First there are distortions in resource allocation arising as individuals or enterprises respond to the tax structure - the 'excess burden' of taxation. Second there the compliance costs taxpayers incur as they fill in forms, make visits to tax offices and so on . And third there are the administrative costs the government itself incurs in collecting revenue.
Tax collection can be bureaucratic and ineffective.
Variations in the effectiveness of tax administration are reflected both in the proportion of GDP countries raise in the form of tax revenue and also in the percentage of tax revenue going on the costs of tax administration. Some LDC's struggle to maintain even minimal tax collection levels, and this seriously impedes development efforts because it starves the public sector of the funds needed for investment in vital services such as health, education and infrastructure. Substantial effort internationally goes into the implementation of improved tax administration. But it is clear that there may be substantial benefits from the related but different goal of finding ways of engineering tax policy deliberately so as to make taxes easier and cheaper to collect . As many authors have pointed out, however, tax policy and tax administration are less easy to untangle in practice than they are in theory .