ocde-performance measurement in tax adm practice.pdf

GAP005Issued: 4 May, 2001

Ptd: 24 September, 20011

Centre for Tax Policy and Administration

Tax guidance series

General Administrative Principles – GAP005 Performance Measurement in TaxAdministrations

Performance Measurement in Tax Administrations –Practice Note

Prepared by the OECD Committee of Fiscal Affairs Forum on Strategic Management

CaveatEach Revenue authority faces a varied environment within which they administer their taxation system. Jurisdictionsdiffer in respect of their policy and legislative environment and their administrative practices and culture. As such, astandard approach to tax administration may be neither practical nor desirable in a particular instance.

The documents forming the OECD Tax guidance series need to be interpreted with this in mind. Care should alwaysbe taken when considering a Country’s practices to fully appreciate the complex factors that have shaped a particularapproach.



Performance Measurement in Tax Administrations – Practice Note

Contents

Executive Summary .......................................................................................................................3

Introduction (Chapter 1)..............................................................................................................3

International comparisons (Chapter 2) ........................................................................................3

The Swedish Case (Chapter 3) ....................................................................................................5

Conclusions (Chapter 4)..............................................................................................................7

1. Introduction ..............................................................................................................................10

1.1 Public Management Reform................................................................................................10

1.2 Performance Measurement..................................................................................................11

1.3 A Note on Terminology ......................................................................................................13

1.4 General Outline of Chapters 2 and 3 ...................................................................................14

2. Performance Measurement in Tax Administrations in OECD Countries ..........................15

2.1 Introduction.........................................................................................................................15

2.2 The Management Context ...................................................................................................15

2.3 Measures of Input, Output, Outcomes and Productivity .....................................................23

2.4 Measures of Quality and Taxpayer Attitudes......................................................................27

2.5 Outcomes, Impacts and the Tax Gap...................................................................................29

3. Performance Measurement in the Swedish Tax Administration .........................................32

3.1 Introduction.........................................................................................................................32

3.2 Institutional Context............................................................................................................32

3.3 A Performance Measurement Model (PMM)......................................................................36

3.4 Performance Indicators .......................................................................................................40

4. Conclusions ...............................................................................................................................50

4.1 Introduction.........................................................................................................................50

4.2 General trends among tax administrations ..........................................................................50

4.3 The Swedish Experience .....................................................................................................52

Guidance .......................................................................................................................................57

References ......................................................................................................................................58

Appendix: Questionnaire to Tax Administrations in OECD Countries..........................................59

History............................................................................................................................................62

Compatibility..................................................................................................................................62

Contact ...........................................................................................................................................62



Performance Measurement in Tax Administrations – Practice Note

EXECUTIVE SUMMARY

Introduction (Chapter 1)

1. Faced with growing budget deficits and increasing demands on public services, governments have sought newways of making the public sector more effective and responsive to client needs. A common response has been publicmanagement reform. Tax Administrations have been affected by these reforms in much the same way as othergovernment agencies. Management has become more decentralised and more emphasis has been put on efficiency,effectiveness and quality of service. The quid pro quo for greater managerial autonomy is accountability and hencethere is a need to develop more effective systems for performance measurement.

2. Performance measurement, however does not only serve the need to hold managers accountable, it is also atool for managers to control and develop operations, motivate staff and to make more informed budget decisions.

3. The terminology used in this report conforms with the standard usage in OECD reports on performancemeasurement. It is based on the so-called input-activity-output-outcome model, from which the basic performancecriteria of productivity (efficiency), (service) quality and effectiveness are derived. The specific meaning of theseterms, however, must be defined in relation to the relevant programme logic, in this case, the ends and means oftaxation.

4. The main body of this report consists of two parts. The first part (chapter 2) attempts to give a broad view ofperformance measurement in tax administrations in OECD countries. Some issues raised in this part will bediscussed in greater detail in the second part (chapter 3), which is a case study of performance measurement in theSwedish Tax Administration. The report is concluded in chapter 4, where the Swedish experience is discussed inrelation to some basic requirements on performance measurement.

International comparisons (Chapter 2)

5. The comparative part of this study is based on a questionnaire answered by the tax administrations in 15OECD countries in the autumn of 1998. The purpose is not to gauge the level of development or to explain thereason for different approaches, but merely to identify some general trends and common varieties of performancemanagement and measurement.

Management system

6. It is obvious that the development of performance measurement owes a great deal to structural factors, servicetraditions and the relative urgency of managerial reform, all of which are unique to each country. In some countries,for example, the tax administration (or its head office) is part of the ministry of finance, in other countries it forms aseparate, more or less, autonomous administration.

7. A common trend in public management reform is to grant managers greater autonomy, while introducing newmechanisms for accountability. In many countries this has inspired the introduction of contract management based onperformance agreements that set out targets (in terms of revenue, number of audits, service standards etc.) and theresources allocated to achieve them. In other countries the procedure is better described as a budget dialogue, whichtakes place before the government issues a unilateral budget document. Such budget documents commonly definegeneral objectives and priorities, and may also specify targets.

8. No matter if the budget process is based on contract negotiations or not, reports on past performance play animportant role in informing the involved parties. In performance management, especially when a contractual



approach is practised, it is also common to establish a system of rewards and sanctions that depend on the attainmentof agreed or decreed performance standards. Several countries have introduced performance related pay, whichapplies to all staff or to managers only. At the organisational level, some countries have tried or consideredperformance budgeting, where budget allocations, to some extent, would be influenced by results. It seems, however,that no country actually practices a system with a formal link between performance and the size of appropriations.Although budget decisions may well be influenced by performance, most countries prefer to make such decisionsdiscretionary rather than rule-bound.

9. Performance management requires a well functioning reporting system to ministers and top management. Atthe managerial level most tax administrations produce monthly or quarterly performance reports, which are discussedat top management meetings. Reports on performance to the ministerial level typically take the form of interimreports (submitted every quarter or after six months) and annual reports.

10. A precondition for timely reports on performance is an efficient information system. The ultimate source ofmost data is the tax administration’s main business systems, but these systems are not generally designed to providetimely and easily accessible data on performance. Most, but not all, tax administrations, therefore, have introduced orare developing special management information systems. A common trait of such systems is that they provide agateway to statistical information from many different sources and make it easy to combine these data into keyperformance indicators.

11. In our study, using the input-activity-output-outcome sequence, we have classified performance measures intothree groups. First measures that relate output to input, second, measures of quality and taxpayer satisfaction and,third, measures of outcome with respect to revenue and compliance.

Input, output and productivity

12. The main input measures are cost and labour (expressed in work hours). At corporate level most taxadministrations account for all costs (salaries, accommodation, investments etc.), but they do not always apportionoverhead costs to lower levels in the organisation (regions, offices etc.). What is regarded as an overhead cost variesfrom country to country, which often depends on the degree to which budget authority has been devolved to lowermanagerial levels. In most countries, therefore, it is only possible to calculate the full unit cost at corporate level. Onthe other hand, overhead costs are of little relevance, when comparing the unit costs of different offices.

13. Many tax administrations have introduced time reporting systems. In some countries such reports cover allactivities, in other only specific areas, e.g. audits. The purpose is to attribute input (measured as work hours or directlabour cost) to different activities, functions, processes, programmes or outputs. This information can also be used toapportion overhead cost to the appropriate offices or functions.

14. Typical output measures are related to the workload (number of taxpayers or tax returns) or to tax control(number of audits or verifications). Some countries include taxpayer contacts in the form of telephone enquiries andvisits to tax offices in their output measures. Most countries also seem to regard revenue, at least additional revenuerecovered by audits, as output although it can also be regarded as outcome.

15. The distinction between output and outcome will influence the definition of productivity. Most taxadministrations in this study report regularly on productivity development. Productivity is the ratio between outputand input. Output is normally expressed in physical terms, while input can be expressed either as costs or as workhours. There is a variety of productivity measures depending on different definitions of output. Alternatively,productivity can be expressed as unit costs. A common measure is cost per taxpayer. When revenue is included inoutput, productivity is typically expressed as administration costs in per cent of total revenue.

Quality and Taxpayer Satisfaction

16. The issue of quality - especially quality of service or client satisfaction - has become more important in recentyears. Some aspects of quality can be measured like timeliness in terms average processing time for applications.Another aspect is quality with respect to legality and professional standards, which can be assessed by inspections orreview of selected files.



17. A third aspect is client satisfaction, which can be studied by taxpayer surveys. Most tax administrations carryout such surveys and some do so regularly. There are many other ways to get feed back from clients, for examplefocus groups, exit surveys, letterboxes for suggestions and complaints etc. Some countries measure quality againstpublished standards (taxpayers’ charter)1.

Outcomes, impacts and the tax gap

18. Whether classified as output or outcome, all tax administrations measure and report collected revenue. Sometax administrations work to achieve revenue targets, which makes the attainment of these targets an important aspectof performance. Much attention is also focused on the direct revenue effects of tax control, and in several countriesaudit programmes are expected to achieve certain targets in terms of additional tax revenue. It is also commonpractice to relate additional revenue to direct costs to get a measure of audit efficiency. The main function of taxcontrol, however, is to prevent and deter tax evasion. In some countries attempts have been made to measure thedeterrent effect of tax control.

19. The overall effectiveness of the tax system can be expressed as the ratio between actual tax revenue and thetheoretically correct yield. The difference between the two is commonly referred to as the tax gap. Many attemptshave been made to measure the total tax gap or with reference to particular taxes. Such studies are largely based onestimates of the black economy and they are not very reliable. Several tax administrations have been involved instudies of the black economy. Generally, such studies have not been found to provide much practical guidance and itseems that no tax administration in the survey carries out such studies regularly.

The Swedish Case (Chapter 3)

20. In chapter 3 the main issues raised in the previous chapter are revisited and discussed in greater detail drawingon the experience of the Swedish Tax Administration.

Institutional context and management system

21. A unique trait of state government in Sweden is that ministries are small and most executive functions havebeen delegated to central agencies that have long enjoyed a considerable degree of autonomy.

22. This traditional autonomy has been further strengthened by recent budget reforms and the introduction ofmanagement by results. Today most agencies are funded by a single lump sum appropriation covering all kinds ofexpenditure. Agencies are allowed to carry over surpluses to the next budget year and, within strict limits, takeadvances on future appropriations. Capital investments are financed by loans at the National Debt Office.

23. A parallel development to this devolution of financial authority is the introduction of more stringentaccountability mechanisms. To hold agency heads accountable for performance, stricter reporting requirements havebeen introduced. Presently every agency has to submit an interim report after six months and an annual report withintwo months after the end of the financial year. The National Audit Office audits these reports, which contain bothfinancial statements and performance data. Today the annual report has replaced the budget request as the maindocument in the budget process.

24. These developments have also affected the Swedish Tax Administration, which is made up by the NationalTax Board (NTB) and ten Regional Tax Authorities. The NTB is also the parent agency for ten the RegionalEnforcement Authorities, responsible for collecting bad debts owed either to government or to private creditors. Inall, the NTB and its 20 Regional Authorities has about 13,000 employees.

25. The Swedish Tax Administration has moved from a traditional bureaucracy to modern managerialism in threegreat leaps. The first leap was triggered by the introduction of programme budgeting in the 1970s. Although thisreform was aborted after a few years, it created the foundation for the next budget reform and management by

1 See GAP002 Taxpayer Rights and Obligations page 7 for an example Taxpayer Charter incorporating service standards.



objectives in the 1980s. In the late 1990s there has been a shift of emphasis to results oriented management and totalquality management (TQM) has been introduced. In the wake of recent organisational changes and to fit this newmanagement philosophy, the entire management system has been overhauled.

Performance measurement

26. Since the late 1980s the management system has rested on three pillars; a system for budget allocations; asystem of co-ordinated planning based on annual guidelines; and performance measurement. Despite the need tobalance devolution of authority with improved performance reporting, the performance measurement system hasdeveloped more slowly than budgeting and planning. For a long time, the Annual Report was narrowly focused on afew performance indicators and it was not clear to what extent they reflected total performance. In 1994 thegovernment therefore requested the National Tax Board to design a more comprehensive performance measurementmodel (PMM) to become the basis for a more informed budget dialogue.

27. The PMM was built around the so-called input-activity-output-outcome sequence mentioned above. Withreference to these concepts three basic performance criteria were defined: productivity, quality and effectiveness.Effectiveness was defined as the tax administration’s impact on the tax gap. The tax gap was then divided intocollection losses (taxes billed but not collected) and assessment error (theoretical tax minus the total tax bill), whichincreased the number of basic performance criteria to four.

28. To make these performance criteria measurable, they were broken down into sub-criteria, to whichperformance measures are attached. Most of these measures are in fact indicators, which means that there is anassumed causal relationship between the indicator variable and the corresponding performance criterion, but therewill always remain a certain incongruity between the two. Favourable figures on several performance indicators aretherefore not equal to good performance, but a good sign.

Performance criteria and indicators

29. The first performance criterion is productivity. There are indicators of total productivity (based on cost) andlabour productivity (based on work hours). Output is defined as a weighed total of tax returns, field audits andcorrections due to desk audits.

30. As for quality a distinction has been made between quality according to legal and professional standards andquality according to taxpayer perceptions. The former is assessed by frequency of certain errors, timeliness, standardof quality assurance systems etc. The latter is measured using taxpayer surveys.

31. Revenue, which can be regarded as an outcome, is of course measured and reported, but it is not included inthe model as a criterion of performance. The reason is that variation in tax revenue is much more influenced bychanges in tax legislation and macroeconomic development than by improved or worsened performance of the taxadministration.

32. The size of the tax gap, on the other hand, is regarded as more closely related to the tax administration'sperformance, but, alas, difficult to measure. The part made up by collection losses is measurable, however, and canbe related to total revenue. Nonetheless, there is no simple way to separate the impact on collection losses of actionstaken by the Tax Administration from other influences. Instead reliance must be put on indicators that measureactivities and outputs that can be assumed to have an impact on the payment of taxes.

33. The same logic is applied to the criterion impact on the assessment error. There are indicators that reflectsome aspects of compliance and indicators that measure activities and outputs that are likely to deter tax evasion.

Implementation and practical application

34. These four performance criteria are the pillars on which the performance measurement model (PMM) wasbuilt. It was originally designed to form the basis for the performance assessment in the annual report, which issubmitted to the government. It was, however, also the intention that the PMM should serve internal management



needs by providing the criteria and indicators for assessing the results achieved by the county (now regional) taxauthorities. To make this practicable an information system (RESUMÉ) was developed. Most data are supplied tothis system from the main business systems and the accounting system via other databases.

35. From an internal management point of view the PMM has some limitations, since it focuses on outcomes(rather than outputs), on the external perspective (rather than the internal) and on annual performance evaluation(rather than short term performance monitoring). Many managers also felt that the system was cumbersome becauseof the large number of indicators (although there was a system of aggregation in place that provided summarymeasures on different aspects of performance)

36. It was therefore decided that the PMM should be supplemented by a balanced scorecard that contained fewerindicators and covered some internal aspects that the PMM did not (budgets, development of human resources andIT). The scorecard, however, shared most of its indicators with the PMM and it did therefore not compensate for themain shortcomings of the PMM. Instead short term performance reviews continued to focus around a narrow rangeof traditional measures, such as the number of audits and alternations of tax returns.

37. The PMM, therefore, did not, as intended, become the universal instrument for performance management.Instead it continued to structure the performance dialogue between the National Tax Board and the Ministry ofFinance. At the conceptual level it also had great influence on the development of compliance strategy.

Conclusions (Chapter 4)

International trends in performance measurement

38. Although the managerial context varies between countries there is a strong tendency among taxadministrations to follow the general trends of the New Public Management. Among other things this means a strongemphasis on performance measurement. Most countries have developed new management information systems(MIS) and apply a wide range of performance indicators to monitor activities and report results to higher levels. Inmany, performance is measured against ex ante targets.

39. There is also a trend towards full cost accrual accounting, which forms the basis for efficiency measures,where various caseload measures count as outputs. Sometimes the revenue yield of audits is also regarded as anoutput when productivity is measured.

Reliability and Validity

40. The objective of performance measurement is to support better decision-making, which in the end is expectedto lead to improved overall performance. To do this, the measurement system must be functional and satisfyconcerns about reliability, validity, legitimacy and continuity.

41. A measurement system that does not produce reliable data will not pass any other test. To ensure data qualityat the point of entry, the grounds for classifications must be clear and staff must receive feedback to understand thepurpose of measurement. Since many systems must interact in the production of performance data, sufficientresources must be allocated to monitor the information systems and ensure data quality.

42. Validity of performance measures depends on how closely they reflect the basic performance criteria. Thegreat reliance on indirect measures (or indicators) weakens the validity of the system. However, generally speaking,weak measures (indicators) that measure important things are to be preferred to strong measures that measureunimportant things.

Functionality and dysfunctionality

43. It is much too early to evaluate the contribution of the measurement system to total performance. First it mustbe said that the availability of data concerning personnel, costs, activities, outputs and taxpayer perceptions has been



greatly improved over the last decade. The sheer amount of data has multiplied and it has become available atthousands of workstations at all levels of the organisation. Despite this progress, the development of themeasurement system has not managed to pace with the growing demand for performance data.

44. In a management context the measurement system must be assessed with regard to its ability supplyinformation for decisions concerning accountability, resource allocation, management control and processdevelopment. With regard to accountability it must first be stressed that contract management is not practised in theSwedish Tax Administration. Neither the Director General nor Regional Tax Managers are at present underobligation to meet specific targets. Instead performance is assessed with respect to previous results or in relation tothe results of other authorities. Given the great degree of transparency in Swedish Government this does put a greatdeal of pressure on managers to perform well.

45. Furthermore, there are no specific rewards or sanctions linked to performance, neither on organisational noron individual level. Individual pay is nonetheless related because there are no fixed pay schedules and the salary ofeach individual is negotiated in the same way as in the private sector. In the last rounds of pay negotiations there hasbeen no guaranteed salary increase, which means that there has been plenty of room to reward good performance bylarger salary increases. On the organisational level there is no link between budget allocations and results.Appropriations are allocated between the regional authorities according to relative workload.

46. The measurement system can also make an important contribution to the development of business processesand work practices since it opens up great opportunities for bench marking between regions and offices. However, atpresent, local bench marking initiatives are not very common. Experience shows that such initiatives must be co-ordinated at national or regional level.

47. The most immediate need for local managers is, however, timely information to monitor budget expendituresand the implementation of plans during the current year. The performance measurement model, however, was notdesigned to meet this need. The balanced scorecard is intended to compensate for this deficiency at top managementlevel, but local managers are at present left to their own devices to select the proper indicators among the multitudeof data provided by the information systems.

48. Many fears have been expressed about perverse behaviour inspired by performance measurement. Because ofthe incongruity between indicators and performance criteria there are ways to improve the statistics without actuallyimproving results. Sometimes such work practices may even be directly counterproductive. There is an abundance ofanecdotes on such cases, but there is little evidence that the practice of working against better judgement to gaingood statistics is widespread. The danger is rather that the entire organisation gets its focus wrong, for examplemaximising the number of audits without ensuring that the selection of audit targets is optimal with regard to risk anddeterrence

Legitimacy and continuity

49. The practice of performance measurement enjoys a high degree of legitimacy in the Swedish taxadministration. There is general recognition of the fact that large organisations cannot be managed effectivelywithout access to quantitative information about activities, outputs and outcomes. Nevertheless, there is somescepticism as to the ability of the measurement system to deliver on its promises, which is to provide validinformation about the organisations true performance.

50. As for continuity, the basic performance indicators have remained reasonably stable since the introduction ofthe PMM. The recent overhaul of the management system has, however, introduced a number of new managementtools, all of which do not share the same basic assumptions and terminology. It has therefore has taken some timeintegrate these new approaches into a consistent conceptual framework, which is a prerequisite for a well functionperformance measurement system.

