Improving tax-collection processes and cracking down on tax evasion are among the few ways
governments can raise more revenue without prompting a vocal outcry from at least some
parts of the electorate.
Fortunately, it is becoming easier for governments to pursue these objectives. The trend toward
cashless, digital transactions, coupled with the emergence of powerful data and analytics tools
(new algorithms, visualization technologies, and data-management approaches, for instance)
is helping tax authorities
significantly reduce revenue leakages. At the same time, increasing
automation of tax-collection tasks is helping governments reduce processing times, costs,
errors, and fraud.
These developments are clearly visible in global statistics.
Estimated tax evasion between 2005 and 2015 declined in 34 of 44 countries analyzed in a
study commissioned by the McKinsey Center for Government (MCG). Across all 44 countries,
there was an average decrease in estimated tax evasion of 0.1 percent of country GDP. During
that same ten-year period, more than 50 percent of the 32 countries for which we also have
cost data managed to reduce their overall expenditure on tax administration per capita by
about 20 percent, on average, according to the Organisation for Economic Co-operation and
Development (OECD) tax-administration database.
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As highlighted in MCG’s recent
global benchmarking study, Denmark, the Netherlands, and
the United Kingdom reduced their expenditure on tax administration by around 20 percent,
10 percent, and 30 percent, respectively, between 2005 and 2010. In the same period, the tax
gap in the United Kingdom—the difference between actual tax collected and the theoretical amount that should have been collected—dropped from 7.9 percent to 6.7 percent. Estimated
tax evasion in Denmark and the Netherlands decreased by 0.5 percent and 0.3 percent of their
GDPs, respectively. Common to all these jurisdictions was the increasing use of prefilled and
third-party information in tax forms.
Even the countries in our benchmarking study that increased their expenditure on tax
administration ended up with net gains: the increases were counterbalanced by significant
reductions in estimated tax evasion. For every additional dollar these countries spent, they saw
a gain, on average, of around $30 in tax revenues, or $45 billion in total (interactive).
Turkey provides a case in point. Overarching tax reform is still a work in progress for the
country; in the meantime, it has sought to improve the effectiveness of its tax collection.
Starting in 2004, Turkey reorganized its tax administration, simplified its tax code, introduced
digital technologies, and implemented mandatory e-filing. Citizens’ use of e-filing for income
taxes rose from 30 percent in 2004 to 99 percent in 2009; in that same period, use of e-filing for
corporate taxes increased from 72 percent to 99 percent, and use of e-filing for value-added
taxes rose from 70 percent to 99 percent, according to OECD data.
The opportunity in government productivity
Turkey’s tax-collection upgrades resulted in improved accountability, transparency, and
information cross-checking among agencies, among other benefits. The country experienced
a reduction in estimated tax evasion of 1.1 percent of GDP from 2005 to 2010—which
translated into approximately $13 billion in tax revenue that otherwise would have been lost.
Turkey achieved these gains with only a modest increase in funding: spending rose by just over
$230 million, or around $2 per citizen. In the end, each additional dollar spent on tax collection
yielded almost $60 of additional tax that would otherwise have remained unpaid.
In their quest to capture uncollected revenue, most countries could benefit from reforming
their tax systems. Such changes can be politically difficult to agree on and implement, of
course. The good news is that even within existing tax systems, there are still powerful levers
governments can pull—using digitization, automation, and advanced analytics to improve tax-collection
processes and work more efficiently.
For detailed findings from the McKinsey Center for Government’s productivity research, see
“ The opportunity in government productivity.”