The 2025 IMF Working Paper “Closing the Gap: How Tax Administration Performance Shapes Compliance” by Katherine Baer, Patricio Barra, and Juan Carlos Benítez, produced by the Fiscal Affairs Department of the International Monetary Fund in collaboration with the World Bank and the European Union’s Center for Social and Economic Research (CASE), delivers a landmark global analysis of how effective tax administration drives tax compliance. Drawing on international datasets such as the Tax Administration Diagnostic Assessment Tool (TADAT), the International Survey on Revenue Administration (ISORA), and the IMF’s Revenue Administration Gap Analysis Program (RA-GAP), the paper establishes that better governance, efficient operations, and institutional trust can substantially shrink tax evasion without changing tax rates.
The Evolving Economics of Tax Compliance
At the heart of the study lies an expanded version of the classic Allingham and Sandmo (A-S) model, which treats tax evasion as a rational choice shaped by the probability of detection and the severity of penalties. The IMF researchers update this framework by integrating a crucial behavioral factor, the social acceptability of taxation. Compliance, they argue, is not merely a matter of enforcement but also of public trust and the perceived fairness of institutions. When citizens believe that taxes are used responsibly and that rules apply equally, compliance rises naturally.
The model identifies three pillars that determine compliance behavior: detection probability, penalty severity, and tax morale. Both the first two are shaped not only by spending but also by the effectiveness of administrative systems, measured through TADAT scores that grade tax agencies from A (best) to D (worst). Tax morale, meanwhile, reflects citizens’ confidence in the rule of law and in the legitimacy of their government’s fiscal practices.
A Global Data Effort Across 111 Countries
The paper uses a unique panel covering 111 countries between 2010 and 2023, merging operational, diagnostic, and fiscal data into one framework. To assess compliance, the authors construct a harmonized measure of the VAT compliance gap using a “Reverse RA-GAP Method,” which blends C-efficiency ratios, tax policy gap estimates, and national accounts data. This innovative approach enables meaningful cross-country comparisons even in the absence of official compliance audits.
For econometric rigor, the study applies Hausman-Taylor and Mundlak-Krishnakrishnamurthy estimators, which correct for endogeneity and unobserved country effects. This allows the authors to isolate the true causal impact of tax administration performance on compliance outcomes, controlling for economic structure and institutional quality.
Key Findings: Stronger Institutions, Higher Revenues
The results are both robust and revealing. A 1 percent improvement in overall administrative performance, as measured by TADAT, leads to a 0.47–0.78 percent reduction in VAT noncompliance. Raising a country’s TADAT score from 1.85 (D+) to 2.32 (C+) could boost VAT revenues by roughly 0.6 percent of GDP. When indirect effects on Corporate Income Tax (CIT) compliance are added, the potential revenue gain reaches 1.3 percent of GDP.
Crucially, the study finds that simply increasing administrative budgets or hiring more staff does not significantly improve compliance once efficiency is accounted for. What matters most is how resources are used, not how much is spent. The analysis also reveals that improvements in the Rule of Law Index, used as a proxy for public trust, yield measurable fiscal benefits. Even a modest increase from -0.62 to -0.57 on this index can enhance revenues by 0.04 percent of GDP by fostering voluntary compliance.
Economic structure plays a vital role as well. Nations with large agricultural sectors, dominated by informal and small-scale operators, tend to exhibit higher VAT gaps due to the difficulty of monitoring transactions. Conversely, economies that rely heavily on international trade show smaller gaps, as import VAT collection creates natural verification channels through customs data. Interestingly, the number of VAT rates or structural complexity does not significantly influence compliance outcomes, suggesting that institutional capacity outweighs policy design in determining success.
From Data to Policy: Why Institutions Matter More
When the researchers tested their model using VAT revenue-to-GDP instead of compliance gaps, the findings remained almost identical, confirming the robustness of the results. The consistency across methods underscores a simple but powerful conclusion: strong institutions are the backbone of fiscal performance.
The authors emphasize that reforms must go beyond budgetary increases or technology upgrades. Lasting improvements require governance reforms that enhance accountability, transparency, and public engagement. Tax administrations that invest in risk-based audits, taxpayer education, and fair dispute resolution not only collect more but also cultivate trust, an asset that strengthens compliance in the long run.
The Road Ahead: Reform Takes Time, Trust, and Coordination
The study concludes that improving tax administration performance is a high-yield yet long-term investment. Data from 30 countries with multiple TADAT assessments show that moving from a D+ to a C+ rating typically takes about 5.8 years of sustained reform. The process demands coordination across government institutions and steady political commitment. The authors recommend a “whole-of-government” approach, where tax authorities work closely with justice systems, audit offices, and social ministries to reinforce the perception that taxes are collected fairly and spent wisely.
Ultimately, the paper argues that building effective, trustworthy tax institutions is not only a matter of better governance; it is a cornerstone of economic development. For developing countries, where every fraction of GDP in additional tax revenue can transform social and infrastructure spending, investing in administrative quality offers one of the most powerful and sustainable tools for closing compliance gaps.