The future of performance measurement

51. The reliance on performance measurement in the management of tax administrations is likely to increasedespite problems to establish valid output and outcome/impact measures. There is a need both for measures that are



useful in monitoring the implementation of the management plan during the current year and for valid and practicalmeasures or indicators to gauge outcomes and impacts with respect to the central strategic objective of reducing thetax gap.

52. The best way to proceed is probably to make a distinction between performance monitoring focused on inputsand outputs in the short term and performance evaluation to assess impacts and cost effectiveness in the long term (2-5 years).

53. In the management plan, operational targets can be selected in such a way that they can be monitored byinformation supplied by the management information systems at reasonable intervals during the current year. Suchinterim performance reports will focus on costs, activities and outputs and other standards that relate to targets in themanagement plan.

54. To stay on course, it is however also imperative that tax administrations build capacity to evaluate outcomesand impacts with regard to long-term performance. This requires the combination of several analytical approachesthat cannot be contained within a management information system. It is not possible to cover all aspects ofperformance by such studies each year and it will take several years to carry out in depth analysis of all vital parts ofthe organisation. It is also important that the assumptions and rationality of the management plans be examined withrespect to the outcomes they produce.



1. INTRODUCTION

55. Performance measurement is a central feature of public management reforms carried out in many OECDcountries over the last decades. Tax administrations have not been left out, and in most countries efforts are beingmade to design measurement systems that will allow ministers and managers to assess their performance to guidedecision-making.

56. This study has two purposes: First, to provide both a broad overview of what is currently being done in taxadministrations in OECD-countries to develop systems for performance management. Second, to discuss somecentral issues of performance measurement in greater detail based on the experience of the Swedish taxadministration. We hope that this presentation can provide a basis for dialogue and inspire further sharing ofexperience in this field among tax administrations.

57. The approach is descriptive. The international comparison in chapter 2 sets out to identify some commontrends and typical varieties. We believe that the basic problems of performance management and measurement in taxadministrations are shared, at least to some extent, by all countries, but the appropriate solutions vary from country tocountry.

58. In the remainder of this introductory chapter we shall put the issue of performance measurement in taxadministrations in the general framework of public management reform. This presentation is based on the reportGovernance in Transition - Public Management Reforms in OECD Countries (OECD, 1995).

59. We will then proceed to establish a descriptive model and the terminology that we will apply in later chapters.Again we seek to stay close to the conceptual framework favoured by OECD as presented in the report PerformanceMeasurement in Government: Performance Measurement and Results-Oriented Management (OECD, 1994).However, when these broad generic terms are applied to tax administrations they must be given a more precisemeaning. We shall therefore introduce some additional terms of our own.

1.1 Public Management Reform

60. Administrative reforms in the late 19th and early 20th centuries aimed at stamping out arbitrariness,corruption, political patronage and keeping costs down. This was achieved by establishing rule-bound andhierarchical bureaucracies whose chief virtues were impartiality and compliance with law and other rules ofprocedure.

61. These reforms were largely successful, but as often happen, the solution to yesterday’s problems become anew issue in need of reform today. The growth of the public sector in the 20th century has changed the character ofpublic administration. Today, traditional governance makes up only a small part of the duties of the public sector;most public sector workers are not bureaucrats but teachers, doctors, nurses, social workers etc. The administrativeworkload has also increased and to a large extent the basic processing of applications, tax returns, payments etc. isdone by computers. In this new administrative environment, management can no longer be structured in thetraditional way.

62. Public management reform has often been linked with budget reforms and since the 1960s a number of suchreforms have been launched with varied success. The slowing down of growth and, as a consequence, rising taxesand/or widening budget deficits have given management reforms a new urgency, since they are expected to improveefficiency and effectiveness and thus allow the public sector to do more with less.



63. In 1995 the OECD Public Management Committee listed five reasons why unchanged government structuresand classic responses are inadequate in the new policy environment:2

• Maximising economic performance and ensuring social cohesion requires governments to adjust rapidly tochanging circumstances

• Centralised rule-bound and inflexible organisations that emphasize process rather than results impede goodperformance

• Large government debts and deficits place limits on the size of the state and require greater cost effectiveness

• Extensive government regulation affects the productivity of the private sector and requires greater costeffectiveness

• Demographic changes and economic and social developments demand more government services, whiletaxpayers want more value for money and become more reluctant to pay taxes.

64. Against this background, according to the Committee, governments need a new paradigm for publicmanagement with a closer focus on results about efficiency, effectiveness and quality of service. The centralisedhierarchical organisational structures are being replaced by decentralised management environments. There is greaterflexibility to explore alternatives to regulation and direct public provision of services. To improve the efficiency inthe services provided directly by the public sector, productivity targets are set and more competitive environmentshave been created.

65. Tax administrations in OECD countries have not been left unaffected by these developments. First, naturally,tax administrations have been drawn into reforms that are applied globally to all parts of government, like budgetreforms. Then there are developments that put particularly strong pressure on tax administrations:

• Increasing scale of operations. The need for more tax revenue to finance the growth of the public sector has beensatisfied not only by raising tax rates, but also by introducing new taxes and by widening existing tax bases. Thishas increased the number of taxpayers that file tax returns and demand service.

• Growing complexity of tax law and the rate at which tax laws are changed means that tax officers must becomemore skilled in order to handle their case loads and to serve taxpayers with information.

• Greater reluctance on part of the public to accept high taxes and a feared increase in non-compliance has madeeffective tax enforcement more urgent.

66. One way of dealing with these challenges is to make maximum use of information technology. In many taxadministrations today a large part of the processing of tax returns and payments have been automated.

67. Another solution is more effective management. The general approach to management reform is the same intax administrations as in other parts of the public service. The re is a greater focus on performance in terms ofefficiency, effectiveness and quality of service offered to taxpayers. Authority is devolved to managers at lowerlevels in the organisation (without compromising a uniform application of tax of rules). Internal markets are createdfor support services and/or contracting out of such services. Sometimes contracting out has also included theoperation of core information systems.

1.2 Performance Measurement

68. As noted by the OECD (1995), the quid pro quo for increasing autonomy and flexibility in resource use ismore stringent accountability for performance. This requires both a definition of tasks as well as measures ofperformance and systems for monitoring, reporting and analysis.

2 OECD, Governance in Transition - Public Management Reforms in OECD Countries, 1995



69. Accountability, however, is not the only motive for performance measurement. As pointed out by OECD(1994), the main objective of performance measurement is to support better decision taking leading to improvedoutcomes for the community. All other objectives are derived from this, including:

• improved performance of an organisation from the point of view of economy, efficiency, effectiveness andquality of service

• improved control mechanisms for managers and ministers and accountability mechanisms for external reviewers,such as auditors and legislators

• informing the budgetary process by giving decision-takers new kinds of information, which allows them to makelinkages between performance and budgets

• motivation of staff to improve performance

70. The same report offers some general advice on the design of performance measurement system. A first point,which is stressed, is the need to clearly define the objectives of the organisation. Another is to relate measurement toa common model or conceptual framework for performance measurement like the commonly used the input-activity-output-outcome sequence.

71. Against this background performance measures can be grouped into the following categories:

• Economy measures, which refer to the ratio of costs of inputs to the expected value of those costs. Anorganisation is economical if it is purchasing its resources as cheaply as possibly

• Efficiency measures, which describe the relationship between outputs and the resources used to produce them.

• Effectiveness measures refer to the achievement of intended objectives or outcomes. If measures ofeffectiveness incorporate cost, they are referred to as cost-effectiveness measures.

• Service quality measures can be regarded as an aspect of programme effectiveness, but in a more narrow senseit refers to service delivery rather than service outcomes.

• Financial performance measures which refer to gross or net earnings of user charging organisations or moregenerally to appropriate management of cash flows

72. Finding performance measures that correspond directly to a particular objective is not always possibly.Instead, performance indicators are used. According to OECD (1994) one can make the following distinctionbetween measures and indicators:

• measures correspond to expected direct results at any particular performance level such as the number of clientsserved (output) or decreases in infant mortality (outcome).

• indicators are less direct measures and are used where direct measures are difficult or costly to obtain. Theycorrespond less precisely to the performance being measured, e.g. fewer insurance claims as a measure of safercar design.

73. Developing performance measurement systems, there are, following OECD (1994), three major concerns thatmust be satisfied in order achieve a system that is functional:

• Validity, which is about whether the system measures what it claims to measure and does so in a reliable, correctand accurate way

• Legitimacy. It is important that those who operate and use the system, both internally and externally, accept it.

• Continuity. Once developed and started, the system must be kept alive and remain functional. The performanceinformation produced by the system must be used and seen to be used.

74. The basic terminology and standards of performance measurement presented above apply to taxadministrations as much as to any other public administration. Inputs are defined in much the same way across thewhole public sector, but objectives, outputs, and outcomes must be defined with reference to the specific programmelogic of each administration.



1.3 A Note on Terminology

75. The terminology used in this report conforms with the usage in the OECD reports referred to above. Thepoint of departure is the so-called input-activity-output-outcome model illustrated by the diagram below. In thissection it will be explained how this conceptual model is applied in this report and how the terms derived from themodel are interpreted.

Diagram 1: The input-activity-output-outcome model

76. Inputs are the resources consumed to produce the outputs. They can be described in financial terms as costsor in physical terms with respect to the factors of production (work hours in the case of labour).

77. Activities are the basic steps of the production process. Appropriate costing of these activities is a greataccounting challenge. Normally it requires some form of time report system to calculate direct labour costs. Thegreatest difficulty, given full cost accounting, is to find relevant factors by which to apportion overhead costs toactivities.

78. Attaching precise meanings to the terms output, outcome and impact is difficult, as definitions vary betweendifferent government services. One definition of output is the goods and services funded and directly produced by aprogramme (European Commission 1997). In schools, output measures could seek to quantify the volume ofteaching produced by the school for the benefit of its students.

79. Outputs are seldom ends in themselves, but means to produce certain desired socio-economic effects. Theseeffects can be termed outcomes, impacts or results. The terms are also often used in conjunction with each other tomake distinctions between short and long-term effects or with respect their social reach. Thus impacts may be chosento represent all effects on society and then let results mean initial impacts and outcomes longer-term impacts(European Commission 1997). Other ways of arranging these concepts have also been suggested, but in most casesoutcome (rather than impact) is used as a generic term covering all effects.

80. While it is our ambition to stay as close as possible to the standard terminology our use of these terms is alsodictated by the specific programme logic of taxation. In this context outputs are often defined in terms of final taxassessments or tax bills (sometimes the number of tax returns is used as a proxy measure). Because of the great stressput on tax control, the number of audits, alterations etc. are also often regarded as outputs. In this report outputs areunderstood in this general way, i.e. as a measure of the number of finished cases, but the precise definition may varyfrom country to country.

Inputs(costs) Activities OutcomesOutput

Effectiveness

Impacts

Productivity (Efficiency)

Quantity * Quality



81. This means that we do not, in this report, include tax revenue, neither total revenue collected nor additionalliabilities imposed by tax audits, as output. Instead we regard revenue as an outcome. This agrees with the generalterminology in as far as raising revenue is the ultimate aim of taxation.

82. However, we have also found it useful to introduce the term impact to describe the effects of information,service and tax control on taxpayer compliance. The reason is that many tax administrations have adopted a generalstrategy that aims at encouraging voluntary compliance, while deterring those less inclined to comply by effectivetax control. When we stress the behavioural effects of this strategy, we use the term impact, while the term outcomeis reserved for the monetary effect of improved compliance.

83. The development of performance measurement over time can be described as an expansion of its scope fromleft to right in the diagram above. Traditionally management control in government focused on inputs. Withprogramme budgeting it became more important to measure the costs of different activities grouped intoprogrammes. The next natural step was to measure efficiency or productivity as outputs in relation to inputs. In thisreport the terms efficiency and productivity are regarded as synonymous, although many authors make a distinctionbetween the two.

84. Measures of productivity based on simple quantitative measures of output have been criticised because theyleave out important qualitative aspects. As more emphasis was put on compliance costs and service to taxpayers, thisclearly was not satisfactory. Measuring quality, a distinction can be made between quality of process and quality ofproduct. While quality of process focus on how well procedural safeguards to protect taxpayers are observed andhow well taxpayers are served in contacts with the tax authorities, quality of product focus on correctness ofdecisions.

85. Effectiveness, finally, relates outcomes and impacts to the corresponding objectives. Reliable measures ofeffectiveness are highly desirable, but often difficult to find. But not always. If the government sets a total revenuetarget, it is easy to measure the outcome in terms of collection and compare that to the target. The problem withrevenue as a target and measures of effectiveness is that in most countries the amount of revenue collected dependsmuch more on economic growth and changes in tax legislation than on the general performance of the taxadministration. This makes setting appropriate revenue targets a science in itself.

86. A less practical but conceptually preferable measure of effectiveness is the tax gap, i.e. the difference betweenthe theoretical tax and actual tax revenue. The snag, of course, is that calculating the tax gap is almost impossible.

87. If outcomes or impacts are related to inputs or costs, we speak of cost-effectiveness. Sometimes taxadministration costs are related to total revenue, which could be regarded as a measure of cost-effectiveness. If suchmeasures are used for international bench marking, they tend to favour countries with high taxes.

1.4 General Outline of Chapters 2 and 3

88. The following chapters will be structured along the lines of the conceptual model described above. Thismeans that we will discuss measurement in terms of inputs, outputs and productivity (efficiency), before moving onto measures of quality and outcomes and impacts.

89. However, performance measurement, does not stand alone, but must be understood in its proper context. Thisis especially important when the experiences of tax administrations in different countries are compared with eachother. Therefore both chapters two and three begin with descriptions of the managerial contexts in whichperformance measurement is supposed to function. It is this broader approach to performance management thatdetermines the scope of measurement, benchmarks, reporting requirements and so on.



2. PERFORMANCE MEASUREMENT IN TAX ADMINISTRATIONS INOECD COUNTRIES

2.1 Introduction

90. Under pressure to cope with rapid change and increasing workloads many tax administrations have introducednew management practices. A central feature of modern public management is performance measurement. Thischapter describes different approaches to performance measurement in a number of OECD countries.

91. The comparisons are based on the replies to a questionnaire distributed to the tax administrations in all OECDcountries in September 1998 (see appendix). We have received replies from 16 countries. The coverage is thereforenot complete and important developments in some countries may have been overlooked. Neither can short answers toa questionnaire give a full picture of performance measurement in the countries that have supplied answers. Insteadour aim is to identify some general trends and common varieties of performance measurement, not to gauge thedevelopment in different administrations against some common benchmark. We quote individual countries asexamples to give a more concrete picture and better understanding of the variety behind the general trends, not toprovide a complete picture.

92. Comparisons of management practices are complicated by the fact that tax administrations are organiseddifferently in different countries. To some extent, such structural variations can explain the choice of approach toperformance measurement. Most countries, but not all, have more than one revenue service (customs, inland revenueetc.) but the way that responsibilities are divided between them varies. Many tax administrations also perform othertasks than taxation. In some countries there are separate or semi-autonomous revenue authorities, while in othercountries the entire tax administration or its executive head office is a ministerial department. Federal countries mayhave both federal and state tax administrations.

93. This chapter opens with a discussion of the role of performance measurement in the management system. Itthen moves on to the measurement of productivity and efficiency based on input, output and outcome measures. Athird section is devoted to the issues of quality and taxpayer attitudes. Finally there is a short discussion aboutmeasuring impact as tax gap estimates.

2.2 The Management Context

2.2.1 Ministerial and managerial roles

94. Traditionally the political management of state bureaucracies such as the tax administrations has been basedon carefully itemised budgets, rules and directives. Under the influence of new public management ideas there hasbeen a shift towards performance budgeting and contractual relationships between the political level and theexecutive level (as well as between different management levels). In many countries today appropriations arecoupled with stated objectives, expected levels of output and quality and service standards. In some countries this isformalised as contracts signed by the minister and the chief executive, in other countries there is consultation but thefinal budget document takes the form of a one-sided directive

95. In our study at least five countries (New Zealand, Australia, United Kingdom, Denmark and Finland) reportthat there is some form of performance agreements between the tax administration and the political level.

96. The New Zealand system is the purest form of contract management. The most important prescription ofdepartmental accountability is the Purchase Agreement. This details the operational aspects of performance, outputsand costs. The Purchase Agreement is agreed with the Minister and post-ante reports are audited and tabled forparliamentary scrutiny. The development of performance standards and targets involves discussions between thedepartment, the Treasury and the Minister of Revenue. In contrast, the Chief Executive’s Performance Agreement isa contract between the Minister and the Chief Executive. This agreement, with a medium-term working focus, details



high-level strategic priorities and key developmental projects rather than the overall departmental performance.Reporting back includes the Annual Report and the Chief Executive’s Performance Assessment3. The Annual Reportis audited by Audit New Zealand (Central Government’s auditors) to verify the financial and the non-financialperformance. In verifying that the accounts in the Annual Report are correct, Parliament is assured that the AnnualReport provides a clear and accurate picture of the department’s performance. The Chief Executive’s PerformanceAssessment is an account of the Chief Executive’s performance against the contract between the Minister and theChief Executive.

97. In the United Kingdom, the Management Plan of the Customs and Excise incorporates the Department’sOutput and Performance Analysis framework, which is agreed with the Financial Secretary. This allows theDepartment’s performance to be measured against its high level operational objectives. The Next Steps Initiativeseparated the executive aspects of public service from the political, to allow operational units to focus moreeffectively and transparently on their operational priorities. Customs & Excise operates along Next Steps grounds,with a small headquarters and 24 Executive Units. As part of the introduction of an accruals-based accounting andresource management, from 1999 all Departments will be required to produce annual reports on performance andoutput, within the three-year framework of the Public Service Agreement. The Minister is closely involved in thesetting of annual targets and forecasts and takes a keen interest in outturn against key indicators.

98. In France, the implementation of performance measurement indicators has paved the way for the conclusionof agreements on objectives between three operational levels of responsibility within the administration (theChairman of the General Tax Directorate, the directors and the local managers). These agreements are based onreciprocal commitments in terms of results and allocation of resources. Each territorial director, following hisappointment, reports to the Chairman on the diagnostic of his directorate and his priorities. Commitments areexpressed in terms of objectives regarding indicators linked to defined priorities. Official assessment of results ismade in the form of a conference and an in-depth assessment takes place two years after the arrival of a new director.The validation by the Minister of Finance of the national guidelines, based on an agreement on resources andobjectives concluded in October 1999 for the period 2000-2002, is the only direct involvement of the political levelin the management process.

99. The outcome/output measures of the Australian Tax Office (ATO) are agreed with the Treasurer. Thesemeasures form part of the ATO’s resource agreement with the Department of Finance and Administration, and thebudget submission as part of the Treasury portfolio. While the Government may indicate priority performance areas,such as client service, the Government does not set specific performance targets. The ATO is subject to scrutiny byParliamentary committees. The Treasurer evaluates ATO performance overall and provides feedback to theCommissioner. The Commissioner’s annual report to Parliament and the commitments made to Government in theresource agreement provide the basis for evaluating performance.

100. In Denmark, the Outcome Agreement, which is concluded for periods of four years between the Ministry ofFinance and the tax administration, lays down the overriding performance requirements. These are further specifiedby the Department of Taxation. In Finland, the political involvement is visible primarily through the performanceagreement between the Ministry of Finance and the tax administration. Annual targets are set also in the written partof the budget.

101. The approach of the other two Nordic countries in our study, Norway and Sweden, is not explicitlycontractual and the main steering documents, the annual approval documents, are issued by the ministry or thegovernment. However, their contents are highly dependent on an ongoing dialogue between the ministry and the taxadministration. In Norway the approval documents specify the budget allocation as well as overriding objectives,priorities and performance targets for the next fiscal year. The Tax Administration reports back twice a year to theMinistry and the reports are discussed at meetings between the management of the Tax Directorate and the Ministry.In these meetings, the results are discussed and evaluated along with current issues of importance, and agreementsare being made on future priorities for the tax administration. Through this dialogue agreements have been reachedabout the design and content of the main documents in the steering process (e.g. the budget bill, approval documents,annual report etc.). This way the conformity with the objectives and strategies of the tax administration is ensured.

