Well-defined objectives should shape the targeting of reform in significant ways. Different objectives are likely to imply a focus on different segments, and different combinations of enforcement, facilitation and trust-building reforms. Over the past several decades, a focus on revenue mobilization and economic efficiency has frequently motivated a primary focus on enforcement reforms related to the VAT. A greater focus on equity and trust might, for example, imply more attention to income and property taxes. A concern with strengthening the fiscal contract at the sub-national level might lead to a focus on local-level taxes. Critically, varying objectives may not only shape the segments of the tax system to be targeted, but the specific approaches adopted within segments. Even among two countries interested in expanding taxation of businesses, specific focuses could vary substantially: a focus on revenue maximization may dictate an emphasis on maximizing collection from large and easily-identified firms, while a focus on equity might imply a focus on those who are outside the tax net – though whether the focus is on larger or smaller informal firms will, again, depend on the overall priorities of reform.

_Technical Appropriateness: What are the binding constraints on reform?_ Once goals have been defined, designing successful reform is likely to depend on identifying the _binding constraints_ to progress– technical, social and political –within particular taxpayer segments. Tax systems are likely to vary in the extent to which weak compliance is driven by (a) a lack of technical capacity for enforcement; (b) high costs of compliance; (c) low trust and tax morale; or (d) political barriers to reform. And, of course, this may vary across tax segments, tax types and over time. If the goal of reform is, for example, to increase vertical equity through improved income tax enforcement, there is a wide variety of possible strategies available: changes to tax laws, expanded or improved audits, improved data sharing, introduction of new IT systems, stronger and more enforceable penalties and so forth. The challenge lies in identifying the most feasible and impactful focus for reform. Strategies to reduce compliance costs may similarly vary quite dramatically across segments of taxpayers. For example, some countries have introduced “tax fairs” of various kinds to attempt to register small informal firms. These “fairs” assume that the largest barrier to formalization is a lack of knowledge and the difficulty of reaching tax offices. But, while this may be true for some firms, for others the primary concern may be that formalization would expose them to new forms of informal harassment by tax officials, or unmanageable reporting requirements. Meanwhile, while reform diagnostics tend to focus on identifying technical steps, in many cases the binding constraint may actually be the absence of adequate political commitment – or public sector leadership – to put widely-understood reforms into practice. Selecting the appropriate strategy demands an understanding of the binding constraint in a particular country context.

More specifically, a binding constraints analysis generally consists of four steps. These include 1) defining a clear problem statement; 2) developing a decision tree that lays out all the potential causes of suboptimal performance;<sup>157</sup> 3) systematically identifying which causes are, in fact, most important; and 4) among these, identifying likely _binding_ constraints. Because the potential barriers to reform are often diverse, and tax administrations are often characterized by a wide variety of overlapping weaknesses, a key challenge for reformers lies in pinpointing the most significant issues. Where there is a clear understanding of the binding constraint on reform this

> 157 Drawing on existing tax diagnostic tools, like TADAT or DIAMOND, may be very valuable at this stage.

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