In 1989, the Brazilian tax collection authority introduced a bonus programme to reward tax officials for their performance in collecting overdue federal taxes. New research by Professors Charles Kahn, Emilson Silva and James Ziliak, published in the latest issue of the Economic Journal, indicates that this incentive reform was very successful, leading to an extraordinary 75% increase in fines collected per inspection. This could be a good way for governments elsewhere to increase their revenues, particularly in countries where tax evasion is widespread.
The study uses unique panel data from the Brazilian tax collection authority to examine the effectiveness of the incentive programme known as the Retribuição Adicional Variável (RAV). Since the bonuses amount to about 11% of the total taxes and fines collected, the average bonus paid is quite large. Bonuses frequently triple the basic salary of tax collectors. The total bonus paid to a tax official has two components: an individual reward and a group reward. Both types of reward increase with the amount of fines collected, so both the individual and the group have incentives to increase their productivity. Group rewards are paid with 30% of available monthly revenues, while individual rewards are paid with the remaining 70%. The group reward, calculated according to the efficiency of the agency relative to other agencies in the country, equally compensates all officials within a given tax agency. The individual reward compensates the official for his/her individual productivity and is based on individual monthly evaluation of performance executed by supervisors of tax agencies.
The researchers use two separate sets of data, covering auditing and collection activities for the years 1987-92: three years before and after the reform. One set contains data for each of the 10 tax regions in Brazil on fines collected and resources devoted to fine collection, including the number of inspections, the average number of auditors and high-level supervisors assigned, and employee hours. The other data set contains information from external examinations of fines collected and hours spent in collection activities for each of 25 different types of tax, such as income and excise taxes. This second set makes it possible to isolate the effects introduced by the RAV reform from tax compliance effects brought about by a concurrent income tax reform.
The findings are stark. From 1987-9, fine collections were relatively stable. But a significant break in fine-collection growth rates occurred after 1989. The estimates indicate that after the reform, fine collections per inspection were about 75% above what they would have been in the absence of the programme. The results also reveal substantial differences in the impact of the taxcollection reform across tax regions, ranging from an increase of 19% to an increase of 145%.
While the Brazilian bonus programme was very successful in boosting fine collections, it also has potential drawbacks. On the one hand, there is evidence that the programme has been watered down over time, with the link between reward and performance loosened, reducing the incentives for collectors to work as hard. On the other hand, it is possible that a too tight link between collections and compensation can make tax collectors overzealous, resorting to extortion in collecting overdue taxes.
”Performance-Based Wages in Tax Collection: The Brazilian Tax Collection Reform and Its Effects” by Charles Kahn, Emilson Silva and James Ziliak is published in the January 2001 issue of the Economic Journal. Kahn is at the University of Illinois at Urban- Champaign; Silva is at Tulane University; and Ziliak is at the University of Oregon.
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