3 An agreement between the Minister and the Chief Executive. This agreement sets out the key priorities for the Chief Executive over the mediumterm (1-3 years) and performance assessments are weighted towards achieving these goals.



102. The Swedish approach is similar to that of Norway. The Swedish constitution, however, gives executiveagencies a more independent status vis-à-vis the ministries. Although the Ministry of Finance is responsible forhandling the budget of the tax administration, the National Tax Board is not subordinate to the Minister of Finance.The cabinet makes all formal decisions concerning the executive agencies - the National Tax Board being one ofthem, and not individual ministers. In this way neither ministry nor parliament becomes closely involved in themanagement issues of the Swedish tax administration.

103. In contrast to Sweden, the United States Congress is closely involved with the performance management ofthe Internal Revenue Service (IRS). In reviewing and approving the IRS’ annual operating budget, the Congressconsiders the Service’s high-level performance measures and strategic goals. The Congress communicates itsconcerns and priorities by questioning and examining specific targets and measures during formal budget hearings aswell as during informal consultations between Congress and IRS executives and staff. In addition, the Congress isconsulted about, and thereby influences the development of, the IRS Strategic Plan from which agency goals andperformance measures flow. Results are shared with the Congress through an annual performance report. Again,these results are discussed during formal budget hearings and informal consultations. The IRS is asked to account forand explain instances where performance fell short of stated goals.

104. The relationship between the political level and the tax administration is of course different when its headoffice or the entire administration forms a part of the Ministry of Finance itself. This is the case in the Netherlands,where Parliament takes a close interest in the managerial aspects of the tax administration. The yearly business plansand yearly performance reports of the Tax Administration are sent to and discussed in the tax commission of theparliament. These discussions can lead to amendments in plans or processes.

105. In Canada, the Department of National Revenue (Revenue Canada), a department of the federal government,is responsible for tax and trade administration, as well as customs and excise matters. In 1999, it is expected thatRevenue Canada will become the Canada Customs and Revenue Agency. As an agency, this new organisation willbe well positioned to provide better service to its clients, and will have more flexibility and authority than traditionalgovernment departments. For example, the agency will be fully responsible for managing its human resources,capital assets, real property and procurement and contracting. However, the Minister of National Revenue will retainhis existing duties and responsibilities and will remain fully accountable to the Parliament of Canada for the Agency.In this respect, the Minister will, each year, provide Parliament with a summary of the Agency’s Corporate BusinessPlan (strategic goals, priorities, initiatives, and planned results) and an Annual Report on the operations of theAgency.

2.2.2 The Use of Key Indicators and Targets

106. Result-based management requires benchmarks against which to assess performance. Past performance mayserve as such a benchmark. Productivity will be expected to improve compared with the previous period and failureto do so will demand explanations. Within an organisation with many regional or local offices the efficiency of thebest performing offices may serve as benchmarks for the others.

107. It seems, however, that the preferred benchmarks in most administrations are targets or standards that definethe required (minimum) level of performance. This level may be defined as a certain level of revenue, a number ofprocessed returns, standards for timeliness (e.g. refunds within a certain number of days), approval ratings in surveysetc.

108. Such targets can be imposed by the ministry or by parliament, but normally after consultation with theadministration. In countries applying contract management, the targets are negotiated between the minister and thechief executive. The agreement will specify budget allocations and the quantity of output, quality standards, servicelevels, reporting requirements etc.

109. As part of the annual budget process, the New Zealand Department of Inland Revenue completes anextensive exercise of prioritisation of tasks and detailing of the performance measures for the upcoming year. Duringthis phase, measurable targets are set for all output areas, for example number of returns to be processed or amountof debt to be collected.



110. The Australian Tax Office (ATO) Agency Agreement includes a number of measures from the ATO Plan.Performance against these measures is used in determining whether to award productivity pay rises to staff.Performance each year must improve for revenue collection and professionalism, and improve or be maintained inother measures. Relevant performance measures in the Agency Agreement are

• collection of budgeted revenue and improved professionalism of field operations and debt collection and

• improvement in corporate outcomes in any two of the following areas without reduced performance against theothers: (a) debt collection, (b) taxpayer service standards and (c) technical quality.

111. In the United Kingdom, the Customs & Excise selects key indicators to set measurable targets, for examplethe percentage of risk-based assurance visits which produce assessments against the total number of visits completed(target 46%). Another target is the sum of net errors identified from such visits (target •1.5 billion). Still anothertarget is that month end arrears do not exceed 2% of the 12-month payment liability.

112. In Finland key indicators are defined for service, tax control, quality, personnel and organization. Theyinclude, for example, the correspondence between prepayment and final taxation, realisation of tax surveillanceplans, duration of appeals, client satisfaction surveys, expenditures by client group etc. In Denmark, the VAT liableturnover of controlled traders also counts among the particularly important indicators

113. Both Norway and Sweden have built measurement systems based on a hierarchical goal structure starting withthe basic aim to achieve “Due taxes the correct way”. In Norway this basic aim is specified as three overridingobjectives, one of them being the correct assessment and collection of taxes and duties. At the next level in thishierarchical structure there are six main objectives and for each programme there are special goals linked withmeasures (some of them with specified targets).

114. At the conceptual level the Swedish approach is very similar to the Norwegian. In Sweden, however, therehas been a shift of focus from management by objectives to management by results. This is not a radical departure,but it means that less effort is put on establishing ex ante targets and more energy is spent on analysing output,outcomes and impacts in relation to previous performance. The government’s annual approval document to theSwedish tax administration therefore sets out goals and performance criteria, but does not define any precise ex antetargets linked to these criteria. Similarly the National Tax Board makes clear what measures and indicators will beused to assess the performance of the regional authorities, but the Board does not set out any specific levels that haveto be reached. Instead the best performing authorities will provide benchmarks for the others.

115. A related approach is that of the Netherlands. In the Dutch Tax Administration the strategic goals have beenlinked to a number of critical success factors, which in turn are linked to performance indicators. The success factorsinclude for example optimisation of tax yield, client acceptation and quality of communication, treatment oftaxpayers, quality of fraud combat, feasibility of laws and rules, process and product quality, budget control,personnel satisfaction etc. Division directors have management contracts with the Director General. In thesemanagement contracts the expected performances are formulated in quantities. Every quarter the central Planningand Control department has interviews with the divisions on the basis of their performance. In these interviewsactions to improve performance are prepared.

116. In France, the diagnostic working programme developed in the 1990s relies on the identification ofprioritised areas and the definition of a program adapted to the situation of each operational entity. Although therelation between administration costs and the yield of each type of tax (“intervention rate”) is an important indicator,the main focus of the agreement on objectives and resources is the level of compliance. Indicators used to measurecompliance are the rate of compliance with filing deadlines in the areas of VAT and income tax, respectively, and thepercentage of taxes paid on time.

117. Other tax administrations do not establish key indicators or targets on the basis of a global structure of goalsand objectives, but rather select such indicators and targets to reflect specific priorities. In Canada, for example, keyindicators are related to the specific corporate priorities for the year. The targets are generally expressed in terms ofinitiatives related to the priority. For example, a priority could be to improve management processes. Specificimprovements in management processes would be reported against that target.



118. In Spain, the National State Tax Agency is obliged to present every year to the Parliament the objectives ofthe State Agency during the first months of the year. In some areas, Tax Inspection units set up measurable targets astheir work objectives. These targets are - number of people to be investigated, number of tax inspections byeconomic activity, provinces and so forth. In fact there is a "National Tax Inspection Plan" with targets, which isactualised every year.

119. In Germany key indicators include the relationship between finished assessments and the number of taxreturns, the quota of audited firms, the number of audited firms per auditor, additional assessments (or tax revenue)per audited firm.

2.2.3 Performance Budgeting - Rewards or Sanctions?

120. In performance based management it is natural to include rewards or sanctions dependent upon the attainmentof agreed or decreed performance standards. In some tax administrations there is an element of performance relatedpay for all staff or managers only. The extent to which this is practised, however, lies outside the scope of this study.

121. The question posed here is to what extent rewards or sanctions are applied on the organisational level; i.e.does budget allocation in some way depend on results. One can imagine such systems being applied both on the totalbudget allocation to the tax administration and within the administration on allocations to regions, offices etc. Fewsuch systems are however in operation, but they are considered.

122. In Norway a system where budget allocations would be influenced by results was considered but abandoned.The system was believed to become too dependent on a few measurable indicators. An unintended side effect ofrewarding offices with good performance could also be the starving of offices with weak performance of resourcesneeded for their improvement. Instead, the Directorate has tried to develop a system that allocates resourcesaccording to the number and complexity of the taxpayers in the different counties. In Mexico, however, resourceallocation is established in the Tax Administration Service Annual Budget and is based mainly on the performance ofall the different areas. In the Netherlands, there is presently no formal link between performance and resourceallocation, but on a central level a system is now under development. Likewise, in the tax administrations of theGerman Länder there is presently no connection between performance and resource allocations. It is however underconsideration in some places.

123. In the United States the Government Performance and Results Act, which requires agencies to developstrategic plans, performance plans and performance reports, also calls for the piloting of a performance budgetingprogram to examine the feasibility of linking resource allocation to program performance. At this point, theperformance budgeting pilots have been delayed pending further progress by US agencies on improving theirstrategic plans, performance plans, and performance reports. Therefore, while it was the intention of the US Congressto enact performance budgeting as part of the Government Performance and Results Act, that phase has not yet beentested and is not currently in use.

124. Rather than being dependent on previous performance, budget allocations as a rule are determined byorganisational and structural factors (the number and kind of taxpayers in the area). Low productivity due to internal(or structural) factors are seldom punished by lower budget allocations, rather it is financially compensated. InFinland, budget allocations are based on the person-work year calculations. The National Board of Taxes sets up theperson-work year framework annually for the regional tax offices, taking into consideration the productivity level ofeach regional tax office. A similar approach is applied in Denmark, where the main emphasis is on making sure thatall the regional administrations are enabled to perform their work at the same quality level externally as well asinternally. The relation between input and performance indicators is analysed annually in order to establish a key forthe distribution of funds. This is used for a dialogue where qualitative aspects are also taken into account. In France,the in-depth assessment based on the agreement on objectives may lead on to a decision by the Chairman to allocateadditional resources, along with new commitments on objectives.

125. The Swedish model applied by the National Tax Board for allocating budgets to the regional authorities isbased on workload calculations, which take account of the number and composition of taxpayers in each region. Ithas been suggested that the best performing regional authorities should be rewarded with a financial bonus asrecognition of their achievement, but this idea never materialised. To make any substantial part of the budget



dependent on historical results was however never seriously considered. Apart from this, there have been twoisolated tests with individual performance related pay, but these tests have been abandoned for the time being.

126. In the United Kingdom, the Customs & Excise has a complex, centrally based statistical risk analysis systemfor UK VAT traders, which can be used to allocate assurance resources according to risk priority. Performanceinformation is used in the assessment of risk but there is no direct link between performance information andresources allocated. The link between risk and resources is useful as it allows estimates of how a local office shouldperform and identify issues for discussion with local managers, with the overall aim of improving their performance.

127. In New Zealand, there are a number of external mechanisms that allow the monitoring of departmentalaccountability.

• The Minister (following consultation with the Chief Executive) may initiate remedial action if there are anysignificant areas of non-performance.

• A Parliamentary Select Committee (Finance and Expenditure Committee) scrutinises the department’s AnnualReport and other accountability documents. This Select Committee has the ability to institute inquiries orrecommend remedial action into areas of poor performance.

• The Central Agencies’ evaluation of the Chief Executive’s Performance Agreement may also highlight areas ofnon-performance or make adverse comments.

128. Internally, the department’s performance management system is partly based on rewarding achievement ofagreed output targets and bonus payments may be made for exceptional performance.

129. Resource allocations at the business line level in the Australian Tax Office are based on managing thebusiness as usual, addressing identified risks and preparing for the future, for example by re-investing in technology.Senior managers receive individual performance pay based on achievements in relation to their performanceagreements. General staff receive productivity pay increases if ATO performance satisfies the requirement of theAgency Agreement.

130. In Spain, a portion of the civil servant's wage is related to his or her productivity. It is difficult to measure thelink, but in certain areas, e.g. Tax Inspection, there even exists a complex model to allocate tax inspector's rewardswith the accomplishment of his or her tasks.

2.2.4 Performance Reporting within Tax Administrations

131. Performance management requires a well functioning reporting system to top management and ministers. Inorder to make measurement a management tool, monitoring and evaluation of performance must become an integralpart of the on-going management processes.

132. In most tax administrations in our study senior management receive and discuss key performance data on amonthly and/or quarterly basis in order to take appropriate action where necessary. A typical model is to have keyindicators reported monthly to the executive board without extensive comment. Each quarter (or every six months)top management will receive a more thorough progress report with comments and trend analysis and, sometimes,proposals for necessary corrective action. In addition to this most tax administrations publish annual reports.

133. The Dutch tax administration is typical in this respect. A central department produces monthly and quarterlyperformance reports for the board of directors. The monthly reports are restricted to critical headlines and withoutextensive explanation. The quarterly reports contain all the performance indicators plus interpretation and actionprograms for indicators in the red zone. In addition to these monthly and quarterly performance reports there is ayearly extensive report with performance indicators and their interpretation, and a production and yield report on alldivisions and tax items.

134. The same model is applied by the Australian, New Zealand, British and Mexican administrations. InAustralia, revenue and debt collection performance are reported monthly to senior management. Business linessubmit brief monthly reports to the Executive Board covering financial performance, service standards performance



and significant issues. More extensive reports are submitted tri-annually and accompanied by discussions betweenthe Executive Board and senior business line managers.

135. In New Zealand, the Internal Revenue Department produces internal performance reports every month thatare discussed and assessed by the senior operations managers. The department also produces a Quarterly Report forthe Chief Executive, General Managers and the Minister. These reports are inclusive of all performance measures,and also include the department’s financial performance. They provide details of actual performance against budgetsand provide explanations for any significant variations from expected performance. On an annual basis thedepartment produces the Annual Report to Parliament.

136. In the United Kingdom, output against targets and forecast is monitored within Customs & Excise andreported to a Board level Management Committee for monthly discussion. Emerging annual output is published inthe Management Plan alongside the next year’s plan in April, and final output is reported to Parliament in theDepartment’s Annual Report in October.

137. In France, results in terms of indicators are calculated annually. In order to help the directorates assess theirperformance level, a classification was set up for each indicator. Departmental directorates are classified in fivehomogeneous groups (size, tax environment), permitting a comparative approach between departments. Data are alsoavailable to the administration on a monthly or quarterly basis, depending on type of mission.

138. In Mexico, there are (generally) monthly productivity meetings of the general directions with the President ofthe Tax Administration Service. In addition, the Tax Administration Service participates with other areas of theMinistry of Finance and Public Credit Board of Directors in meetings held on a quarterly basis where issues relatedto the productivity of each sector are followed up, discussed and evaluated.

139. The Swedish tax administration has recently been reorganised and a new management structure has beencreated. Presently a new model of performance reporting at top management level is being introduced based on theconcept of Balanced Scorecard with performance indicators grouped under 6 focus areas. Monthly figures arereported, but comment is restricted to major deviations from expected trends. Mid year - in August - there is a morethorough review of performance development. Towards the end of the calendar year emerging outturn is analysedand discussed in preparation for the Annual Report, which is submitted, to the Government by the end of February.

140. In Finland, reporting is based mainly on the performance management process. Every year the NationalBoard of Taxes makes performance-objective agreements with the regional tax offices. Reports on the matterscovered by the agreements are produced twice a year. At the same intervals the National Board of Taxes will reportto the Ministry of Finance about how the objectives have been met within the Tax Administration.

141. In Norway, the regional and special (taxation) offices report to the central Directorate of Taxes by annualreports. The regional collection offices, however, report twice a year. This is partially determined by historicalfactors, and partially because the collection of taxes is important for the state budget/finances. In its turn, theDirectorate submits an annual report as well as a six-month report to the Ministry of Finance. These reports focus onthe attainment of objectives and other performance indicators. Within the Directorate of Taxes the management planis evaluated quarterly.

142. In Denmark, too, the results of productivity measurement and other standard reports are delivered annually.In addition, performance is reported to and discussed with the political level regularly, at shorter intervals (e.g.quarterly), with regard to the objectives set up for initiative oriented programs, activities that have to be completedby a fixed time of the year and certain qualitative aspects.

143. Revenue Canada has a formal accountability session held in the third quarter of the fiscal year. At this in-year review session, senior managers for both the Programs (involved in program design and development) and theRegions (involved in program delivery) are asked to report on progress and identify emerging issues. Also, in thefirst or second quarter of the next fiscal year, a similar, end-of-year accountability session is held.

144. The Federal Tax Inspectorate in Austria (a department of the Ministry of Finance) submits annualperformance reports to the Minister and the Director General. These reports are also sent to the regional Financial



Directorates, which are under obligation to explain discovered weak spots and measures taken to remedy them. Inaddition, electronically available key performance indicators can be produced at any time. This is done at least eachquarter.

2.2.5 Management information systems

145. Timely reporting on performance requires efficient information systems. The source of most data is the taxadministration’s accounting and business systems. However, these systems are not always designed to provide timelyperformance data easily accessible to management. Many tax administrations, therefore, have introducedmanagement information systems, specially designed to provide tailored information to decision makers.

146. In the United Kingdom Customs & Excise has developed a number of specific information systems forplanning and capture of performance information. These cover all aspects of the activities by which results areachieved. Currently a Resource Management Information System is being introduced, which brings together the keyperformance information from these systems together with cost and expenditure information to provide a singleintegrated system for performance monitoring across the Department. Beneath this is a series of feeder systems,which capture data on productive time and output and enable performance to be reviewed at the local level.Measurement of key-indicators in the Dutch tax administration is based on the Mirabel performance system(Management Information and Report system). The Mirabel system is supported by several information systems togenerate the performance indicators and a system to make a uniform report.

147. The New Zealand Department of Inland Revenue has developed a number of information systems that serveperformance measurement. These information systems are both manual and automated. The Financial ManagementInformation System is the latest information system designed for the department. When the FMIS was being designedthe needs of the organisation4 were carefully considered and incorporated into the final design. In addition to the newfinancial management information system, the department has also rolled out a data warehouse system with the aimof providing improved information for decision-making. It provides the department with a wide range of informationon taxpayers, thus allowing improved targeting of enforcement and services to taxpayers.

148. In Mexico, there is a specific information system operated by the unit in charge of reporting to the top-levelmanagement. This system keeps track of the objectives established at the beginning of each year by comparing suchinformation with the actual figures determining deviations that may be subsequently analysed in a detailed manner.

149. The Spanish Tax Administration’s SHMO-system ("Sistemas de Información de Medios y Objetivos" -"Information System on Targets and Means") is operated by the Internal Audit. This system serves the territorialdelegations of the tax administration with controls and measures of workload, results, time needed to processdocuments etc, all of them related to taxpayer activities. This information and data are distributed by provinces andother territorial units of the Tax Administration.

150. In the United States, the IRS uses an automated Executive Management Support System (EMSS) to track andreport its performance measures. A variety of other systems is used by the program areas and functions to gather rawdata that is then uploaded and/or entered into EMSS. This information is updated and is available to management forreview continuously. Some restrictions are placed upon who may access this data and at what level of theorganization results are made available. For example, the IRS is striving to move the organisation away fromfocusing purely on the numbers, to focusing on a dialogue about the causes and actions that lead to results. As such,district managers and executives may only review results for their site and compare those to the composite, overallService-wide results.

