returns can be automatically prepopulated by the tax administration with existing public data. By now the majority of OECD economies — which have annual compliance time of 159 hours on average — provide such prepopulated returns. So do a number of developing economies such as Bhutan, Côte d’Ivoire, and Mauritius, which introduced online tax platforms in 2019. 

E-invoices are also gaining popularity in some developing economies, with increased implementation of mandatory e-invoices for value-added tax. For example, Rwanda implemented an e-invoice system to replace the physical electronic billing machines in 2020, just before the COVID-19 pandemic hit. Both Tajikistan and Azerbaijan in Central Asia introduced e-invoice tax technology in 2019.  There is an additional benefit: the use of big data made possible by e-invoice systems can bring about improvements in the detection of tax fraud. 

The path of convergence 

In reaction to the COVID-19 pandemic, companies and governments around the world have sped up the adoption of online technology. One consequence of this acceleration is the likely disabling of the traditional manufacturing-led ‘journey’ of economic development, such as the one China and various East Asian economies have undertaken. Instead, the adoption of online technology by companies may enable a services-led development journey of the type Estonia and India are taking (Baldwin and Forslid 2020). The adoption of such technology by governments, on the other hand, eases compliance with tax and other public services in developing economies, making them more competitive globally across all sectors. 

Which force of convergence is stronger remains to be seen, yet both forces work in Adam Smith’s direction of achieving an effective state. One caveat is in order, however. In much of the developing world informality in business activity is still the norm (Djankov et al. forthcoming) and these companies do not benefit from the adoption of technology advancements in the public administration. Accommodating policies for expanding the tax base are also needed, so everyone sees the upside from online tax services.

References 

Acemoğlu, D, L Fergusson, J Robinson, D Romero, and J Vargas (2016), “How not to build a state: Evidence from Colombia”, VoxEU.org, 06 October.

Baldwin, R and R Forslid (2020), “Covid 19, Globotics, and Development”, VoxEU.org, 16 July.

Besley, T, C Dann, and T Persson (2021), “State capacity and development clusters”, VoxEU.org, 18 June.

Djankov, S, T Ganser, C McLiesh, R Ramalho, and A Shleifer (2010), “The Effect of Corporate Taxes on Investment and Entrepreneurship”, American Economic Journal: Macroeconomics 2(3): 31-64. 

Djankov, S, E Glaeser, A Shleifer, and V Perotti (forthcoming), “Property Rights and Urban Form”, Journal of Law and Economics.

Endnotes

1 Source: https://www.doingbusiness.org/en/reforms/overview/topic/paying-taxes

2 Source: https://www.doingbusiness.org/en/reforms/overview/topic/paying-taxes

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