fragmented, and the number of formally taxed activities so extensive, that taxpayers have little hope of understanding all details – and tax collectors have ample opportunities for extraction.<sup>112</sup> A different problem can arise at the level of revenue forecasting. In many – if not most – cases, revenue forecasting is highly imprecise and achieved based not on objective assessment of actual tax capacity, but based on simple extrapolation from earlier years, or an assessment of revenue needs. Whatever the case, where revenue targets are set in ways inconsistent with economic and administrative realities, this can expand incentives for tax collectors to engage in arbitrary extraction to meet targets.<sup>113</sup>

# **Equity**

Equity captures the extent to which the tax burden is felt to be fairly distributed across different taxpayers. There is now considerable evidence that taxpayers are less likely to comply – or to support higher taxes – when they feel that the distribution is unfair. Put differently, while taxpayers may be willing to pay their “fair share”, they are more likely to oppose taxation when they feel that others are not paying enough. For individuals this may represent a form of principled resistance to bearing an unfair burden. For businesses the stakes may be more tangible and explicit: inequity in tax enforcement across firms operating in the same sector can generate an uneven competitive playing field and generate pressure on more compliant firms to reduce their tax burdens to match those of their less compliant competitors.<sup>114</sup> The term “equity” captures two distinct dimensions: horizontal and vertical equity. Horizontal equity asks whether a taxpayer pays similar taxes to those in similar economic circumstances, or whether there are large differences in tax burdens among otherwise similar taxpayers owing to unequal tax policies, or unequal enforcement. Horizontal equity is similarly relevant to both individual and business taxpayers. Vertical equity asks whether the distribution of the tax burden is equitable across the wealth spectrum. This of course depends to an important degree on societal beliefs about what a “fair” vertical distribution of the tax burden looks like. In most countries there is a broad belief that individual tax burdens should be progressive -- that is, that the wealthy should pay more, as a share of income, than the less wealthy. The story for businesses is more complex. In most countries, corporate tax regimes apply a single tax rate to all firms, with a stated goal of ensuring competitive balance. However, effective tax burdens may vary owing to exemptions and incentives, while many countries apply special regimes for smaller firms, sometimes with the official goal of delivering somewhat lower burdens to those firms. Discussions of equity from the perspective of firms may thus focus on the relative balance of effective tax burdens across differently-sized firms.

The most conspicuous, and problematic, horizontal inequity in most countries appears to be the result of unequal enforcement of many taxes. Among those with enough income to be liable for individual income taxes, those whose primary income is from formal employment – and who thus

> 112 Paler, L., Prichard, W., Sanchez de la Sierra, R., & Samii, C. (2017). Survey on total tax burden in the DRC, Final Report. Kinshasa: Department for International Development.

> 113 Piracha, M., & Moore, M. (2015). Understanding low-level state capacity: Property tax collection in Pakistan. _ICTD Working Paper 33_ . Brighton: International Centre for Tax and Development.

> 114 Hassan, M., & Prichard, W. (2016). The political economy of tax reform in Bangladesh: Political settlements, informal institutions and the negotiation of reform. _Journal of Development Studies_ , 52 (12):1704-1721.

31