151. In Denmark, the Performance Requirement System (REKS) has been developed for management purposes.The system is continually being expanded to cover new areas. In the Swedish tax administration several statisticaldatabases were merged into one in 1994. In 1997 a system specifically designed to support the PerformanceMeasurement Model (PMM) was added. No restrictions are put on access to the information in these databases, as

4 The need for the system to be flexible, enhancing the ability of the system to apply cost allocations and the updating or redesign of operationalfinancial management procedures.



they contain no information that can be linked directly to individual taxpayers. In the Finnish tax administration anew Internet-based information system was introduced in 1998. The central part of the system includes the controland supervision of the appropriation, personnel reporting and productivity (under construction). All employees havethe right to use the system.

152. Although most tax administrations in our study have introduced different kinds of high-level managementinformation systems to support performance management others, like the Australian, Canadian and Norwegianadministrations, rely on information provided directly by the business systems.

153. In Australia, information for performance reporting comes from systems used to manage the business. Someenhancements to business line case management systems were required to enable reporting on the full range ofTaxpayers Charter service standards when these were introduced across all lines in July 1997. Similarly, in Canada,performance measures are gathered by a number of systems that support operations. Other than the departmentalfinancial system, no systems have been designed to serve performance measurement exclusively. In Norway there isno specific information system to support performance measurement. There is a need for such a system, but there aretechnical and financial difficulties that have to be overcome in order to do that.

2.3 Measures of Input, Output, Outcomes and Productivity

2.3.1 Input measures

2.3.1.1 Costs154. To make it possible to relate performance measures to the full costs of their achievement, the budgetallocations to the tax administration must be designed to cover all costs related to its activities. Although not alwaysdirectly stated, it can be implied from the replies that this is the case in most countries in our survey.

155. Some costs are generally regarded as corporate overhead costs and budgets are not always allocated to lowerorganisational levels, programmes or outputs. The United States (the IRS) may be quoted as an example. Itsfinancial management system does track all cost categories but such costs as rent and utilities are consideredcorporate expenses and are not apportioned to program usage. Similarly, in Denmark costs other than labour costsare monitored at national level but do not seem to be apportioned to organisational units or programs.

156. Such a system may still allow calculation of unit costs, but only at the national level. In the United Kingdom(Customs & Excise) unit costs are used, but only at the centre of the Department, and include apportioned overheadsas well as direct costs. In Australia each output must have measures for price based on accrual budget costings. InNew Zealand the debt management measure (dollar return on debt collected) and audit measures (dollar return onaudit activity) are based on the allocation of full costs (personnel, operating and overhead costs).

157. In Canada measures expressed in terms of achievement of major Departmental programs often include fullcosting. In Sweden total costs are apportioned to the tax administration’s major programs in order to calculate annualproductivity changes. In Finland, costs are followed up by type of activity, type of tax and type of client. Costsinclude all kinds of costs at the national level. At the regional level costs do not include IT costs.

158. In France, surveys are carried out, by the General Tax Directorate, in order to assess performance. The fullcosts (salaries including social security contributions etc., IT support, premises, furniture and investment costs) areallocated to each of the main taxes and to different units of the administration. Other, more limited surveys arecarried out to determine e.g. the annual cost of computer investments.

159. Another approach is to exclude overhead costs and relate outputs only to direct costs that relate specifically toa responsibility centre (salaries and other running expenditure). Such cost measures are useful to monitor andevaluate the performance of different organisational units. Canada, New Zealand, Norway and Sweden referdirectly to such measures, but it can be assumed that they are used much more widely than that.



160. Where cost related performance measures are not used service-wide they can be used to monitor specificactivities. In Mexico broad cost measures were introduced in 1998 for the purpose of making cost-benefit analysis ofthe auditing process. In Norway costs are generally apportioned to organisational unit, but not to outputs or targets.However, in evaluation of special projects the costs of these projects are related to the achievement of theirobjectives.

161. In Germany, efforts are made at present in the Länder to introduce cost and performance measurement intheir tax administrations and meetings are being held at Federal level to co-ordinate measurement methods in orderto allow for comparisons between the Länder.

162. As far as a trend can be discerned from the replies it seems to indicate movement towards full cost and(sometimes) accrual accounting (at least at corporate level) as well as the introduction of financial managementsystems that allow for flexible allocation of costs to activities. Australia, Mexico and New Zealand report moves inthis direction during 1998 and United States is working to develop an activity-based costing system for use Service-wide.

2.3.1.2 Time reporting

163. Time reporting may be used e.g. to compare manpower productivity over organisational units, functions andprocesses etc., to monitor productivity trends, establish unit costs for different products and to orient input towardsprioritised activities.

164. In some countries, time reporting seems to cover all activities and organisational units of the taxadministration. This applies to Canada, Finland, the Netherlands, New Zealand, Sweden, the United Kingdom(Customs & Excise) and the United States. Some replies mention specifically the treatment of indirect (overhead)costs and describe the methods used to apportion these costs to programs and activities (the Netherlands, NewZealand, Sweden). In Denmark, time reporting covers a wide range of different activities.

165. In other countries, time reporting is applied only in specific areas, for instance tax inspections and auditing.This is the case in Austria and Mexico. In Australia, the costs for every person can be linked to an organisationalunit and, in addition, time reporting is used by internal ser-vice units to attribute costs to functions. In Norway, timereporting systems have been developed for large parts of the organisation: the county tax offices, the localassessment offices and the county tax collection offices. Time reporting has not been introduced at the Directorateyet, but some departments have developed individual systems. In France the General Tax Directorate does not havea global time reporting system at its disposal. Instead, surveys are carried out with a view to assessing, for example,the time dedicated to the management and collection of different taxes. In Spain there is no direct reporting of actualworking hours, but a pro-rata system is applied for persons with multi-functional work.

166. As some countries have recently introduced time reporting, and others are expanding their use of it to newareas of the tax administration, there would seem to be a movement towards full use of time reporting across allorganisational units and activities, also including different methods of apportioning indirect costs to programs andactivities. However, there also seems to be quite some way to go before this is accomplished, and it should be notedthat in some cases the replies cover only central government agencies, while parts of the tax administration is aresponsibility of regional or local government.

2.3.2 Output measures

167. A majority of the countries seem to regard at least additional revenue resulting from different types ofenforcement activities as a key output measure. However, there are a variety of approaches to the use of these dataand only a few of the countries mention explicitly the relationship between revenue collected and costs incurred.Some countries make no specific mention of revenue effects.

168. In Australia total tax collected as percentage of estimate is a key output measure. In Finland, the output (inrevenue terms) is being supervised separately, but not used in the calculation of productivity and economy. InMexico, the key elements of measurement are the numbers of audits, desk verifications and tax returns. In Norway,



amounts are important in monitoring the precision of the advance payment system and the timeliness of taxpayments, while the number of products is otherwise paid more attention to.

169. In the United Kingdom (Customs & Excise) revenue from errors discovered through the inspectionprogramme is applied as a key measure. In France indicators used for performance measurement and sector-basedfollow-up of missions include total amount of taxes collected and tax audit adjustments. Another category, the so-called activity indicators, includes frequency of adjustments. In the United States, workload measures includenumbers of products as well as revenue collected, but these measures are not intended to be viewed as goals. Othermeasures are ratios like the percentage of returns selected for verification (Norway), percentage of assessmentsfinished and percentage of companies audited (Germany), the number and importance of fraud cases discovered(Luxembourg), percentage of audits/inspections where unreported amounts are discovered (United Kingdom) andpercentage of tax owed that is paid duly (Norway).

170. In Denmark, the additional yield from tax control is one of 7 particularly important quantitative indicatorsand in Austria the key measures are additional revenue and number of inspections. In Spain, efficiency indexes areestablished which measure the relation between revenue collected and costs incurred. In New Zealand total revenueis not used in performance measurement, although it is monitored and reported regularly. In order to measure theoverall performance other proxy measures are used, such as customer contacts, the dollar return generated throughaudit activity and outstanding arrears recovered.

171. In fact, the numbers of various products play an important role as throughput measures in all the countries inthe survey, at least in the area of audits and inspections. In addition to numbers of tax returns processed, inspections,amendments etc., some countries have made specific reference to the numbers of different kinds of taxpayer contactssuch as telephone enquiries and visits to a tax office (Australia), providing taxpayer services (New Zealand) andclients access by telephone for enquiries purposes and calls handled by automated response systems (Canada).

172. Some of the countries in the survey refer specifically to timeliness as an indicator of the service level of thetax administration, e.g. time taken to process non-complicated objections (Canada), percentage of VAT registrationforms processed within 3 weeks (Norway), percentage of VAT repayment returns authorised within 10 days ofreceipt (United Kingdom).

2.3.3 Measuring Productivity

2.3.3.1 Use and reporting of productivity measures

173. Almost all tax administrations in our survey have measures and report on productivity development. This istrue for Austria, Australia, Canada, Denmark, Finland, Mexico, the Netherlands, New Zealand, Norway,Spain, Sweden and the United Kingdom. Typically productivity measures or unit costs are published with otherperformance measures in their annual reports, which, depending on the institutional set-up, are submitted to theMinister, the Government or Parliament. In New Zealand the Internal Revenue Department produces a ‘HealthReport’ annually, with an overview of the relationships between the various initiatives being pursued by thedepartment and their contribution to the overall efficiency of the tax administration. It also identifies particular areasthat are generating pressure on the operation of the administration. The Health Report provides input into thepurchase advice provided to the Minister as part of the ongoing budgetary cycle. The Annual Report of the SpanishTax Administration includes an estimation of tax collection costs.

174. Some countries supply productivity measures to ministers or parliament at shorter intervals. In theNetherlands this is done twice yearly (in the Annual Report to Parliament and in the National Budget Plan). In theUnited Kingdom, Customs & Excise report emerging outturn against targets in the Management Plan in April andfinal outturn to Parliament in the Annual Report in October. It is also stated that figures are supplied on request(Canada, Spain).

175. In the United States, the IRS does not currently report productivity/efficiency changes due to restrictionsplaced on the organisation by statute governing the use of enforcement/productivity measures. As part of a new



measurement system to be introduced in 1999, the IRS is pro-posing the use of some productivity measures that willbe balanced by equally important measures of quality.

176. Productivity measures are also often an important tool for the management of the tax administration tomonitor performance of different business lines or units of the organisation. In Mexico reports on audits and deskverifications are submitted to the chief executive of the tax administration on a monthly basis. In New Zealandchanges in the levels of efficiency is measured through unit costs and senior operations managers monitor the unitcosts, also on a monthly basis

2.3.3.2 Measures of productivity

177. Productivity measures are based on the relationship between outputs and inputs. Using expenditure as theinput measure, this relationship can be expressed as a ratio between total (weighted) output and total costs, or as unitcosts for individual outputs.

178. Another approach is to replace cost by labour input expressed as days or staff years (full time equivalents).The ratio between total (weighed) output and the total number of work hours (days, staff years etc) yields labourproductivity. Working time can also be compared to individual outputs, which yields the average time spent on eachcase.

179. To get costs or work hours right can be a problem. The greater problem is however to define the proper outputand how to take account of different levels of quality of output.

180. Efficiency is often used as a synonym for productivity, but other slightly different definitions are also in use.One measures the degree of efficiency in relation to the ‘productivity frontier’ formed by units making the best useof their resources. The problems of finding proper measures of input and output still remain.

181. None of these problems will be discussed here, but they should be kept in mind when comparing differentapproaches to productivity measurement.

182. Output can also be expressed in terms of the number of taxpayers and be compared with the number of taxofficers. This number is often a rough equivalent of the number of tax returns.

183. Productivity measures normally define output as some kind of physical quantity. It is not unusual to applyefficiency measures where output is defined in monetary terms such as total tax revenue per dollar spent or additionalassessment produced per dollar spent on audits. In tax administrations where the management plan defines outputtargets, these targets often replace cost efficiency as benchmark. The important thing is to reach the targeted volume(within a given budget restraint) not to attain best possible ratio between output volume and cost.

184. All these approaches to efficiency measurement are represented among the tax administrations in our study.Many (or most) use a combination of methods. In Australia, for example, the efficiency measures of the AustralianTax Office are cost in relation to revenue collected, cost of collection per taxpayer and the number of taxpayers pertax officer. Canada also reports a great variety of output measures that are combined with inputs in terms ofexpenditures or full-time equivalents. In the Netherlands production volumes of diverse tax items are related toexpenditures. Measures also include production time of assessment and appeals and labour capacity.

185. Sweden has a long tradition in measuring total productivity (total output in relation to total expenditure).There are time series for the entire public sector as well as for individual agencies dating back to the 1960s. Thislong-term productivity index for the Swedish tax administration is based on the number of taxpayers (or tax returnsas a proxy measure) as output, which is related to cost deflated to constant prices. The problem with this measure isthat output is virtually impossible to influence by the tax authorities as the number of taxpayers or returns aredetermined by the legal definition of tax subjects. To estimate productivity development in the medium term (up to 5years) the number of desk and field audits is also included in the output measure. In order to arrive at a totalproductivity index, the different components of output are weighted according to their unit cost a given base year.



186. In Finland, productivity is measured as the number of taxpayers related to total costs and reported workhours. In Norway a similar approach is used, and productivity indicators relates the number of taxpayers of differentcategories to staff years.

187. In Spain, the most common output measure is the amount of tax revenue collected and the most commoninput is the cost incurred to collect this amount. It is however pointed out in the Spanish reply that other outputscould also be considered (the number of taxpayers affected by tax measures or amounts discovered by taxinspections). It is also regarded as a problem that qualitative measures are difficult to evaluate.

188. In Austria and Mexico it seems that efficiency measurement is focused on the audit area. The main outputmeasures of the Austrian Tax Administration appear to be the number of verifications and additional revenuerecovered as a result. This output is related to the number of work hours. The Mexican administration measures thenumber of verifications carried out and the number of auditors involved in a specific verification as well as theamount of taxes collected.

189. In France the performance measurement system is composed of three main elements: activity, quality andefficiency. Efficiency indicators link services’ production to the number of employees available, permitting tomeasure e.g. average number of cases handled per employee. Efficiency indicators are regularly analysed, taking intoaccount also environment factors (social and economic environment that may influence the work of the relevantservice).

190. In the United Kingdom (Customs & Excise) unit costs are calculated at Department level. Such measures,however, do not feature prominently in the management plan and focus is rather put on to achieve objectives, eachoperationalised through performance measures and indicators with planned outputs or ratios expressing timeliness,accuracy etc.

191. In the New Zealand system of contract management based on so called Purchase Agreements, the Ministerand the Chief Executive Officer of the Inland Revenue Department agree what quantity of output will be produced atan agreed price. The agreement contains a detailed specification of each output in terms of quantity, quality,timeliness and cost. Individual outputs are not always related to cost, but in debt management a dollar return iscalculated (target $50 for every dollar spent) and a similar measure is applied to auditing (target $4 on every dollarspent).

192. In Germany, it is being discussed in the Länder what measures of input should be included in the design.However, assessments seem to be regarded as the most important output measure.

2.4 Measures of Quality and Taxpayer Attitudes

2.4.1 Approaches to quality assessment

193. The issue of quality is important to tax administrations and seems to become even more so. Most countries inthe survey report measures to ensure or improve quality standards. It is, however, often stated that quality is difficultto measure.

194. One can discern different strands in quality work. One is to secure quality in terms of high levels of legalaccuracy, professional standards in processes, decisions and other output. This is accomplished through internal audit(Mexico, the Netherlands), quality checks by experts from within or outside the organisation (Austria, theNetherlands, New Zealand, Sweden, the United States).

195. In Denmark, one important aspect of quality is uniformity, not only in applying tax laws but also as regardsthe manner in which taxation work is carried out in the regions. In addition, the number of appeals, administrative aswell as appeals to the courts, is reported and an account is published annually by the Ministry of Taxation.



196. Another focus is on service delivery and client satisfaction. Taxpayers are more often than not referred to ascustomers and their views are studied through regular or ad hoc surveys (see next question). In some cases servicestandards are publicised, as in the United Kingdom (taxpayer’s charter etc) and quality is measured against thesestandards. In France, in the 1997 up-date of the measurement system, the need to improve quality measurement wasstressed. Quality indicators are defined according to type of mission and include the duration of appeals, rapidity ofresponses to taxpayers etc. The General Tax Directorate has committed itself to observe five quality standards by2002, regarding reception of taxpayers on appointment, no phone calls without any follow-up, sending out of leafletsand forms, interim replies when needed and the abolishment of anonymity.

197. Quality is also discussed in a broader sense (total quality - TQM). Finland reports that quality work is relatedto the assessment criteria of the Finnish Quality Award modelled on the American Malcolm Baldridge QualityAward. Similar work is being done in New Zealand, Denmark and Sweden.

198. In Germany, it is regarded as difficult to measure quality in the tax administration, but attempts are made totake qualitative aspects into consideration within the framework of cost and performance measurement.

2.4.2 Investigating taxpayers’ attitudes

199. Almost all the countries in our study report that they conduct surveys to find out what taxpayers think aboutthe tax administrations service delivery etc. In some countries this is done on a regular or on-going basis. In othercountries surveys are carried out frequently but not according to any fixed schedule (Norway). In Denmark, surveyshave not so far taken place regularly. However, in the strategic management plan for the years 1998-2001, overallclient surveys are foreseen to take place at two-year intervals. There will be a set of questions to be asked nation-wide, but the regional administrations can add questions that they find particularly relevant to their region. InGermany, regular surveys of taxpayers are not performed, but it is planned to do such surveys in the context oforganisational studies.

200. Surveys are sometimes global, in other cases focused on special target groups, a special issue, or programme.In some countries it is up to the regional or local offices to carry out surveys.

201. The surveys are often carried out by private sector survey companies (Sweden, Finland, the United States)or independent institutes (Spain) to make sure that they have a high professional standard and that they protect theconfidentiality of respondents. In France, the General Tax Directorate will regularly measure taxpayers’ awarenesson quality service and users’ needs by a sampling process.

202. But surveys are by no means the only way to investigate stakeholder opinion. Tax administrations frequentlyarrange meetings or seminars with industry associations (Mexico) or with local user groups (the United Kingdom).

203. In Mexico there are letterboxes to collect complaints and suggestions from taxpayers. In the United States, inaddition to mail and phone surveys covering certain categories of customers, exit surveys are offered regularly totaxpayers who visit an IRS walk-in site.

204. The main focus of these surveys seems to be on the tax administration's service delivery. But surveys andother forms of investigation are also used as input into compliance research (New Zealand, Sweden) or into otherissues. In the Netherlands, for instance, they are used as input for drafting new, or upgrading of existing, policymeasures, which can be found in the yearly business plans. To ensure this yearly survey by the Netherlands Tax andCustoms Administration, called Fiscal Monitor, is embedded in the planning and control cycle.



2.5 Outcomes, Impacts and the Tax Gap

2.5.1 Outcomes: Effects of Tax Control

205. Many tax administrations (see section 2.3.2) regard tax revenue, or at least additional revenue as a result oftax control as output. For reasons given in section 1.3, tax revenue can also be classified as outcome. No matter howthey are classified, the revenue effects, direct as well as indirect, of enforcement activities are essential as a basis fordiscussions regarding priorities within the tax administration as well as for the budget dialogue with the politicallevel. They can also be used to monitor trends in productivity and quality of tax enforcement.

206. Most member states measure the direct revenue effect of audits and desk verifications in absolute terms and,in some cases, as percentage of total revenue. Some member states report that they also measure direct effect inrelation to costs incurred, i.e. a kind of productivity measure, or the percentage of audits etc. where unreportedamounts are discovered (which could be viewed as a quality indicator).

207. One country (Norway) mentions specifically the role of information and different forms of co-operation withtaxpayers. Good information could make taxpayers report accurately, so as to make assessment and payment of taxesmore correct, and probably increase revenue. The type of information varies according to whom you want toinfluence. Some groups of taxpayers want to handle their taxes correctly, and need and demand information in orderto do so. For others, information regarding controls/audits in their business may strengthen the feeling that there is arisk of getting ‘caught’.

