achieved through better administration of the tax system." (World Bank, 1993: 1) There is little if anything that is extraneous in the loan, in the sense of having a larger purpose than just tax administration. It is difficult to estimate a standard economic rate of return for an improvement of tax administration since one would need to calculate welfare gains of more public goods and/or a lower fiscal deficit and contrast this with the losses caused by fewer private goods (if the improvement was revenue increasing). To complicate matters further, there would likely be improved horizontal equity (and perhaps vertical equity) in the tax system, increasing the welfare gains to the administrative reform. In essence you would need a general equilibrium model, requiring significant conceptual development and substantial reliable data. Even if the data was available such models are good tools for reforms which result in equivalent amounts of revenue, but they are not very suitable when the reform is not expected to be revenue neutral.<sup>34</sup> One could, of course, calculate the expected change in the average (and/or marginal) cost of tax collection. Presumably the reform should result in a lower collection cost.<sup>35</sup> In addition, the expected collection costs for various taxes can be compared with those in other countries. The one caveat to this argument is that if revenue enhancement is the driving force of the reform, little change or small increases in collection costs may not be important. However, the second part of the analysis - cross country comparisons - is still valid.

An alternative or back-up analysis would be the fiscal impact of the reform. Stabilization and adjustment in many countries have been threatened by large fiscal imbalances. If the reforn is expected to have a strong effect on the fiscal balance, this could be justification enough in a time of serious macroeconomic imbalances. First, it would be necessary to estimate the expected changes in revenues and costs. Second, if the data was available, it may have been possible to construct a small macroeconomic model, which could be used to estimate the effect of changes in the fiscal deficit on inflation and the balance of payments. Even if the second step was not possible, the simple conceptualization of the problem in such terms would have been useful.

In sum, it seems possible that fairly inexpensive quantitative analysis could have been undertaken in the appraisal of this project. (Of course, if it was decided to build a general equilibrium model, the costs would not be trivial.) It may well be that data limitations would have made even the relatively simple analysis that we have suggested impractical, although for Hungary and this particular project, this seems unlikely. (See Box 1 for a further discussion of the different stages of analysis of tax administration reform.) IIIb.ii **The Russian Federation Management and Financial Training** - Loan #38240 (1995) and **Russia Tax Administration -** Loan #38530 (1995) 34 It is also unlikely that a computable general equilibrium model would be suitable to use for a transition economy where large changes in economic structure are expected to occur.

35 In general changes in collection costs and welfare costs can be quite different. However, as in this project there is no reform of the various types of taxes, the two costs should be quite similar for the revenue neutral scenario.

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