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**_Polky, Planning, and Research Working Paper Series_**

_nance can be used to determine which excise taxes are preferable, both for equity and administrative feasiblity. Applied to Cote d'Ivoire, the technique shows that the most effective excise taxes would be on electricity and telephone services._ There is a compelling fiscal rationale for encouraging greater reliance on taxing the consumption of electricity and telephone (ET) services.

ET taxes are easy to administer. Enforcement and collection of the tax is relatively inexpensive, since the tax can be added to commercial charges, and the services quickly turned off for nonpayment. It is not difficult to distinguish in most cases between business and personal use of these services. ET taxes avoid the problems of smuggling and evasion commonly associated with taxing the production or use of commodities that can be imported.

On equity grounds, in CMte d'Ivoire at least, ET taxes are clearly the most desirable excise taxes. Ranking alternative commodity taxes with high income elasticity, telephone services clearly dominate - and electricity consumption nearly dominates - the taxation of alcoholic beverages and public transportation.

These conclusions on the distributive impact of alternative indirect tax measures are reached through the application of the relatively new concept of marginal conditional welfare dominance. A commodity tax dominates others on social welfare grounds when a marginal shift in the balance of commodity taxation toward that particular commodity enhances social welfare.

Using household budget data, such dominance can be established statistically and shown graphically without resort to normative considerations. This approach suggests that ET services may be an underexploited tax base in many developing countries.

ET taxes may also meet the test of relatively high efficiency if they can be implemented through a two-part pricing schedule that charges a flat fee for access toservice and an additional escalatingfee for marginal use.

This paper is a product of the Public Economics Division, Country Economics Department. Please contact Ann Bhalla, room NIO-061, extension 60359.

# **76. The Shadow Price of a Tax Inspector**

# Shlomo Yitzhaki and Yitzhak Vakneen

_To make sure that tax collectors do not abuse their powers and that taxpayers obey the law, governments can analyze the tax administration's methods of selecting and inspecting tax returns._ The effects of tax evasion on tax rates and government revenues have focused fresh attention on the question of tax administration. Because of the difficulties of measuring the consequences of good or bad administration, policymakers cannot rely on a wide range of specific information on this subject.

An economist faced with widespread tax evasion is likely to recommend harsher penalties for violations of the tax law. The argument is that compliance and high penalties go hand in hand. But stiffer penalties only work when the administrators are honest; if they are not, the recommendation may backfire as high penalties increase the power of the tax inspector, and provide incentive for corruption.

Using this model, which shows the process of auditing tax returns as a decision tree, governments can verify that the additional power is not abused and that the administration is efficient. The main idea is to introduce economic considerations into the process of selecting and inspecting tax returns. By calculating the investmentin the inspector's time at each stage (the taxpayers is likely to appeal), and the increase in revenue that will result, it is possible to calculate the minimum amount of tax evasion that justifies continuing with the audit - the shadow price of a tax inspector.

The administration can recommend that auditors only pursue a file if the tax increaseishigh enough tojustifycontinuing the process. By equalizing the return per unit of time, the administration gives the same treatment to all taxpayers. If the guidelines are followed, the productivity of the inspectors will improve as well.

This paper is a product of the Public Economics Division, Country Economics Department. Please contact Ann Bhalla, room N10-061, extension 60359.

# **77. Incentive Policles and Agricultural Performance In SubSaharan Africa**

# Bela Balassa

_It has often been said that Sub-Saharan African countries do not respond to price incentives because of rigidities and inflexibilities in their economic structure. This is not the case, however, as this paper shows._ Exports in general, and agricultural exports in particular, are more responsive to price incentives in Sub-Saharan Africa than in developing countries as a whole. These are the results of an econometric investigation on the effects of real exchange rates on exports. It further appears that in Sub-Saharan Africa the impact of real exchange rates is greater on agricultural exports than on the exports of goods and services.

Within Sub-Saharan Africa, marketoriented countries generally gained, and interventionist countries lost, export market shares as the former, but not the latter, group of countries maintained realistic exchange rates and did not appreciably bias the system of incentives against exports. The differences in policies, and in export performance, are even greater if comparisons are made between private market economies and etatist countries in a three-fold classification scheme that puts some countries in an intermediate category.

These results are supported by the findings ofaWorld Bank study on agricultural exports in Eastern and Southern Africa. According to this study, industrial protection and overvalued exchange rates adversely affected the exports of the region. Another Bank study has found that in Sub-Saharan Africa agricultural growth rates were higher in countries whose currency depreciated, than in countries whose currency appreciated, in real terms.

Kenya and the Ivory Coast exemplify market-oriented, and Tanzania and Ghana interventionist, countries in SubSaharan Africa. Pairwise comparisons between Kenya and Tanzania and between the Ivory Coast and Ghanahave indicated the superiority of the marketoriented approach in promoting exports and agricultural production.

This paper is **a** productofthe Office of the Vice President, Development Eco-