208. Only a few member countries report attempts to measure or estimate the total direct and indirect impact ofenforcement measures or to estimate the gap between the actual revenue yield and the theoretically correct yield (seesection 2.5.2 below).

209. In Australia, revenue effects are determined in reference to specific risk areas. Revenue effects are reportedby risk area and may be assessed by comparing actual revenue trends with projected trends if there was nointervention, revenue raised, reduction in the level of deductions and losses claimed, increase in the number oflodgements etc.

210. In Sweden, the direct revenue effect of audits and desk verifications is measured on a regular basis and hasbeen regarded, along with the number of audits and inspections carried out, as a key element in performanceassessment. The indirect effect has been researched and was discussed recently in a report based on enforcementactivities in the years 1992 through 1997. It was concluded that the deterrent effect of tax control is considerable butcannot be specified in revenue terms. In an earlier estimate, the total indirect revenue effect of an expansion ofenforcement programs was assumed to be somewhere between 100 and 200 per cent of the direct effect. InDenmark, revenue effects are implied from the degree to which performance targets have been attained, notably thenumber of controls performed and the size (turnover) of taxpayers controlled.

211. In the United Kingdom, the effectiveness of the VAT assurance program is evaluated in the three areas directeffect, preventive effect (which is the increased level of tax declared by a trader following a visit) and deterrent effect(which is the increased level of tax declared by traders other than the trader visited). The direct effect is measuredusing an operational measurement system. The preventive effect has been researched a number of times and thedeterrent effects have recently been measured by university academics working on behalf of Customs & Excise.

212. In the United states, the effects of auditing are measured and estimated by monitoring the actual directenforcement yield, predicting (periodically) future direct enforcement yield expected from a significant expansion ofan enforcement program and estimating the indirect effect of enforcement. The latter is said to be particularlydifficult with regard to those who have not been contacted directly by an enforcement program. A limited studycompleted recently has, however, confirmed the presence of the indirect effect and indicated that it is much largerthan the direct effect.



2.5.2 Estimates of the tax gap

213. To close the tax gap, i.e. the difference between actual revenue and the theoretically correct yield can beregarded as the ultimate (if unattainable) objective of tax administrations. It can be assumed that most of this gap ismade up by deliberate tax evasion, since genuine involuntary mistakes on part of taxpayers and tax officials shouldtend to cancel each other out. It is however difficult to monitor progress against this objective, since it requires areliable measure of the hidden economy which is notoriously difficult to find.

214. It is therefore not surprising that no country reports regular estimates of the tax gap or the hidden economy asan integrated part of a performance measurement system. Some administrations have carried out or commissionedspecial studies at different points in time, but not in a regular fashion. Generally this seems to be regarded as thedomain of economic research, with limited practical use for tax authorities.

215. In Sweden, the tax administration has commissioned studies based on national account data. One such studywas made in the mid 1980s and another in the early 1990s. The earlier study indicated that the size of the ‘blackeconomy’ was between 4.7 and 7.5 per cent of GNP in 1981 and the later study gives the figure 4.7 per cent for1991. By combining the 1991 measure with data from tax audits based either on random selection of targetedtaxpayers or total coverage of a certain target group, the total tax gap has been estimated to about 9 per cent of thetheoretical tax yield (including a collection loss of 0.5 per cent). This figure is by no means undisputed, there areother estimates that give both higher and lower figures, but most fall in this range. The significance of this estimate isto give an indication as to the size of the problem. It does not, however, give much practical guidance.

216. This experience seems to be shared by many other tax administrations. In the United Kingdom the Customs& Excise and a number of independent economists have tried to measure the theoretical yield of VAT and tocompare it to the VAT actually declared. This turned out to be very difficult. From the Department’s point of viewthe most successful attempt was a study focusing on small sectors of the economy. But even this study revealedproblems with data quality. A more fruitful approach seems to be trend analysis. Currently Customs & Excisecalculate a ‘VAT Compliance Measure’, which is a relation of the actual VAT declared over the VAT calculated asdue on the basis of data from the Office of National Statistics.

217. In Finland, the tax gap has been estimated by a working group set up by the Ministry of Finance in 1995,targeting on the underground economy. This work has been continued by the National Board of Taxes, concentratingon different fields of activity. The estimation made is based on the analysis of the information in the balancing ofaccounts and income distribution statistics.

218. Another approach is represented by the United States. Up to 1988 the IRS made estimates of the ‘tax gap’that relied heavily on thorough audits of representative samples of taxpayers. The audit data were then supplementedby studies to compensate for weaknesses of these audits. More recently the IRS has explored the use of a compliancemeasure based on such studies, but have found it impractical, partly because the Service cannot control externalinfluences on the measure, partly because these measures must be based on historical data.

219. Canada’s tax administration is based on the fundamental concepts of self-assessment and voluntarycompliance. Individuals and corporations provide information on income, expenditure, tax credits and otherentitlements. As a result, it is extremely difficult to objectively measure the tax and compliance gaps in variousprograms, and attempts to do so have been largely inconclusive. New Zealand recognises the tax gap as an indicatorof tax system and tax administration efficiency, but notes that no accurate method of measuring this gap has beenestablished.

220. In Denmark, too, there are no regular assessments of this kind. A private foundation has attempted tomeasure the size of the shadow economy in 1997. The investigation was based on a questionnaire to find out thenumber of people engaged in unreported work and the time spent on it.

221. To the extent the idea of finding measures of compliance has not completely been abandoned it seems thatapproaches more closely linked to tax control and risk assessments are preferred. Australia does not attempt toestimate the total tax gap, but undertakes rigorous risk assessments to identify and address areas where this gap may



be significant or have the potential to become significant. The effectiveness of its risk assessment is in itself animportant compliance measure and is included in the annual report.

222. Nor does the Netherlands Tax Administration measure the level of non-compliance through estimates of thetax gap. Percentage of surveys with corrections and amount of audit discrepancies are however importantperformance indicators.

223. Recognising the difficulties other countries such as Austria, Norway and Spain do not attempt to measurethe tax gap. In Germany, in the context of an organisational review in one of the Länder, such estimates have beenmade in order to check on the necessity of quality assurance, but they are not part of a performance measurementsystem.

224. To sum up, the general position on measuring the tax gap is that it is difficult if not downright impossible andeven if it were possible to get a reliable total figure it would not tell us much of practical value in the struggle againstnon-compliance.



3. PERFORMANCE MEASUREMENT IN THE SWEDISH TAXADMINISTRATION

3.1 Introduction

225. In the previous chapter some current trends and common varieties of performance measurement in taxadministrations were identified. In this chapter some of the issues touched upon in chapter two will be discussed ingreater detail drawing on the experience of the Swedish Tax Administration.

226. The first part of this chapter describes the institutional context of performance management in the SwedishTax Administration. This is to explain how the traditionally large autonomy of Swedish agencies has been furtherstrengthened by recent budget reform. Then the focus will shift to the management system. The following sectionsdescribe the design of the Performance Measurement Model (PMM), which has been derived from the generalprogramme logic of taxation and the basic strategy of the Tax Administration. The choice of performance indicatorswill be discussed as well as some implementation issues.

3.2 Institutional Context

3.2.1 Ministerial and managerial roles

3.2.1.1 Constitutional Background227. In Sweden ministries are small and the responsibility for implementation of government programmes isessentially left to the central agencies and their regional and local branches. These agencies enjoy a considerabledegree of autonomy, which is based primarily on the fact that agency heads (director generals) do not report to anyindividual minister but to the government as a whole. Although ministers are responsible for the development ofpolicy, drafting legislation, as well as preparing the budget for and monitoring the performance of agencies in theirrespective policy area, no minister can issue direct orders to the director general of an agency. Such directives musttake the form of cabinet decisions. There are of course frequent informal contacts between the central agencies andtheir ministries, but ministers are, in fact, very careful not to act on their own and interfere with day-to-daymanagement of the agencies.

228. Furthermore, neither ministers nor the cabinet as a whole are allowed to interfere with how individual cases(applications, tax returns, complaints, investigations, etc.) are handled by the agencies.

229. In recent years this constitutionally based autonomy of the agencies vis-à-vis the government has been furtherstrengthened by devolution of managerial authority (especially in human resource management) and budget reform.

3.2.1.2 Budget Reform and Management by Results230. In Sweden, like in most other Member States, the budget process has undergone fundamental changes duringthe last few decades. The 1970s saw a period of experimenting with the Program Budget concept developed in theUnited States, but basically budgeting for the public administration remained traditional up to the late 1980s.

231. Traditional in this context means that the process was short sighted - based on a closed fiscal year, withoutsaving or borrowing facilities - and focused on marginal input changes rather than an overall analysis of input andoutput (performance) of the agency or administration, as a whole.

232. In 1988, the Swedish Parliament endorsed the principles of a new budget and management process, to beimplemented gradually over the fiscal years 1991/92 through 1993/94. In general terms, the major administrations,such as the Police and the Tax Administration, were left to the last round in 1993/94, when some experience hadalready been gained regarding transition problems and the functioning of the new system.



233. Basic features of the new process were the introduction of:

• three year planning periods, with an in-depth assessment of the agency, or administration, preceding each suchperiod, and a simplified procedure the years in between;

• accounting on an accrual basis, virtually along the same lines as business accounting;

• comprehensive Annual Reports, containing performance data as well as financial information presented in theform of a balance sheet, a profit statement, a statement of appropriation and a financing analysis;

• a single appropriation, referred to as frame appropriation, for all kinds of expenditure (salaries, accommodation,travel costs, computers etc.) and with facilities for unlimited saving and borrowing up to, normally, 5 per cent ofthe amount of the appropriation;

• loans from the Public Debt Office for investment in durable assets, at market interest rates, instead of ad-hocadjustments of the appropriation in order to accommodate investment needs.

234. These innovations constitute a major shift of powers and responsibilities. The Government offices were to beless preoccupied with details of financial management and, on the other hand, play a more active role in designingtargets and setting priorities of the agencies’ operations. As a consequence, the idea was to reduce the role of theagencies’ Budget Request and develop the Annual Report and the annual Government approval document for eachagency/administration into the most important documents of the entire budget and management process. TheGovernment approval document was to contain far less details on the input side (financial restrictions) and, on theother hand, clear cut goals, performance targets and reporting requirements.

235. The new process was implemented successfully over the period mentioned above, even though many agencieshad difficulties at the beginning in meeting the new requirements on their accounting systems. As an increasingnumber of agencies were integrated into the new process, it was realised that three year planning periods beingapplied to all of them was too stiff a system and the in-depth assessment was made optional: currently an in-depthBudget Request has to be submitted only when demanded by the government from a specific agency/administration.This is likely to be less often than after three years.

236. An important reason for introducing saving and borrowing facilities was, of course, the desire to induceagencies to plan for expenditure over longer periods and make them less inclined to use up all the funds availabletowards the end of each fiscal year. Obviously, for this to be achieved, a certain degree of discipline was required onthe hand of the government and the parliament, who would have to abide with the new rules and refrain from“confiscating” savings even if these appeared to be excessive. By and large this would seem to have been observedso far, with the possible exception of budgeting for premises.

237. In order to gain experience of the key elements of the new budget and management process, a limited numberof agencies were selected to start developing performance measurement and submitting annual performance reportsin the late 1980s. Development in this area has continued, along with efforts to develop the skills of the governmentoffices in designing goals and performance targets. The trend right now would seem to be away from what wasinitially a rather rigid system towards a more differentiated one, where the characteristics of each area of publicadministration can be taken into account when designing goals, targets and reporting obligations.

238. Besides specific success indicators for each agency/administration, productivity and quality issues have beenaddressed and an attempt has recently been made to measure the overall productivity development of Swedish centralgovernment over the years 1991 through 1997. Plans are to present overall productivity figures regularly henceforth,based on the profit statement presented in the agencies’ annual reporting.

239. In response to the need to tighten up what was realised in the early 1990s to be a, by comparison, very loosebudget process, several other changes have been introduced in recent years. Amongst other things, the so-calledsuggested (or preliminary) appropriations that could be exceeded by government decision have been abolished. As aconsequence, efforts are being made to develop and refine expenditure-forecasting methods, especially with regard tothe major subsidy programs within the social insurance and social security sector. Fundamental changes have alsotaken place in the parliamentary decision making process. However, as these changes have little to do withmanagement at the level of individual agencies or administrations, they need not be discussed in greater detail in thiscontext.



240. To conclude, while focusing on the development of instruments for follow-up and evaluation, enhancing therole of the government and its services in the management process, and strengthening budget discipline, the BudgetReform has not addressed the issues of incentives and sanctions. There are good reasons why this has not been veryhighly prioritised so far, but it would seem to call for more attention in the future, as the reform processes itself isbeing evaluated.

3.2.2 Organisation of the Swedish Tax Administration

241. With only a few exceptions, all taxes (including local income tax) are collected by the Swedish TaxAdministration (skatteförvaltningen). At central agency level the National Tax Board (Riksskatteverket) is the"parent" not only of the 10 Regional Tax Authorities (skattemyndigheter) but also of 10 Regional EnforcementAuthorities (kronofogdemyndigheter).

242. The role of the National Tax Board (NTB) is to provide guidance on the application of tax law and tocoordinate and support the activities of the regional authorities, which carry out most operational duties. Despite thecommon "parentage" the Tax Administration and the Enforcement Service are in many respects two separateservices. The Enforcement Service is responsible not only for collecting tax arrears and other unpaid debts to thepublic sector but also for the collection of bad debts owed to private companies and individuals.

243. The Tax Administration is the larger of these services (in 1999 there were 9,400 employees at the regional taxauthorities while the regional enforcement authorities employ about 2,700 people). The NTB itself had about 1,100employees, 60% of which work in the Computer Services Department.

Diagram 2: The organisation of the Swedish Tax Administration and Enforcement Service

Ministry of Finance

10 Regional Enforcement Authorities

(with about 80 local offices)

10 Regional Tax Authorities

(with about 120 local offices)

Cabinet

Staff: 2 700 Staff: 9 400

The National Tax Board

Staff: 1 100



3.2.3 Management System

3.2.3.1 Management by Objectives 1987:

244. After a major reorganisation in 1987 a new management system which was established, which was based onManagement by Objectives and built on three pillars:

• A model for budget allocation

• A system for coordinated planning

• A model for performance measurement

245. The Tax Administration is financed through appropriations put at the disposal of the National Tax Board. TheBoard decides the allocation of funds to the regional authorities. This allocation is based on a model that divides theavailable sum between the authorities in relation to their workload, which is estimated on the basis of factors such aspopulation, the number of businesses weighted according to size etc. This is done annually and thus gradual changesin the population or business structure will result in gradual shifts in the allocation of resources. As long as theregional authority does not exceed its total budget there are no formal restrictions on the use of its budget allocation.By reducing staff, an authority can gain room for buying more equipment or by reducing its accommodation costs itcan retain more staff. Such decisions are made by the head of each regional authority.

246. Until recently the planning process is coordinated by the National Tax Board’s annual guidelines that set outthe goals and priorities. The guidelines were based on the Government approval document, which was supplementedby policies and strategies drawn up within the Tax Administration. As a rule these guidelines did not contain specifictargets to be met by the regional authorities. It was left to the Authorities themselves to work out their own targets,provided that they were in line with overall strategy.

247. While models for budget allocation and coordinated planning were quickly set up in the late 1980s, it hastaken long to create a system for performance measurement. Although the Tax Administration did not lag behindother agencies in this respect, it was soon recognised that the lack of a comprehensive measurement system createdan imbalance between the degree to which authority had been delegated and the capacity of the Ministry and theBoard for monitoring performance. The awareness of this problem eventually led to the development of the PMMthat will be described below.

3.2.3.2 Results oriented Management and Total Quality 1999:

248. The need for improved performance measurement has led to a shift of emphasis from Management byObjectives to Results Oriented Management. The Government expects agencies to spend less time on arguing fortheir budget allocations and more time on providing informative and well-structured annual reports.

249. In the wake of a recent reorganisation, in which the 24 county tax authorities and 24 county enforcementauthorities were merged into 10 regional authorities in each service, there has been a comprehensive review of themanagement system. This review has not affected the degree to which powers are delegated to the regionalauthorities, but a smaller number of regional authorities has allowed for a new management structure. The DirectorGeneral, his deputy and the (10+10) regional managers now form two management groups, one for the TaxAdministration and one for the Enforcement Service. Usually their meetings are coordinated so that the two groupsdiscuss common matters jointly and then meet separately to discuss topics that are specific for each service.

250. The annual management process has also been redesigned. The starting point is a joint 3-5 day strategyseminar for the two management groups. The outcome of this seminar will decide the contents of the Board’s overallmanagement plan, which serves as framework for planning and budgeting at authority level. The management planhas replaced the annual guidelines and unlike the guidelines the plan contains a great number of national targets to bemet by the end of coming year or by the end of the three-year planning period.

251. Implementation of the management plan is monitored through key indicators, which are discussed at themonthly meetings of the two management groups. A more thorough analysis of performance development ispresented in an Interim Performance Report (per 30 June) and in the Annual Report (per 31 December). Thesereports also form the basis for meetings with the Minister of Finance.



252. Another development has been the introduction of Total Quality Management as the framework for the TaxAdministrations management philosophy. The Swedish Quality Award has recently been introduced as a vehicle ofcreating both a new culture and a framework for business process development. A number of the central values thatform the basis for the Quality Award have been selected as the core values around which the Tax Administration’snew culture will be fostered. To promote this culture, existing missions statements, objectives and policies, are beingreviewed, revised and amended.

253. Currently work is under way to document present management practices according the Swedish QualityAward criteria. In this context present business processes are being defined with respect to categories of taxpayers(individuals, small businesses, medium-sized businesses and large businesses). So far process orientation has nothad any major impact on actual organisation, but within functional departments process coordinators are beingappointed to ensure consistent implementation of policies, strategies and plans throughout the organisation withregard to the different target groups.

254. At a more practical level a number of new management tools have been adopted in order to structure theplanning process, facilitate continual improvements and other forms of business process development. Of criticalimportance are tools to monitor and measure progress. Great emphasis is therefore put on improving measurement,analysis and evaluation of internal processes and their impact on our business environment.

3.3 A Performance Measurement Model (PMM)

3.3.1 Introduction

255. With time the scope of performance measurement has widened. In the 1970s programme budgeting focused inimproved measurement of inputs. In the Swedish Tax Administration it brought a new accounting system thatallowed costs and work hours to be linked to activities and programmes. There were also attempts to quantify theoutput of each programme. Before 1987 progress was slow, however, because of a complex organisational structurethat made it difficult to measure the Tax Administration’s total costs and outputs.

256. When a new unified tax administration was formed in 1987 reliable figures on costs and manpower becameavailable for the entire tax administration. By linking them to caseload figures, productivity could be measured.5

These productivity measures became a central feature in the annual reports that the National Tax Board began topublish in the late 1980s.

257. The early 1990s was a period of reform and restructuring. Costs increased and output fell and so did reportedproductivity. In the years that followed it became urgent to restore productivity, especially in tax control. Great stresswas put on increasing the number of field audits, but there were signs that quality suffered. A number of steps weretaken to improve quality. One was to extend the quality assessment programs. It was also seen as important thatperformance measurement should include indicators on quality, such as the number of complaints, averageprocessing time for applications etc. Taxpayer surveys became a useful tool form measuring public perceptions ofthe quality of service delivery.

258. Productivity and quality are prerequisites but no guarantee for reaching the objectives. It is not enough toproduce the desired outputs and to ensure quality. To achieve effectiveness it is also necessary to measure outcomesin terms of revenue and evaluate the impact of service and tax control on compliance.

