Fiscal Adjustment in Developing Countries Through Tax Administration Reform

Many developing countries undertaking a fiscal adjustment have followed the International Monetary Fund's (IMF) recommendation to create a large taxpayer unit (LTU) to ensure stable or enhanced revenue flows, but the problem is that researchers have not conducted a systematic evaluation (other than a survey) of this recommendation's revenue raising effects. It is important to understand the effects of this reform measure because limited country resources should be allocated carefully to policy reforms that have a reasonable chance of success. In order to address the issue, this paper evaluates the effectiveness of this fiscal reform using economic data. A unique panel data set has been assembled to evaluate performance of LTUs based on each country's tax share (tax revenue divided by GDP) over a seven-year period. Employing a straightforward empirical methodology of comparing changes in the average annual tax share before and after implementation, a surprising 43 percent of countries experienced a decline in the tax share after implementing an LTU. The implication for policy makers is that successful reform not only includes adopting the correct policy, but also taking adequate steps to ensure that the policy is well-implemented.