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Performance Measures for Sustainable Tax Reform: Quantifying Short-Term Gains vs. Assessing Progress Toward Sustainability. Wilson Prichard International Center for Tax and Development. Outline. The General Argument Core Proposition The Practical Challenge Policy Implications
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Performance Measures for Sustainable Tax Reform: Quantifying Short-Term Gains vs. Assessing Progress Toward Sustainability Wilson Prichard International Center for Tax and Development
Outline • The General Argument • Core Proposition • The Practical Challenge • Policy Implications • Illustrating the Argument in Sierra Leone • The Property Tax Reform Program • Standard Indicators of Reform Progress • Short-Term Progress vs. Long Term Sustainability • Identifying Measures of Long-term Sustainability • Concluding Thoughts
Core Proposition • One important goal of performance measurement is to assess whether a reform program is succeeding, in order to take corrective measures or reassign resources toward “reform leaders” • Conceptually, performance measure can focus on two distinct elements of reform success: • Short-term progress of a reform program in improving performance (e.g. increased revenue, reduced leakages, greater compliance) • Progress in laying the foundation for long-term program success and sustainability (e.g. establishing appropriate processes, securing political leadership, overcoming looming risks to the program)
The Practical Challenge • These are frequently aligned: Short-term progress reflects the success in putting in place the necessary elements of long-term sustained success. • However, sometimes short-term gains can mask the failure to build the foundation for long-term success • For example, short-term revenue gains may be achieved by “squeezing” key taxpayers, or briefly suppressing networks of collusion or corruption, but without addressing the roots of existing problems • This disconnect often related to the central challenge of politics: Where there is no political commitment to reform sustainability is unlikely – but identifying political support, or its absence, can be very challenging.
Policy Implications • Focusing on short-term gains, rather than indicators of long-term sustainability, can provide a misleading picture of reform progress, resulting in: • Complacency and a failure to address potential risks to the program • Declining program performance over the medium term • Misallocation of reform resources
Illustration from a Local Government Property Tax Reform Program in Sierra Leone
Program background • City Councils reestablished in Sierra Leone in 2004, following the end of the civil war, after having being abolished in 1972 • The Councils had extremely limited capacity, with property registers often destroyed or decades out of date, leading to very limited tax collection
Program Overview • Property tax reform program was initiated in Makeni City Council in 2006-2007, while it then began to be implemented in Freetown, Kenema and Bo in 2008. • The program called for the identification of all local properties, automation of the property register and billing process and extensive outreach and enforcement efforts
Standard Performance Measures • As with most tax reform programs, standard performance measure for local government reform are generally quantifiable measures directly related to revenue collection: • Number of properties identified and valued • Implementation of the automated software • Distribution of Rate Demand Notices • Public outreach about the new tax • Total revenue collected
Short Term Gains • Against these measures Bo, Makeni and Kenema all initially exceeded expectations, while Freetown made rapid progress on revenue collection: • Virtually all properties were identified in Makeni, Bo and Kenema, while significant gains occurred in Freetown • Makeni Bo and Kenema introduced the new IT systems, and fully automated the property register and billing • All councils implemented basic outreach activities to inform citizens about the new tax • There were dramatic revenue gains in all three locations
Short Term Gains From 2007 to 2009 the largest increase in collection, in percentage terms, was in Freetown (420%), while gains were almost identical in Makeni (280%), Kenema (285%) and Bo (305%).
Long-Term Sustainability • However, short-term gains were a poor predictor of long-term progress, with outcomes diverging sharply 2009-2011. Freetown and Makeni stagnated, Kenema continued to make progress, while Bo accelerated rapidly.
Politically Difficult Reform Measures • All councils implemented discovery, assessment, a basic IT system and taxpayer education. • Why? These were “political easy”, brought in new revenue and were paid for by external actors • Divergence came in less easily monitored areas: IT system transparency, new forums for dialogue, and, above all, enforcement among elites. These were much better predictors of program sustainability. • Why? Taking the “politically difficult” steps directly challenged vested interests, and thus acted as a signal of political leadership and buy-in.
Concluding Thoughts • No set of performance measures perfectly signals future developments: political commitment to reform can shift over time, even when apparent early on. • However,focusing on “politically difficult” reform measures can offer insight into the strength of local commitment to reform. • This can act as a key indicator of future success, while aiding governments or donors in identifying risks early on and allocating reform support where it is most likely to be successful.
