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Reward Pakistani tax collectors to boost their performance, says new IGC film

Salary incentives for tax collectors could significantly increase the amount of taxes raised in Pakistan, according to a new film released by the International Growth Centre (IGC), based at LSE.

The IGC’s latest film, Taxing Pakistan: How to motivate civil servants, shows the results of a ‘pay for performance’ scheme that was tested in Punjab, Pakistan. IGC-funded researchers found that incentivising tax collectors increased the amount of tax collected by 30-40 per cent. Public satisfaction in the work of tax collectors wasn’t affected, and the increased revenue more than paid for the reward scheme.

TaxationTax collection in Pakistan is very low, even compared to other developing countries. Pakistan’s tax revenue is just 9 per cent of its gross domestic product, compared to a 15 per cent average across developing countries, and 40 per cent across developed countries. This has led to a shortage of funding for public services including education, healthcare, and sanitation.

In Punjab, Pakistan, the Excise and Taxation Department depends on tax collectors who spend much of their time in the field directly determining what needs to be taxed.  Without incentives these tax collectors have suffered from low motivation and productivity. This has undermined the Government’s tax revenue. 

Adnan Khan, Research and Policy Director at the IGC, says: “When people don’t get enough services they don’t want to pay revenues to the state, and the state can’t provide those services because it doesn’t have enough revenue. That vicious cycle needs to be broken at some stage.”

The research was carried out by IGC-funded economists working with the Government of Pakistan, who tested three different pay for performance schemes and monitored the results for two years.

One of the researchers, Benjamin Olken, Professor of Economics at MIT, says: “Overall the pay for performance [scheme] worked. It substantially raised revenue, and surprisingly there were very little detectable downsides. We asked people their satisfaction in the tax department and it didn’t really change, even though revenue went up. That’s in some sense a win for the Government.”   

An academic working paper showing the results of this project is available on the IGC website

The video is available to view on the IGC website

Posted: Monday 19 January 2015