259. Thus it became evident that figures on productivity and recovered revenue through audits were not enough togauge performance. A more comprehensive measurement model was needed and in 1994 the government instructedthe National Tax Board to design such a model, which was to form the basis for a more informed dialogue between

5 Rough estimates of productivity had already been carried out by the Swedish Agency for Administrative Development (Statskontoret, 1995 and

ESO, 1994). In the late 1970s it started measurement of productivity development in the entire governmental and public sector in Sweden. Laterstudies have brought up these studies to the present day and today the entire period 1960-1997 is covered.



the Board and the Ministry concerning the Tax Administration’s performance. The central question was: what are thebasic criteria of a good result?

3.3.2 A Model for Performance Measurement

260. The overriding objective of taxation is to assess tax liabilities and collect tax in accordance with law and atminimum cost to the government and to taxpayers. The amount of revenue that should have been collected if therewere no tax fraud and no unintentional errors can be labelled the theoretical tax revenue. The difference between thetheoretical tax revenue and the tax actually collected is often referred to as the tax gap. The tax gap can be dividedinto two parts. One part is made up by the difference between the theoretical tax and the tax actually assessed andbilled (assessment error). The other is equal to the discrepancy between the amount of tax billed and the amount oftax collected (collection loss).

261. Estimates of the assessment error are based on calculations of the black economy supplemented withestimates of other forms of tax evasion. Recent studies of the size of the black economy in Sweden range between3% and 5% of GDP.6 On the assumption that the correct figure is 5 %, this represents a loss of about 5-6 % oftheoretical revenue. Another 3 % can be added for other forms of tax evasion and unintentional errors.7 This bringsthe total assessment error to about 8-9 % of the theoretical tax. This figure is admittedly shaky and of interest only asan indication of its likely magnitude. According to the latest figures, the actual collection loss is about 0.5% of taxrevenue.8

262. Taxation is done at a cost to society. If excess burden in the form of lost production is disregarded, thegovernment’s administration costs and the taxpayers’ compliance costs still remain. The administration costsinclude not only the cost of the Swedish Tax Administration, but also costs incurred by other government agenciessuch as the Customs, the Prosecutors, the Police etc. In 1992 the administration costs of taxation were estimated toabout SEK 5bn or roughly 0.5% of tax revenue.

263. Compliance costs include the sacrifice of time spent on preparing tax returns, direct outlays for taxconsultants, extra costs for adapting accounting systems to the demands of taxation, etc. A study based on surveydata estimated the compliance costs in 1992 to SEK 9 billion, or about 1.0% of theoretical tax revenue (Malmer,Persson and Tengblad, 1994)

6 A number of studies have been conducted in Sweden in the 1980s and 1990s. In a study based upon the National Account carried out in 1997 by

Åke Tengblad the size of the black economy was estimated to lie within the range 3.17 – 4.5 % of GDP (The Swedish National Audit Office,1998)

7 E.g. smuggling, VAT fraud based on false invoices, deductions based on false information etc. Random audits give some information about the

size of such tax evasion.8 For a discussion of the size of the tax gap, see the English summary of the Tax Statistical yearbook of Sweden 1999 published by the NationalTax Board (Riksskatteverket, 1999), also available on the Board’s web site, www.rsv.se



Diagram 3: Actual tax revenue and costs of taxation as percent of theoretical tax revenue

3.3.3.1 Strategy, Performance Criteria and Performance Indicators264. The ultimate concern of the tax administration is to reduce the tax gap. This means influencing taxpayerbehaviour by encouraging compliance and by deterring and preventing tax evasion. The tools available for thiscarrots and sticks approach are essentially information and service on the one hand and tax control and sanctions onthe other.

265. None of this can be achieved unless the basic machinery works properly. Funding is limited and the taxadministration must maintain high productivity in basic processing in order to free resources for service and taxcontrol. Productivity is measured as the ratio of output (e.g. income tax returns and audits) to total cost or workhours.

266. Quality must first of all be maintained to safeguard against errors in decision-making (quality of product) orin procedure (quality of process), which may cause losses to taxpayers. Such misunderstandings and errors are oftencostly to correct for both taxpayers and the tax administration. There are indicators that measure quality against legaland professional standards (frequency of complaints etc) as well as according to taxpayer perceptions (surveys).

267. Turning to outcomes and impacts, the obvious measure would seem to be total revenue collected. Undernormal circumstances, however, variations in revenue depend much more on changes in the tax law, rising or fallingtax rates and the ups and downs in the business cycle. The overall measure of effectiveness is therefore not totalrevenue but the gap between actual and theoretical revenue (the tax gap). From the tax administration’s point ofview, this concerns its impact on the size of collection losses and the assessment error.

268. Although total collection losses can easily be measured, it is difficult determine the administration’s impacton the collection losses. According to experience their movements up and down correlates more closely with thebusiness cycle than with steps taken by the tax authorities and the enforcement authorities.

269. Most difficult of all is to measure the impact on the assessment error. This involves solving the dualproblem of (1) measuring the size of the assessment error and (2) to identify the Tax Administration’s influence on

-20%

0%

20%

40%

60%

80%

100%

120%

Theoretical Tax Revenue = 100 %

Assessment Error = about 8 %Collection Losses = 0,5 %

Actual Tax Revenue = about 91 %

Administration Costs = 0,5 %

Compliance Costs= about 1 %

Tax Gap = 9 %



this error. Essentially this boils down to estimating the effects of different programs (auditing, service etc) ontaxpayer compliance. Although difficult to measure, in order to get priorities right it is important include indicatorsthat focus attention on compliance, e.g. indicators of actual compliance as well as indicators of deterrence andprevention by tax control.

Diagram 4: Performance criteria and performance indicators

The task

Total Tax Assessment Error

Tax Collection Losses

Administrative Costs

Compliance costs

Productivity

Quality

Impact on Collection Losses

Impact on Assessment Error

(Voluntary or actual) Compliance

Deterrence

Direct Monetary Outcomes

(Voluntary or actual) compliance

Deterrence

Direct monetary outcomes

Output controlled by Tax Authorities

Output determinded by external factors

Quality by legal and

Quality as perceived by taxpayers

Total Tax Revenue/

Total Volume of Output

Performance Criteria

Act

ual a

nd T

heor

etic

al T

ax R

even

ue

Cos

ts o

f

Theoretical Tax Revenue

Performance Indicators

TCMP-measurements

Comparisons with National Accounts

Income tax returns filed on time

Frequency of desk and field audits

Additional tax levied through desk and field audits

Number of audits/total cost

Number of tax returns/total cost



3.4 Performance Indicators

270. The previous section dealt with the logic and structure of the PMM. This section will present the performanceindicators. We will discuss the performance indicators in the same order as they appear in the input-output-outcome-impact sequence:

• Productivity (the ratio of output to input)

• Quality (of process and outputs)

• Outcomes (in terms of revenue)

• Impacts (on collection losses and assessment error)

3.4.1 Productivity

Performance Criteria Performance Indicators

Total Productivity Number of processed returns / costs

Number of desk audits / costs

Number of field audits / costs

Labour Productivity Number of processed returns / work hours

Number of desk audits / work hours

Number of field audits / work hours

271. Productivity links outputs to inputs measured in terms of costs or work hours. In either case inputs andoutputs need to be identified.

3.4.1.1 Inputs

3.4.1.1.1 Work hours

272. A work hour or time report system was first introduced in the Swedish Tax Administration in the 1970s but itwas abolished along with programme budgeting in the early 1980s. It was reintroduced in the early 1990s andbecame a very important source of information on activities and actual resource allocation.

273. The system is based on monthly reports filed by all employees specifying the number of hours spent ondifferent activities according to a detailed chart of accounts. Even if all employees do not record their activities on adaily basis and some time reports are sloppy, the system is deemed to provide a reasonably accurate overall picture.

274. At macro level the time reporting system is an important source of information on the impact of processdevelopment and re-engineering. At micro level it is a useful instrument for planning and monitoring activities.

3.4.1.1.2 Costs

275. Today Swedish agencies are financed through frame (or lump sum) appropriations that cover all costs.Accounts are kept on accrual basis. It is therefore easy to determine the total costs of an agency. If there is more thanone output, however, productivity measurement requires a way to apportion direct and overhead costs between theseoutputs. This is done primarily on the basis of time use.



Table 1: Costs in the Swedish Tax Administration, current prices (SEK Million)

1994 1997 Change

Basic processing, service, & adjudication 1 967 1 810 -157

Desk auditing 903 1 353 +450

Field auditing 856 1 071 +215

Taxation 3 726 4 234 +508

Cost index, current prices 100,0 113,6

Cost index, fixed prices 100,0 102,6

3.4.1.2 Outputs276. There is no obvious answer to the question which outputs should be included in the productivity measure. Oneapproach is to use the caseload or the number of taxpayers as a measure of output. In the first productivity studies thenumber of final tax bills or tax returns were used as a proxy measures of total output. In later studies the number ofregistered employers and VAT-traders were added.

277. The difficulty with this kind of measure is that output is made almost entirely dependent on tax legislation andcannot be significantly influenced by the Tax Administration. This means that when basic processing is made moreefficient and resources are shifted to auditing, this would not have any effect on reported productivity. Today,therefore, the products of desk and field audits are also included as outputs in the productivity measure.

278. To calculate total output, each kind of output is given a certain weight that corresponds to its unit cost a givenbase year. The actual volumes of each kind of output are then multiplied by their respective weights and the resultingsums are added to get a total figure. These sums form the basis for an output index.

Table 2: Index of output

Function 1994 1997

Basic processing etc Number of tax returns 100,0 107,2

Desk auditing Number of altered returns 100,0 117,1

Field auditing Number of completed audits 100,0 99,1

Total 100,0 107,7

279. It is a moot point whether the chosen outputs give a fair representation of total output. Also it is disputable towhat extent the selected outputs, taken one by one, are comparable over time because the figures may be distorted bychanges in tax law or administrative procedures.

3.4.1.3 Productivity

280. Given an index of cost in fixed prices and an index of output, productivity is calculated by combining the two.

Table 3: Index of total (cost) productivity 1997 (1994=100)

Function Costscurrentprices

Costsfixedprices

Output Produc-tivity

Basic processing etc 92,0 83,1 107,2 129,0

Desk auditing 149,8 135,3 117,1 86,5

Field auditing 125,1 113,0 99,1 87,7

Total 113,6 102,6 107,7 104,9



281. By replacing the cost index by a work hour index we can calculate labour productivity. It shows the sametendency, but productivity improvement is much greater. This is not surprising given the massive investment ininformation technology in recent years.

3.4.2 Quality

Performance Criteria Performance indicators

Product quality Frequency of errors by the taxauthorities corrected throughthe simplified complaintsprocedure

Number of tax assessmentsdecided by the tax authoritiesaltered by the courts

Quality of registers

Process quality Average processing time forcomplaints

Quality accordingto legal andprofessionalstandards

Quality Assurance Standard of internal qualityassurance programmes

Product quality Perceptions of professionalism

Process quality Perceptions of availability,information etc

Quality accordingto taxpayerperceptions

Confidence Perceptions of the taxauthorities ability to their job

282. There are many aspects of quality. True to its external perspective the PMM focuses on the aspects of qualitythat are most relevant to taxpayers. Taxpayers (or customers) have a right to expect that decisions made by the taxauthorities are correct (product quality), that they are made within reasonable time and well explained (processquality) and that taxpayers are treated in the same way in all parts of the country (uniformity). With regard to methodof enquiry another distinction can be made, between (a) quality according to legal and professional standards and(b) quality according to taxpayer (customer) perceptions.

3.4.2.1 Quality according to legal and professional standards283. There are several ways to assess quality against legal and professional standards and to what extent the taxadministration lives up to taxpayer expectations. Some aspects can be monitored through available statistics, forexample certain errors made and corrected by the tax authorities, assessments altered by the courts, damages paid totaxpayers, average processing time for complaints etc. Uniformity can be checked by comparing the frequency ofsuch factors between regions.

284. Another approach to quality assessment is to review random samples of decisions made by the tax authorities.Such reviews will look into both procedural and material correctness as well as the intelligibility of language used incommunication with taxpayers. Such quality reviews are regularly carried out by the National Tax Board as well asby the legal units within each Regional Tax Authority.



285. Quality reviews, however, are time consuming and the Board can only carry out spot checks, whose findingscannot be generalised to a total nationwide quality assessment. Instead, the Board seeks to evaluate the standard ofquality assurance within the regional authorities. This evaluation, which is based on self-assessment, is aimed atestablishing how systematic internal quality controls are planned, carried out and reported back.

3.4.2.2 Quality according to customer perceptions286. Still another approach to quality assessment is to ask the taxpayers. Such surveys are carried out at a nationallevel every year and cover a wide range of issues. The target group alternates between the general public andbusiness taxpayers. Each group is surveyed every second year. The findings are used not only for performancemeasurement, but also for evaluations and other studies.

287. The Swedish Tax Administration has carried out taxpayer surveys many years and with time these surveyshave covered an increasingly wide range of topics. Since 1986 the general public has been asked about their attitudesto the tax system and the tax authorities. Generally the approval rating for the tax administration is higher than forthe tax system. Most questions are much more specific and relate to various aspects of product and process quality.Typically questions are framed as statements about professionalism, accessibility etc and respondents are asked toindicate to what extent they agree or disagree with these statements on a scale 1-5 where 5 represents full agreement.

288. The number of respondents is large enough to produce reliable figures for each regional authority. The latestsurvey of the general public (Autumn 1998) had about 12,000 respondents and a response rate of 68%.

3.4.3 Outcomes and Impacts

Performance Criteria Performance indicators

(Total Revenue)*

Total collection loss Total collection loss / total revenue

Voluntarycompliance

Degree to which taxes are paid on time with theright amount

Rate of collectionbefore enforcement

The ratio between preliminary tax and final tax

Share of tax arrears handed over to enforcementservice

Impact oncollection losses

Deterrence Frequency of certain actions to secure payment

Number of cases of suspected fraud reported to theprosecutor

Voluntarycompliance

(Frequency of errors detected by TCMP-audits)

(Survey statements)

Share of returns filed on time

Deterrence Share of returns altered by desk audits

Share of returns altered by field audits

Impact onAssessmentError

Direct monetaryoutcome

Additional tax charged as a result of desk and fieldaudits

*) Not included in the PMM, but discussed below

289. Productivity and quality are not results but prerequisites for a good result. The result is the degree to whichoutcomes and impacts match the objectives. In other words: We have chosen outcome as the term representing actual



revenue and impact to denote the tax administration’s influence on the behaviour of taxpayers in the direction ofcompliance. Outcomes and impacts are two sides of the same coin, but the distinction is nonetheless useful.

3.4.3.1 Outcome 1: Total revenue

290. Total revenue collected and delivered to the treasury can be regarded as the final outcome of taxation. As aperformance measure, however, revenue has the drawback of varying more because of changes in tax legislation, taxrates and fluctuations the business cycle than as a consequence of steps taken by the tax administration. Neitherrising nor falling tax revenue, therefore, give any indication of the effectiveness of tax administration. Only a verysharp increase or steep decline in compliance is likely to have any noticeable impact on total revenue.

3.4.3.2 Outcome 2: Impact on collection losses291. In Sweden, about 99.5% of the total tax bill is collected, although not all of it on time. This means that thecollection loss is about 0.5%. Like total revenue, fluctuations of the tax losses are largely dependent on the businesscycle, but also to a noticeable degree on some forms of tax fraud like “asset stripping”. When such fraud increased inthe late 1980s, the collection losses rose from the normal level of 0.5% to about 1%. A few years later the recessionin the early 1990s brought losses to 1.2%, but since then the level has dropped to the normal level.

292. However, the question of the impact of the Tax Administration and the Enforcement Service on thisdevelopment remains unanswered. The problem can be analysed using indicators that show the share of total taxespaid with the full amount on time (voluntary compliance) and how much more is paid through the measures taken bythe Tax Authorities and the Enforcement Authorities. There are also indicators that show the frequency of actions todeter taxpayers from late payment and persuade them to pay up. Such actions include withdrawals of business taxcards9, legal action to make executives of negligent companies liable for its debts, reports to prosecutors of suspectedcases of fraud etc.

3.4.3.3 Outcome 3: Impact on the Assessment Error

3.4.3.1 The assessment error

293. In section 3.3.2 above the assessment error was defined as the difference between the theoretical (or correct)tax and the total tax bill. This discrepancy is caused not only by tax evasion but also by mistakes made by thetaxpayers or the tax authorities. To measure the assessment error is next to impossible. First there is the problem ofdefining what is the correct tax. We have included interpretations of tax law that are clearly incompatible with theintention of the lawmaker as long as such interpretations in the end are upheld by the courts. Then there is theproblem to measure what is invisible. This involves estimating the size of the black economy by indirect or directmethods. As noted above, recent estimates of the black economy in Sweden range between 3 and 5 % of GDP.However, there are other forms of tax fraud which are not included in measures of the black economy, likesmuggling, VAT-refunds based on fraudulent documentation, groundless deductions and so on. In addition to thisthere are unintentional mistakes, which can be measured only to the extent they are discovered and corrected.

294. Although they help to focus attention on this strategic problem, macro figures on the size of the assessmenterror are not likely to provide much guidance on what to do about it. From a practical point of view it is moreimportant to know how different sectors of the economy contribute to the assessment error, what forms of taxevasion are most serious and what are the main growth areas. Such studies and evaluations have to apply methodsand tap on sources of information that cannot be included in a PMM.

295. Indicators of impact on the tax error have nonetheless been included in the PMM. It is important that thechoice of indicators reflect the Tax Administration’s strategy to promote compliance and combat tax evasion. Even ifmost indicators of compliance and deterrence are only proxy measures and some of them are ambiguous, they havebeen incorporated if they measure factors generally deemed to have a positive impact on compliance.

3.4.3.2 Voluntary compliance

296. Surveys are valuable tools to monitor the willingness of taxpayers to comply with tax laws, but they must beinterpreted with care. Responses to sensitive statements about non-compliance are likely to be either overstated or

9 Business tax cards grant immunity to customers to become responsible for paying PAYE and social security contributions for workers providing

services in the case that the employer fails to do so. Therefore the business tax card is important for small businesses.



understated. Time series analysis and comparisons between different groups of taxpayers will nevertheless provideimportant information about changes in attitudes to compliance and the level of non-compliance.

297. Apart from surveys the supply of data on compliance produced on a regular basis is limited. Audit data canonly be used to the extent those audited have been selected on a random basis. Although there is a programme ofrandom audits, different target groups are selected each year and no time series can be established. It would be toocostly and ineffectual to select random audits from the whole population each year.

298. Partial measures of compliance with administrative procedures are more readily available. One such indicatoris the ratio of taxpayers who file their income returns on time. If this ratio rises, it may reflect a more generalwillingness to comply.

3.4.3.3 Deterrence

299. Deterrence is based on the perceived risk that tax evasion is found out and punished. In the short run thisperceived risk need not reflect the real risk, but in the long run the taxpayers’ perception of risk cannot be maintainedunless there is a real risk of detection. To a large extent this real risk depends on the number of desk and field auditscarried out in relation to the size of different target groups.

300. For technical reasons the number of desk audits cannot be measured. Instead the number of actual alterationsis used as a proxy measure. This measure is ambiguous in the sense that alterations depend not only on the intensityof auditing, but also on the number of factual errors there are to correct. If tax control becomes more effective andtaxpayers become more compliant, this can reduce the number of alterations, which mistakenly could be interpretedas declining deterrence of tax control. However, for the time being, it is generally assumed that the number ofundetected errors is so large that variations in the frequency of alterations much more reflects the intensity ofauditing than the actual level of compliance.

301. Although the frequency of control is a fundamental factor when it comes to increasing the risk of detectionother factors are also essential, not least the professionalism of auditors. Audits that fail to detect fraud may createnegative deterrence. Also, effective sanctions have to be applied when tax returns are found to contain falseinformation.

