# REFORMING TAX SYSTEMS: TBE WORLD BANK RECORD IN THE 1990s

## **Summary**

This paper provides an assessment of the World Bank's record in helping its clients promote tax system reforms during the 1990s. World Bank advice and lending operations have been concentrated on both policy reform and reform of the administration of tax systems. This paper is primarily concerned with the latter. Its main conclusion is that substantial improvements can be expected in project design, execution, and, ultimately, effectiveness, if a more concerted approach to institutional analysis of the tax environment is adopted.

_Objectives and approach._ The use of institutional analysis in the design of operations in support to refonn of public institutions, of which tax and customs administration are important areas of concentration, is now an essential requirement in the World Bank. No formal methodology for institutional analysis has yet been developed in this area. However, institutional concerns have always been high in the preoccupation of task managers, who have striven to incorporate them even without formal methodological guidelines. This paper proposes a methodology for institutional analysis, based on ongoing work in the Bank and elsewhere, and then reviews tax and customs reforms operations during the 1990s to assess the extent to which they incorporate this methodology. As can be expected, since hindsight is 20/20, deficiencies are not hard to identify. The paper then proceeds to recommend steps to improve the institutional analysis methodology employed. It should be noted that the paper does not attempt, except in minor ways, to assess the effectiveness and sustainability of the operations reviewed, since many of them are still ongoing, or completion information is not available.

_Analysis in this review and major findings:_ Of about 120 lending operations in the 1990s with components seeking to strengthen some aspect of the tax system, 43 projects with an outlay of US$3.8 billion had major tax or customs administration reform components and 40 others had important components addressing other aspects of tax systems. Regional emphasis has gradually shifted from Latin America and the Carribean (LAC) and Africa (AFR) to East Europe and Central Asia (ECA) during the decade, and there has been a decline in the total outlay from US$5.1 billion during 1990-94 to US$3.6 billion during 1995-1998.

For the 43 operations with an administrative focus, major objectives cited most often were revenue enhancement (40%), strengthening administrative institutions (37%) and promoting macroeconomic stability and growth (28%). Improving accountability taxpayer education and services was a major objective in very few operations (7% and 5% respectively), while no project had a major focus on strengthening voice and participation.

The framework used in this paper to examnine pre-project diagnostic work of tax systems in these 43 operations assesses project documents according to how adequately they addressed key features of the operating environment (policy formulation, accountability, service delivery effectiveness and efficiency) according to their performance, capacity, institutional arrangements and exogenous constraints.