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ore than two decades ago, Glenn P. Jenkins wrote an article on the importance of modernizing tax administration. He highlighted that a critical impediment to transforming the tax administration of numerous countries was that revenue authorities had traditionally been part of the general civil service.

This, he argued, created a vicious circle. The salaries are too low to recruit and retain qualified employees, and those who are hired work half-heartedly, with '€œinformal payments'€ institutionalized in order for the tax administrations to survive.

As a result, tax officials are perceived as incompetent and corrupt (especially when one compares them with other independent public sector institutions that have much greater opportunity to regulate their remuneration systems, such as central banks). Subsequently, the government assumes excessive loss from the tax collection deficit; meanwhile, businesses suffer substantial compliance costs from such informal payment schemes. The tax collection deficit then becomes a justification to keep the salary of the tax officials low.

The trend toward the creation of semi-autonomous revenue authority was visible in developing countries from the late 1980s (e.g. Ghana in 1985, Argentina in 1988, Peru in 1988) to 1990s (e.g. Malaysia in 1994, Mexico and South Africa in 1997). Rosario G. Manasan posits that the rationale behind this movement was that those countries were tired of inefficiency and perceived corruption in the revenue authorities and had realized that the inefficiency was caused by the present budgetary and personnel regulations that had reduced flexibility for the authority to decide how to spend its budget and how to structure itself.

The results of establishing the new revenue authorities were, however, mixed. Using tax-to-GDP ratio as the benchmark, Manasan recorded that some implementing countries managed to record considerable increases in their ratios, while in some others, the improvement was either modest, marginal or had no tangible impact.

Robert Talierco then studied this result and found that the reason the autonomy resulted in a worse performance was that the autonomous features had been undermined, if not eliminated. He also concluded that the main challenge to the autonomy of the revenue authorities was the government itself and that the support of the head of the government was critical in the creation and the success of a semi-autonomous revenue authority.

This year, Indonesia'€™s directorate general of taxation (DGT) is mandated to collect the equivalent of more than US$100 billion in tax revenues, or approximately 85 percent of total state revenues. Taking into account the shortfall in tax receipts in the last six consecutive years, certainly this task, if not impossible, is very challenging. Institutionally, a traditional government body like the DGT lacks autonomous features.

For instance, the DGT must go through an arduous process when extending its office network, deal with inflexibility when financing its operations and face difficulties when implementing the reward and punishment system. The DGT also does not have the authority to hire new staff. Accordingly, in 2012 for example, each DGT tax official was responsible for about 7,800 taxpayers, whereas at the Internal Revenue Board of Malaysia (IRBM, a semi-autonomous revenue body), each tax official was responsible for around 2,800 taxpayers.

The DGT clearly needs more flexibility. If it were transformed into a semi-autonomous body, would that solve the problem? Lessons learned from the other countries suggest that the answer is '€œit depends'€.

As William Crandall suggested, a revenue authority is not an end in itself and should be a means for implementing reform and improving performance. Furthermore, literature on the subject of revenue authorities suggests some precautions: first, before adopting any form of revenue body, the government should clearly identify the problems and deficiencies and consider strategies for reform and modernization based on international best practice.

Second, the revenue authority should not be considered a panacea. It takes political commitment to establish and sustain a professional and effective revenue authority. It also takes the revenue authority'€™s serious commitment to reform.
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The writer is pursuing his doctorate degree at the College of Business and Economics, the Australian National University, Canberra.