3.4.3.4 Prevention or direct fiscal outcome of tax control

302. The amount of additional tax being levied as a result of desk and field audits has always been regarded as akey outcome. This sum compared with the direct costs of tax control is frequently used as an indicator of itsprofitability. In 1994 an extra SEK 200 million was allocated to the tax administration for tax control on conditionthat it should return 10 times this amount in recovered tax revenue.

303. The great importance attached to the direct monetary outcome as a performance measure has been criticizedboth for technical reasons and on grounds of principle. Most recently the Parliamentary Auditors and by the NationalAudit Office pointed out a number of technical flaws inherent in this measure, for example the difficulty to separateaudit outcome from mere routine corrections of technical errors. They also observed that alterations with respect torecorded business losses affect only future taxes that may never materialize and that a large part (about 30%) ofadditional assessments do not generate any extra revenue but result only in increased collection losses.

304. On grounds of principle, the great stress put on the monetary value additional tax assessments as aperformance indicator has also been criticized for deflecting attention away from deterrence, which is the strategicobjective of tax control. The statistics are also very much influenced by a few very large decisions, which will distortcomparisons over time or between tax authorities. A final point, strongly stressed by the Parliamentary Auditors, isthat revenue targets may tempt auditors to treat taxpayers with less objectivity than they should.

305. This is not to say that additional revenue does not matter. It matters a great deal both for fiscal reasons and asa way to attract attention and publicity to tax control, which is necessary for deterrence. Aggregate figures should,however, be used with great care and not be used as performance indicators without prior analysis of its componentparts.



306. Despite these objections the monetary outcome is still included in the PMM, but only as one of a largenumber of indicators.

3.4.4 Implementation and practical application

307. The primary purpose of the PMM was to serve as a basis for the performance dialogue between thegovernment (Ministry of Finance) and the Tax Administration (The National Tax Board) within the generalframework of results oriented management. In 1995 the basic performance criteria of the PMM were integrated intothe government’s annual approval document, which defines what the administration should accomplish during thecoming year within specified financial restrictions. The PMM also defines the reporting requirements in the annualreport, which the National Tax Board submits to the government.

308. However, the PMM was also intended to serve internal management needs, more precisely to form the basisfor evaluating the performance of the (then) 24 county tax authorities. To make this practicable a new managementinformation system was created and named RESUMÉ. This system became operational in the spring of 1997. Othersystems provided raw data that were combined into the ratios that make up the performance indicators defined by thePMM.

309. From a managerial point of view, however, the PMM has some limitations due to its focus

• on outcomes or impacts rather than on outputs (although outputs are frequently used as proxy measures foroutcomes),

• on the external rather than on the internal perspective

• on evaluation of performance annually rather than on monitoring of the implementation management plan duringthe current year,

• on comparisons (benchmarking) between different regional tax authorities during the same year rather than on thedevelopment of an individual authority’s performance successive years or comparisons between planned andactual output.

310. In short, the PMM is primarily an instrument for ex post evaluation and it is not an effective tool formonitoring the implementation of the management plan during the current year. Many of the performance indicatorsare only available on an annual basis and others are difficult to interpret in the short term (less than one year).

311. In other words, there are management information needs that the PMM does not satisfy. In some respects, thiscould be rectified either by expanding the PMM to include new performance criteria and sets of indicators, or tosupplement the PMM with other measurement instruments. A different road was taken, however.

3.4.4.1 Balanced Scorecard

312. One attempt to solve this problem was the introduction of a balanced scorecard to supplement the PMM. Theintention was to give top management a broad view of performance through a limited number of key indicators thatreflect central elements of the management plan.

313. The Balanced Scorecard was created by Robert S. Kaplan and David P. Norton and was first introduced to thegeneral public through a number of articles in the Harvard Business Review in 1992. It was founded on the beliefthat existing performance measurement approaches in business were becoming obsolete because they relied toheavily on financial accounting measures and did not identify the processes that were truly strategic (Kaplan andNorton 1996, p. viii). The Balanced Scorecard is therefore intended to complement financial measures of pastperformance with the drivers of future performance.

314. The objectives and measures should be derived from the organisation’s vision and strategy and viewperformance from four perspectives:

• financial

• customer



• internal business process

• learning and growth

315. The Balanced Scorecard has become popular in the private sector and in many countries it has also beenapplied in the public sector. The Swedish National Audit Office has suggested an adaptation that is built around fourfocuses (Riksrevisionsverket 1996):

• Internal

• External

• Historical (rear view)

• Future (forward view)

316. It is in this adapted form that the Balanced Scorecard has been introduced in the Swedish Tax Administration.In this form it represents no real departure from the PMM. The chosen structure means that three of the fourperspectives of the new scorecard closely correspond with those of the PMM and most of the scorecard indicators arein fact provided by the PMM.

Perspective Focuses according to proposedscorecard

The PMM

Internal View Process focusProductivity

Lead times of individualoutputs

ProductivityProductivity

External View Customer focusQuality according to legal andprofessional standards

Customer attitudes

QualityQuality according to legal andprofessional standards

Quality as perceived by taxpayers

Rear view Results focus

Impact on tax error

Collection loss

Enforced collection of publicand private debts

Financial (budgets andspending)

Outcomes and Impacts

Impact on tax error

Impact on collection loss

Forward View Development focus

Development of humanresources

Development of informationtechnology

3.4.4.2 Conclusion

317. The balanced scorecard was only one of a great number of new management tools that were introduced in thegreat overhaul of the Tax Administration’s management system following the appointment of a new DirectorGeneral in 1996. Most were picked from the standard toolbox of Total Quality Management, but some, like thescorecard, had been developed within the framework of rival management schools. Although the problems shouldnot be exaggerated, the co-existence of management tools that represented significant differences in approach andterminology still made it difficult to establish an internally consistent framework for the on-going development of themanagement system.



318. Conceptually there is little that separates the balanced scorecard (in the form that it was adapted by theSwedish Tax Administration) from the PMM. Terminology aside, the main difference was that the scorecardcontained some internal indicators relating to the annual budget, human resources and the development ofinformation technology. The scorecard also contained much fewer indicators. In this light the scorecard can beviewed as a modified version of the PMM.

319. This meant, however, that the scorecard did not effectively compensate for the major shortcomings of thePMM as a tool for short term performance monitoring. A number of prototype scorecards were presented, but noneprovided a very useful framework for interim performance reviews.10 Instead the management group, in monitoringperformance during the current year, continued to rely heavily on a small number of traditional indicators, mostly inthe compliance area, such as the number of finished field audits, frequency of altered tax returns etc.

320. The impact of the PMM on the internal management environment thus turned out to be more limited thanenvisaged when it was launched in 1997. The PMM still defines most of the main performance indicators that areused in interim and annual reviews of tax authority performance, but, as pointed out, they are used selectively.

321. The PMM has however been very influential at the conceptual level in informing the debate on corporatestrategy. Its basic conceptual framework is very simple and has turned out to be useful in communicating some keymessages to staff and other stakeholders. This is especially true in the development of compliance strategies. ThePMM has highlighted discrepancies between basic strategies and their application in the field. The main purpose isdeterrence but in practice implementation has been guided more by notions about maximising the number of audits(regardless of their impact on deterrence) and on the revenue yield in the individual actions.

322. The PMM has also highlighted issues concerning process and product quality. When the PMM wasintroduced in 1997 the taxpayer surveys were expanded and conducted annually. Gradually these surveys have beenexpanded and they now contain questions concerning most aspects that are relevant to strategy development, both inthe field of service provision and tax control.

323. With regard to performance measurement, the present situation can be described as one where there is greataccess to relevant performance data. A conceptual framework is also available for interpretation of these data. On topmanagement level a system of monthly and periodic (every four months) performance reviews has been introduced.Still implementation of an effective and comprehensive system for performance monitoring has turned out to bemore difficult than anticipated. A recent organisational review has identified some of the reasons for this. One hasbeen a shortage of staff for these tasks at the National Tax Board. Another that the division of responsibilities ofdifferent departments were not clearly defined. Management has now acted on these findings and the Board’sfunctions for management control have been strengthened and the roles of the different departments of the Board, aswell as of the Board vis-à-vis the regional authorities, have been clarified. Against this background there are goodreasons to believe that the main obstacles for a more rapid development of the management system have beenremoved, and, indeed, significant steps have already been taken.

324. Another development is to distinguish more clearly between short-term performance monitoring (focused onthe implementation of the management plan) and long-term performance evaluation (focused on outcomes, impactsand cost effectiveness). With some minor modifications and additions the PMM still provides the long-termperformance criteria as viewed by the government and external stakeholders. The overriding goal is to minimise thetax gap, while administrative and compliance costs are kept as low as possible. At the same time protection oftaxpayer rights means that quality and service standards must not be sacrificed. This means that the taxadministration must be very cost effective.

325. However these long-term permanent criteria must be supplemented by temporal objectives or targets that aredefined in the management plan. Short term performance monitoring is focused on the attainment of these annuallydefined targets and objectives.

10 This is not to say that the balanced scorecard cannot function as a tool for short term performance monitoring. Its usefulness in this respectdepends mainly on making the right choice of indicators to ensure that they are relevant to current plans and that they can be provided andpresented in a meaningful way in a short term perspective.



326. To avoid that the new focus on targets will turn into a dysfunctional straight jacket that prevents theimplementation of flexible strategies and discourages innovative practices (which may not always produce the beststatistics) a new planning procedure has been set up. During the planning stage there will be a great deal ofconsultation between the National Tax Board and the regional authorities. Before the start of the new year themanagement plan of each individual authority is reviewed and approved by the Board. Less emphasis will be put onthe attainment of national targets and more on how well each of the 10 regional authorities has implemented itsindividual plan and reached the targets set in this plan.

327. This approach, however, requires that regular impact and cost-effectiveness evaluations be carried out. Suchevaluations will lean heavily on the performance criteria of the PMM. They will also review the assumptions ofgeneral strategies and how they are translated into the management plans on national and regional level. There isalways the possibility of flaws in the strategy or that the management plans are ill conceived in relation to long termstrategy.



4. CONCLUSIONS

4.1 Introduction

328. According to OECD (1994) the main objective of performance measurement is to support better decisiontaking, leading to improved outcomes for the community (see section 2.2 above). From this main objective otherobjectives can be derived, such as improved performance, improved control and accountability mechanisms, a better-informed budget process and a more motivated staff. To live up to these aims the measurement system must befunctional and satisfy three major concerns: validity, legitimacy and continuity.

4.2 General trends among tax administrations

329. In Chapter 2, member countries’ replies to the questionnaire are in as far as possible grouped together in orderto reflect common approaches adopted by some countries and, as applicable, contrast one approach against another.Even so, it may not be altogether easy to discern common standards or to assess the state of the play in performancemeasurement. The following is an attempt to draw that kind of conclusions regarding at least some of the areascovered by the questionnaire.

4.2.1 The management context

330. Tax administrations are typically organised either as separate revenue authorities or as a department withinthe ministries of finance. In most cases the political responsibility is borne by the Minister of Finance. In mostcountries the minister (and sometimes parliament) is involved with the design of the measurement system, the settingof targets and evaluating performance. This involvement is particularly strong where there is a contractualrelationship between the minister and the tax administration or its chief executive. Only a small number of membercountries apply a clearly contractual concept. However, even in countries where this is not the case, the dialogueregarding priorities, operational targets, development projects etc. would in many cases seem to lead up to what canbe labelled as quasi-contractual documents. Examples of this are the annual approval documents in Norway andSweden.

331. The preferred benchmark in most administrations seems to be targets that define the required (minimum) levelof performance (see section 2.2.2). This level may be defined in terms of revenue (although total revenue is rarelyseen as relevant to the management process), number of processed returns, audits carried out, taxpayer contacts,timely delivery of services etc.

332. In most cases, there is no clear link between performance and resource allocation. In fact, the idea ofrewarding well performing offices, units etc. by allocating additional resources, and vice versa, while beingconsidered by a few administrations, is explicitly rejected by others. The reason for this is that organisational unitsthat do not perform well are seen to need assistance and encouragement rather than automatically applied punishmentin the form of reduced allocations. Instead, resource allocation models based on workload (number of taxpayers bycategory, number of returns filed or the like) are applied by a number of administrations.

333. Measurement does not automatically translate into better performance and results. In the worst case it is justanother set of statistics used to adorn annual reports with little or no impact on behaviour in the organisation. In orderto make measurement a management tool, monitoring and evaluation of performance must become an integral part ofthe on-going management processes. In most tax administrations in our study senior management receive and discusskey performance data on a monthly and/or quarterly basis in order to take appropriate action where necessary. Atypical model is to have key indicators reported monthly to the executive board without extensive comment and eachquarter a progress report with comments and trend analysis and, sometimes, proposals for necessary correctiveaction.



334. Most countries have at least to some extent developed IT systems to support the management process. This isnatural as the core processes of developed tax administrations depend heavily on information technology, meaningthat much of the information needed is already kept in a digital form. Far from all the countries have as yetintroduced management systems that cover the whole range of activities. The sub-area best covered by this kind ofsystems would seem to be auditing. However, keeping in mind the rapid development of the IT sector in general, thetime elapsed since the questionnaire was answered calls for caution in drawing conclusions in this area.

4.2.2 Measures of input, output, outcome and productivity

335. Productivity measures are based on the relationship between outputs and inputs. Using expenditure as theinput measure, this relationship can be expressed as a ratio between total (weighted) output and total input, or as unitcosts for individual products.

336. Another approach is to replace cost by labour input expressed as days or staff years (full time equivalents).The ratio between total (weighted) output and the total number of work hours (days, staff years etc.) yields labourproductivity.

337. It can be implied from the replies to the questionnaire that in most countries in this study, the budgetallocations to the tax administration are designed to cover all costs related to its activities. However, some costs aregenerally regarded as corporate overhead costs and are not always allocated to lower organisational levels, programsor outputs. Such a system may still allow calculation of unit costs, but only at national level. In this study, a broadvariety of solutions were found, including systems where measurement is based on full costs in some sectors (e.g.auditing) but not in others, or where costs are apportioned to organisational units but not to outputs or targets.

338. As far as a trend can be discerned from the replies it seems to indicate movement towards full cost and(sometimes) accrual accounting – at least at corporate level – as well as the introduction of management systems thatallow for flexible allocation of costs to activities.

339. Productivity measures applied in tax administrations normally defines output as some kind of physicalquantity. Efficiency measures where output is defined in monetary terms are less usual. This applies in particular tototal revenue, as this is seen as being too much influenced by factors out of the tax administration’s control to be ofany use for management purposes. On the other hand, additional revenue resulting from different types ofenforcement activities is seen as a key output measure by most administrations. In tax administrations where themanagement plan defines output targets, these targets often replace cost efficiency as benchmark.

4.2.3 Measures of Quality and Taxpayer Attitudes

340. As set out in 2.4.1, most countries in this study report measures to ensure or improve quality standards. Oneapproach to this is to secure quality in terms of high levels of legal accuracy, professional standards in processes,decisions and other output.

341. Another focus is on service delivery and client satisfaction. Taxpayers’ views are studied through regular orad hoc surveys, often commissioned external, to private or public sector institutes or companies. Almost all thecountries report that they conduct surveys to find out what taxpayers think of the tax administration service deliveryetc. Surveys are in some cases global, in other cases focused on certain target groups, issues or programmes. In somecountries it is up to regional or local offices to carry out surveys. Other ways to investigate stakeholder opinionrepresented in this study are to arrange meetings or seminars, e.g. with organisations representing the businesssociety or with local user groups, to collect complaints in writing or to do exit polls. The main focus of these surveysseems to be on the tax administration’s service delivery, but surveys and other forms of investigation are also usede.g. as input into compliance research.

342. A third strand is total quality (TQM). A number of countries have reported that quality work is related tosome kind of global assessment criteria, e.g. a national quality award.



4.2.4 Outcomes, Impacts and the Tax Gap

343. The revenue effects, direct as well as indirect, of enforcement activities are essential as a basis for discussionsregarding priorities within the tax administration as well as for the budget dialogue with the political level. They canalso be used to monitor trends in productivity and quality of tax enforcement. Most countries in this study measurethe direct revenue effects of audits and desk verifications in absolute terms and, in some cases, as percentage of totalrevenue. Some countries report that they also measure direct effect in relation to costs incurred, i.e. a kind ofproductivity measure, or the percentage of audits etc. where unreported amounts are discovered (which could be seenas a quality indicator).

344. One country mentions specifically the role of information to and different forms of co-operation withtaxpayers. Good information could make taxpayers report accurately, so as to make assessment and payment of taxesmore correct, and probably increase revenue. Although mentioned specifically only by one of the respondentcountries, the recognition of this fact would seem to be fundamental to all developed tax administrations. Continuallydeveloping taxpayer services using, amongst other things, information technology, is the only way to secure effectivetax collection at an acceptable handling cost.

345. Only a few countries report attempts to measure or estimate the total direct and indirect impact ofenforcement measures or to estimate the gap between the actual revenue yield and the theoretically correct yield. Toclose this gap can be seen as the ultimate (if unattainable) goal of tax administrations. It is however difficult tomonitor progress against this objective, since it requires a reliable measure of the hidden (shadow) economy which isnotoriously difficult to find. No country reports regular estimates of the gap as an integrated part of a performancemeasurement system. Some administrations have carried out or commissioned special studies, but not in a regularfashion. Generally, this seems to be regarded as the domain of economic research, with limited practical use for taxadministrations.

4.3 The Swedish Experience

346. In the concluding part of Chapter 3 we discussed some of the problems of implementation of the PMM and itslimits in terms of short term performance monitoring. We also discussed other approaches tried and recentdevelopments to overcome the obstacles. This section will put our experience in a more generalised context. Weshall begin with the related issues of reliability and validity, i.e. whether the indicators are reliable and reallymeasure what they claim to measure. After that we will move on to questions about legitimacy and continuity.Finally we will bring up the broader issue of functionality with respect to the management system as a whole and theimpact of measurement on actual performance.

4.3.1 Reliability and Validity

4.3.1.1 Reliability

347. A system that does not produce reliable data will not pass any other test. The weakest link in the chain is datainput, especially if it involves an element of judgement. Classification is often a problem, and if the grounds forclassification are not clearly defined, data will become less reliable. This problem is aggravated if there is a lack offeedback. If staff is not properly informed and motivated, they are not likely to take great care in how work hours arerecorded or decisions coded.

348. Although less frequent there are also internal errors or mismatches that occur when data are processed andtransferred and between different systems. Now and then batches go wrong. Errors also occur because changes in thesystems supplying data are not matched by corresponding modifications in the receiving system. It is thereforeimportant that quality controls are built into the systems and that they are monitored by people who have a thoroughunderstanding of the system as a whole.

349. To sum up, reliability is a fundamental factor for building and maintaining confidence in the performancemeasurement system. It is therefore imperative that sufficient resources are set aside for monitoring and ensuring thereliability of the data produced by the system. In our experience this need is often underestimated and while much



effort is put into developing the measurement system insufficient resources are often allocated to its operation andmaintenance.

4.3.1.2 Validity350. To ensure validity, measures should reflect the basic performance criteria as closely as possible. This oftenturns out to be difficult because data are not available. To make performance criteria operational, therefore,indicators or proxy measures are needed. In the words of Bouckhaert (1993), inputs or activities become indicatorsfor outputs, and outputs are used as indicators for effects or impacts.

351. Even if such compromises are unavoidable, it is important that a set of measures is not simply composed fromwhatever data are available. When the Performance Measurement Model (PMM) was developed, the current supplyof data did not restrict the design of performance indicators. Consequently, when the system was launched there weremany indicators that could not be calculated because the production systems could not yet provide the necessarydata. It was hoped that this problem would correct itself as existing production systems were modified and new onesdeveloped.

