Enhancing Tax Capacity: How Smarter Administration Can Unlock Sustainable Revenues

The IMF working paper "Enhancing Tax Capacity: Revenue Gains from Strengthening Tax Administration", produced by researchers from the IMF Fiscal Affairs Department, the Harvard Kennedy School's Tax Policy and Administration Division, and the London School of Economics (LSE), delivers a compelling argument that the road to stronger public finances lies not in imposing higher taxes, but in collecting existing ones more efficiently. Drawing on a new dataset covering more than 100 countries from 2000 to 2023, the study demonstrates that well-designed administrative reforms, digitalization, risk-based audits, and institutional restructuring can significantly lift tax revenues and fiscal resilience.

The Missing Piece: Building Real Tax Capacity

The paper begins by emphasizing that tax capacity, the ability of governments to collect what is legally due, is the cornerstone of fiscal sustainability. Many low- and middle-income countries collect less than 15 percent of GDP in taxes, compared to 35–40 percent in advanced economies, despite similar tax laws. This gap, the authors argue, stems from weak enforcement, fragmented institutions, and outdated processes. The problem, as they put it, "is not the tax code, it's the tax office." Without stronger tax administration, public services remain underfunded, debt piles up, and governments remain dependent on external aid.

Reform Dividend: The Power of Administrative Efficiency

Using econometric models and case-based evidence, the authors find that major tax administration reforms yield average revenue gains of two to three percentage points of GDP in the medium term, effects that endure for up to five years. These reforms include establishing semi-autonomous revenue authorities, upgrading audit systems, and implementing data-driven risk assessment tools. In contrast, legal tweaks or tax rate hikes without administrative improvements deliver only modest, short-lived gains. In essence, how taxes are managed proves more decisive than what rates are applied.

A key finding in the report shows that countries that implemented broad institutional overhauls, rather than isolated measures, achieved the most durable increases in tax-to-GDP ratios. The evidence is clear: sustained revenue growth depends on professional, transparent, and technology-enabled administration.

Digital Tools: The Great Equalizer

One of the most striking conclusions is that digitalization has transformed tax collection. E-filing, e-invoicing, and automated data matching are game-changers, helping authorities track compliance and curb evasion. The paper highlights Latin American success stories, Mexico and Peru in particular, where digital VAT systems sharply reduced compliance gaps and increased transparency. In these cases, technology amplified both efficiency and public trust.

The authors caution, however, that technology alone is not enough. Digital systems must be backed by strong enforcement, taxpayer education, and reliable data-sharing networks. When done right, digital reforms can reduce compliance costs, expand the taxpayer base, and foster a culture of voluntary compliance. As the study notes, "digitalization is not just a technical reform, it's an institutional revolution."

Institutions and Incentives: Autonomy with Accountability

The study pays special attention to the role of semi-autonomous revenue authorities (SARAs), which tend to outperform traditional tax departments. These agencies benefit from operational independence, performance-based incentives, and professional management. Yet, autonomy without oversight can invite corruption or stagnation. The authors cite examples from Rwanda and Georgia, where strong leadership, internal audits, and data transparency helped maintain reform momentum.

The behavioral dimension of taxation also emerges as critical. When taxpayers view the system as fair and predictable, voluntary compliance increases. Simplified filing, consistent enforcement, and transparent communication nurture public trust. In effect, taxation becomes a social contract rather than a coercive act, a theme reinforced by survey data referenced in the report's later chapters.

Turning Capacity into Fiscal Power

Quantitatively, the paper estimates that closing half of the administrative efficiency gap could raise revenues by 1.5–2 percent of GDP in low-income countries and about 1 percent in emerging markets. Such gains could finance substantial investments in health, education, and infrastructure, without raising tax rates. In fiscal terms, improving administration is as powerful as creating new taxes, but far less politically costly.

Tax administration reform must form part of a broader fiscal modernization strategy encompassing legal updates, inter-agency coordination, and anti-corruption measures. Integrating tax and customs databases, for example, enhances detection of underreporting, while performance audits ensure integrity. The IMF's Tax Administration Diagnostic Assessment Tool (TADAT) is highlighted as a valuable framework for benchmarking these reforms.

The paper sends a clear message: stronger public finances come not from taxing more, but taxing better. By combining data, digitalization, and disciplined governance, nations can convert potential revenue into tangible development gains. As the authors eloquently conclude, "enhancing tax capacity turns fiscal potential into fiscal power."