Property tax experiment in Punjab, Pakistan

Property tax experiment in Punjab, Pakistan

Pakistan faces important policy challenges in improving service delivery and growth and development. Low levels of tax revenue act as a serious constraint to economic growth, provision of services and, more generally, to building an effective state. Pakistan does poorly on revenue collection, even when compared to other developing countries. To address this problem, the Excise and Taxation (E&T) Department in Punjab, Pakistan implemented a series of human resource reforms beginning in 2009 designed to appropriately incentivise tax collection and improve overall departmental performance. The Property Tax Experiment in Punjab involves the design and evaluation of these performance pay packages to increase revenue mobilisation while retaining/raising customer satisfaction and accuracy of assessment.

The main results of the experiment are:

  • the incentive schemes produced substantial and unambiguous impacts on revenue collection. Treatment circles outperformed control circles by a margin of over 12 percentage points in total collections over the two-year treatment period
  • of the three schemes, the Revenue scheme performed best in terms of impact on collections. In both years, the Revenue scheme consistently had the largest effect and the largest return on investment (ROI). Furthermore, a third party survey suggests that the Excise and Taxation (E&T) Department did not suffer any detectable quality of service costs (either in terms of customer satisfaction or assessment accuracy) as a result of incentivizing inspectors

Policy Implications:

  • performance pay works in raising revenues. If revenue increase is an important outcome for the government, some form of monetary incentives has to be an important part of the performance management process for field level staff
  • simpler and objective performance pay schemes perform better. A key element of an effective performance pay scheme is simple and clear directions that explicitly link to performance on objective dimensions
  • performance pay schemes may need to be monitored to ensure customer satisfaction. A general concern with performance-pay schemes that only reward on collections is that they may lead to customer dissatisfaction and over-taxation. While current findings do not show strong evidence for these concerns, it is recommended that the level of customer satisfaction be monitored regularly
  • It may be more cost-effective to introduce performance-pay ‘periods’ Every Few Years. Preliminary evidence suggests that the benefits of performance pay may continue even after the performance-pay period is over; such a persistent effect means that it may be more cost effective for the government to introduce performance-pay schemes every few years. The precise length of time between successive performance-pay periods should depend on how long it takes the tax base to expand
  • performance Pay Schemes may have to be Designed Differently for Supervisory Tiers. Results of introducing the simplest Revenue scheme (which worked the best for field staff) for supervisory staff were not conclusive; hence further study would be required to design an effective supervisory scheme

 

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