352. Validity thus suffers from a lack of data. But sometimes the problem is not to find data but to select the rightmeasures to describe a complex reality. When measuring productivity, for example, a limited number of outputsmust be chosen to represent total output. The number of taxpayers and the total number of tax returns or tax bills arecommon measures of output. In the Swedish Tax Administrations the number of audits and altered tax returns arealso included in total output. It can be argued, however, that, since the purpose of audits is to verify information, anincrease in audits should be regarded as an enhancement of quality rather than as an increase in output.

353. A greater problem is that many output measures will be affected by changes in work processes that occur overtime. Some of these changes are true rationalisations and should show up as improved productivity while otherchanges are carried out for other reasons. The following example will illustrate this. In 1995 the introduction of asimplified income tax return reduced the processing costs and productivity improved. At the same time the standardaccounting period for VAT-returns was reduced from two months to one and the number of returns doubled. Sincethe cost of handling this increased workload did not increase to the same extent, this did also count as improvedproductivity. It can be argued, however, that only the first change caused a true efficiency gain, since the secondchange actually increased costs (marginally) while leaving the number of taxpayers and revenue collected largelyunchanged.

354. To measure quality is also difficult, because many aspects of quality are subjective. One approach, therefore,is to use surveys to quantify the subjective views of representative samples of taxpayers, staff or other stakeholders.It should be kept in mind, however, that to get valid results from surveys a great deal of professional expertise isneeded. Our experience is that taxpayer surveys are useful, but expensive, since much time and effort must beinvested in design, analysis and dissemination of results.

355. Another approach is to measure quality against explicit service standards, e.g. a target number of days toprocess an application, the percentage of incoming phone calls lost etc.

356. Finally there is the broader issue of effectiveness, which we have defined as outcomes or impacts related toobjectives. It is easy to measure outcomes in terms of revenue, but to assess performance, revenue must be related toa relevant objective or benchmark. Usually, growth or decline in revenue will depend more on changes in the tax lawand economic growth than on the performance of the tax administration. For this reason revenue is not used as aperformance indicator in the Swedish Tax Administration.

357. Impact on taxpayer compliance is even more difficult to assess. First, the level of compliance is largelyunknown. Second, even if it were known, it is very difficult to separate the tax administration’s impact oncompliance from other influences. To deal with this problem a programme theory must be established. Impacts willthen be judged on the basis of indicators assumed to be linked to these (desired) impacts. Measures based on a goodprogramme theory should improve validity, but there is always the risk that the programme theory is based onmistaken assumptions.



358. A final point regarding validity is that productivity, quality and effectiveness, as they are defined here, do notcover all relevant aspects of performance. A manager should not only be judged on what has been accomplished inthe organisation, but also on how well it has maintained or developed it resources to be prepared for futurechallenges. In the short run, productivity can be increased if resources are not set aside for investments in trainingand development of new work processes etc. This consideration is one reason for the development of a balancedscorecard, which includes these aspects.

4.3.2 Functionality

359. Performance measurement is primarily a means for the "owner" (i.e. the government) and management insteering the organization to achieve its objectives. The PMM was first and foremost developed with a view toimprove the dialogue between the Ministry of Finance and the National Tax Board concerning the results of the TaxAdministration. It was however also intended as an instrument in the hands of the National Tax Board to assess theperformance of the Regional Tax Authorities.

4.3.2.1 Accountability360. The so-called performance dialogue between the Minister and the National Tax Board is very much focusedon control and accountability to ensure that the objectives set out in the Government’s approval document arerealised. These objectives are stated in quite general terms, however, and the Director General of the National TaxBoard is not under any contractual obligation to deliver performance according to ex ante targets. The same appliesto the regional tax directors vis-à-vis the National Tax Board. Consequently, there is no predetermined rewards orsanctions.

361. The philosophical ground for this soft approach is the fact that the system primarily contains performanceindicators rather than real measures. To link targets to indicators that are just substitutes for measures of realperformance creates a risk of throwing activities off track. The experience so far of setting targets such as a certainrevenue return on auditing activities has raised many doubts, since it will make auditors less inclined to actproactively to prevent errors in the first place. It will also affect the selection of audit targets with a view to achievethe best possible statistics rather than to create maximum deterrence.

362. Instead, the idea is to develop a broad view of performance that can be related to previous years or - in thecase of regional authorities - to other authorities in the same year.

363. The absence of predetermined rewards and sanctions may blunt the impact of performance comparisons. Theimportant thing, however, is that principals (here, the Ministry of Finance or the National Tax Board) publiclyrecognize good and react to poor performance by their agents (here, the Board or the regional tax authorities).Therefore the system must be transparent and performance data for all units should be available to managers acrossthe organisation.

364. It should also be pointed out that rewards and sanctions are not simply a matter of peer pressure. Althoughthere is no official system of performance related pay, managers as well as other staff are in fact appraised inconnection with the salary negotiations. In the case of managers, performance data will play an important role inassessing their performance. If a region does not perform well over some length of time and no good reason can beoffered it is very likely that the manager will not get another 5-year term when the present term expires or will haveto resign before the end of his or her term.

4.3.2.2 Guidance in budget decisions

365. In the discussion on rewards and sanctions, ideas about making budget allocation dependent on performancehave been floated. However, these ideas have been rejected on the ground that poor performance is seldom correctedby starving the tax authority in question of resources to remedy the problem. Budget allocations have to be decidedon the basis of workload, not performance.

366. A good measurement system will, however, shed light on the workload. If it can be shown that poorperformance in a certain area is caused by lack of funding due to factors that the current allocation model does nottake into account, this may be a reason for adjustment.



367. For the tax administration as a whole, an examination of performance data may show that productivity gainshave been accomplished at the cost of quality and effectiveness, e.g. that the tax administration does indeed process agreater number of returns at lower costs, but this is at the expense of fewer or less effective audits or less service totaxpayers. This may be taken as supporting evidence for an increase in funding. Facts may of course also be turnedthe other way.

4.3.2.3 Process development368. The new performance measurement system opens up new possibilities for bench marking. If two comparableregions, or better, two offices find that performance data are greatly diverging, this is evidence that they do thingsdifferently and that at least one of the two offices has something to gain from sharing experiences.

369. The idea was for the PMM to promote spontaneous bench marking, but experience points to the fact thatsuperior levels - regional headquarters or the National Tax Board - have to promote this more actively.

370. Currently, though, there is a program for promoting quality work in the tax administration. The aim is toencourage continual improvement and an active use of performance data can serve as a basis for such work.

371. Large scale re-engineering also needs a factual basis and, at least at the stage of feasibility studies, themeasurement system can offer much information.

4.3.2.4 Performance Monitoring372. The most immediate need of managers is for information to monitor budgets and the activities in his or herorganisation. The PMM was not conceived to satisfy this need, but the data warehouse created to support the PMMhas became a comprehensive source of performance data.

373. Of course the information needs for dialogue about accountability, process development and monitoring ofcurrent activities overlap to a considerably degree. But where accountability and process development is largelybased on ratios that allow comparisons between units or years, monitoring at operational units has much to do withoperational plans, especially short term targets with respect to time limits. Total volumes are often of greater interestthan ratios etc.

374. Performance monitoring by higher levels of management, of course, will have to rely on either aggregatenumbers or key indicators selected to reflect priorities in the current year but not necessarily covering all aspects ofperformance. It is primarily this need that the balanced scorecard has been presented to satisfy.

4.3.2.5 Perverse Effects375. Functionality of the measurement system, in the broad sense, has to do with whether it in fact promotesperformance or whether it has dysfunctional effects. In the best case it will help “owner” and managers to make well-informed decisions and motivate workers and direct their efforts in the right direction. In the worst case measurementwill have perverse effects on performance.

376. Perverse effects are likely to occur if there is a lack of validity because indicators are used instead of directmeasures. If managers and staff are primarily motivated to achieve good statistics this may not always encouragegood performance in the real sense.

377. As mentioned above, there is plenty of anecdotal evidence of such perverse behaviour on the part ofindividual tax officers and sometimes units. Examples include cases where tax officers refrain from informingtaxpayers in advance in order to be able to correct errors that produce good statistics. Such cases are rare however. Amore serious form of dysfunctionality occurs when general priorities regarding auditing targets are based onstatistical considerations (to increase the number of alterations or the number audits) rather than on fashioning theaudit strategy so as to provide the highest degree of deterrence.

378. In the end much of this boils down to the quality of managers themselves. There is no room for managers thatuse the measurement system as a scapegoat for making unwise decisions. Performance measurement will demandmore not less of managers. Managers must have a very acute understanding of real performance (according the



performance criteria) and act on that knowledge even in cases where it may come in conflict with a performanceindicator.

4.3.3 Legitimacy

379. There is a strong legalistic tradition in the Swedish Tax Administration, but in recent decades the culture hasbecome more technocratic and management oriented. In this environment performance measurement has become awell-established and accepted practice. Outright comparison between regions, offices and units was a first moredifficult to embrace but such comparisons have now become routine.

380. The internal debate has not circled around performance measurement per se, but mainly around the reliabilityand validity of indicators and measures as well as the general functionality of the measurement system. A typicalresponse to bad figures is to look for statistical errors. Indicators are also often criticised for failing to take account ofspecial circumstances in different regions or for being easy to manipulate.

381. This reflects an undercurrent of scepticism among some staff about the feasibility of performancemeasurement, which often surfaces as fears about the possible perverse effects of measurement. These fears arebased on the observation that measurement sometimes makes managers and staff more interested in attaining goodstatistics than good results in a genuine sense. The abundance of anecdotes about actual or possible ways of gettinggood statistics without achieving good results would suggest that such fears are shared by many people. There is,however, little real evidence of widespread dysfunctional practices that would be a response to performancemeasurement.

4.3.4 Continuity

382. Performance management requires continuity. On the basic level this means that measures must remain stableover time to allow time series. On the whole the Swedish Tax Administration has lived up to this requirement. In theannual report tables show the development of productivity and other essential performance indicators over a periodof many years.

383. At the management system level, however, many changes have taken place that has affected the wholemanagement process (see sections 2.2.3 and 3.4.4). In connection with these changes a number of new managementtools have been brought in. This has also affected the measurement system. In some ways there has been a loss ofcontinuity that has delayed the development of a workable system. On the other hand the experience gained is likelyto put the system that now is emerging on a more solid footing.

4.3.5 The future of performance measurement

384. In the Swedish Tax Administration the development of a performance measurement system that meet highstandards has been a long and arduous process. The main problem has been to establish valid output andoutcome/impact measures. This is not primarily a conceptual problem but a practical one. There is no reliable way tomeasure the assessment error. The best we can hope for is to combine a number of analytical approaches and thenmake an estimate, which seems most consistent with the facts available. Another way forward is to concentrate onpartial analyses of specific taxes or sectors of the economy, which may yield more reliable and useful figures.

385. One way forward, therefore, is to separate the need for measures to monitor the implementation of plans in theshort term from the need to find ways to gauge progress with respect to long term strategic objectives (i.e. to reducethe tax gap, improve productivity, quality etc.).

386. What is required to meet the needs of interim performance monitoring depends on what activities and targetsare contained in the current management plan. Such targets may well vary from year to year depending on shiftingmanagement priorities. Some may refer to outputs others to the development of productive resources (staff,information technology, business processes and organisation). Targets that are to be attained by a certain date shouldbe measurable, preferably in such a way that progress towards this target can be monitored and corrective action betaken if implementation runs off course.



387. Progress towards the long-term strategic objectives, on the other hand, can only in part be monitored byindicators available in a management information system. Instead those responsible for the programme must rely onanalysis of information pieced together from a number of studies and evaluations carried out over multi-year cycle.Such information will also serve as a basis for re-examining the rationale (or programme theory) that underliesprevious and current management plans.

388. It is therefore our belief that future development of performance measurement must follow a dual track. Onthe one hand efforts must be made to produce timely and reliable indicators to monitor the implementation ofmanagement plans at different levels of the organisation. This means upgrading the management informationsystems and the analytical skills of those responsible for producing interim and annual reports. On the other hand thetax administration must develop its capacity to carry out studies and evaluations of outcomes, impacts and cost-effectiveness with respect to the long term overriding goals. Such evaluations will serve the both purpose ofimproving existing programmes and the purpose of re-examine the effectiveness of these programmes

Guidance

1. Revenue authorities are encouraged to utilise performance measurement approaches in theiradministration.

2. Revenue authorities are encouraged to share details of their performance measurement approaches andresults with other Revenue authorities to assist in the identification of best practices.



REFERENCES

BOUCKAERT, GEERT (1993), Measurement and Meaningful Management, Public Productivity and ManagementReview, vol XVII, no 1, Fall 1993,

EUROPEAN COMMISSION (1997), Evaluating EU Expenditure Programs: A Guide, Ex post and IntermediateEvaluation

ESO (EXPERTGRUPPEN FÖR STUDIER I OFFENTLIG EKONOMI) (1994), Den offentliga sektornsproduktivitetsutveckling 1980-1992, Ds 1994:71

KAPLAN, R. S., and NORTON, D. P. (1996), The Balanced Scorecard, Harvard Business School Press

MALMER, H, PERSSON, A, and TENGBLAD, Å, (1994), Århundradets skattereform: Effekter på skattesystemetsdriftskostnader, skatteplanering och skattefusk, Fritzes

OECD (1994), Performance Management in Government: Performance Measurement and Results-orientedManagement, Public Management Occasional Papers No. 3, Paris

OECD (1995), Governance in Transition: Public Management Reforms in OECD Countries, Paris

OLSSON, G. (1996), A Model for Performance Measurement in the Swedish Tax Administration, New Trends inPublic Administration and Public Law, European Group of Public Administration (EGPA), Yearbook,Annual Conference, Budapest 1996.

RIKSREVISIONSVERKET (1996), Balanced score card i myndigheterna – förbättrad resultatinformation förintern styrning

RIKSSKATTEVERKET (1999), Skattestatistisk årsbok (Tax Statistical Yearbook of Sweden), Borås

STATSKONTORET (1985), Statlig tjänsteproduktion: Prodktivitetsutvecklingen 1960-1980, Rapport 1985:15

SWEDISH NATIONAL AUDIT OFFICE (1998), Illicit work in Sweden – a report on a welfare state dilemma, RRV1998:61



APPENDIX: QUESTIONNAIRE TO TAX ADMINISTRATIONS IN OECDCOUNTRIES

Performance Measurement in Tax Administrations

Dear Sir/Madam,

The Swedish Ministry of Finance has been asked by the OECD Commit-tee on Fiscal Affairs tocoordinate the drafting of a paper on Performance Measurement in Tax Administrations, to bediscussed and adopted by the Committee. The work is carried out by Director Gunnar Olsson,head of the Research Unit of the Swedish National Tax Board, and Deputy Director FrankWalterson from my own staff. They are aiming at presenting a first draft version in time to allowcirculation before the 1999 summer meeting of the Committee.

Basically, the paper will consist of two parts - one containing a brief over-view and comparisonof approaches to measurement in different Member States and one containing a more detailedaccount for the Swedish model.

Therefore, we kindly ask you to provide us with some information about the application and useof performance measurement in your Tax Administration. More specifically, we would like toknow the following.

Input, output and outcome measures

1. Do the cost measures used in performance measurement include all kinds of costs (salaries,accommodation, IT-systems, travel, postage etc.)?

Stockholm, 16 September 1998

Ministry of Finance

Fiscal Affairs Division



2. Do you have time reporting systems to measure the total number of work hours divided up intodifferent functions, processes, organisational units or the like? If not, how do you measure inputin manpower terms?

3. What are the key throughput and output measures (tax returns, audits etc.)?

4. How do you measure or estimate the revenue effects of tax control (desk and field auditing)?

5. Do you regularly seek to estimate the total gap between actual revenue and the theoreticallycorrect yield (compliance measurement)? If yes, what methods are used (e.g. audit based studies,changes in tax return items, financial data). Are such estimates integrated as parts of aperformance measurement system?

The issues of quality and tax payer attitudes

5. Most tax administrations have found that performance measurement cannot rely solely omquantitative measures, but also has to take into ac-count quality aspects of their operations. Whatis your approach to quality assessment?

6. Do you carry out regular enquiries to tax payers to find out about their general attitudes andspecific problems related to tax administration work methods and performance?

Productivity or efficiency

7. Does your tax administration report productivity/efficiency changes

- regularly (e.g. in the annual report)?

- only when requested?

8. What input and output measures are applied?

The role of performance measurement in the management system

9. Do you select key indicators to set measurable targets? If so, what are they?



10. What are the procedures for performance reporting at top management level? How often arereports submitted to top managers (annually, quarterly, every six months, monthly)?

11. Is there a link between performance and resource allocation (or other rewards/sanctions)?

12. In what way is the political level involved in designing the measure-ment system, settingtargets and evaluating performance?

Use of information technology

13. Have specific information systems been designed to serve performance measurement?

To be able to circulate a draft for comments well in time before the meeting of the Committee onFiscal Affairs we need your replies by 16 November at the latest. In order to minimise the risk ofmisinterpretation we kindly ask you to reply in English, German or French (besides, of course,Danish, Norwegian or Swedish, if preferred by the Nordic countries).

Please send your reply to Frank Walterson, either by mail (Ministry of Finance, S-103 33Stockholm, Sweden) or by fax (+46-8-405 14 66). If any questions arise regarding thequestionnaire, please contact Frank Walterson , phone +46-8-405 23 37, or Gunnar Olsson, phone+46-8-764 83 23.

Yours sincerely

Johan Salsbäck

Director General



History

1998: Early in 1998, it was agreed that Sweden would draft a report on Performance Measurement in TaxAdministrations to be presented to the OECD Forum for Strategic Management. The work was to be carried out byMr. Gunnar Olsson, head of the National Tax Board’s Research Unit, and Mr. Frank Walterson, Deputy Director ofthe Finance Ministry’s Unit for Tax Administration and Personal Income tax.

As it was not possible, within the framework of this study, to describe in any detail the practices in all membercountries, it was decided the key elements of the report would be a brief survey of member country practices and acase study of Swedish experience in the area. A questionnaire was sent to all member country tax administrations inSeptember 1998 and a compilation of the answers was circulated for comments early 1999.

June 1999: A first draft of the report, where account was taken of comments received from member countries wassubmitted to the Forum in June 1999 and it was posted on the Forum’s Electronic Discussion Group. At this stage itwas the Forum’s intention to widen the scope of the report by adding a few more country cases and the Forum tookupon itself the to ask some member countries to provide such cases. No such studies materialised however.Therefore and given the fact that an overall update of the information from member countries would be excessivelyburdensome and only delay the publication of the report further, the report is now put to the Committee for FiscalAffairs for approval. The international comparison (Chapter 2) is based on information supplied about two yearsago. However the Swedish case is updated to reflect the situation in October 2000 and information from Francesupplied in March 2001 is taken into account in Chapter 2.

The report authors are:

Gunnar Olsson Frank [email protected] [email protected]

December 2000: At its meeting in December 2000 the FSM Steering group agreed to the tax administration papersseries being made available as public documents. This was endorsed by the CFA at their meeting in January 2001.

May 2001: The revised note is published as part of the “Tax Guidance Series” from the Centre for Tax Policy andAdministration.

Compatibility

The principles in this document are compatible with those contained in:

• GAP001 Principles of Good Tax Administration

Centre for Tax Policy and Administration, OECD 2001

• Performance Management in GovernmentPublic Management Occasional Papers No. 3, OECD 1994

• Governance in Transition: Public Management Reforms in OECD CountriesOECD 1995

• Handbook for Tax Administrations, Chapter 5

Inter-American Center of Tax Administrations/ Centro Interamericano de Administraciones Tributarias (CIAT) 2000[Ministry of Finance, The Netherlands]

Contact

For further information please contact Mr Stuart Hamilton, Centre for Tax Policy and Administration,Tel 33 1 45 24 94 63, Fax 33 1 44 30 63 51

ocde-performance measurement in tax adm practice.pdf

Documents

tax policy

tax gap

swedish tax administration

oecd tax guidance series

comparisons chapter

swedish case chapter

administrative practices

oecd countries