LFMI’s efforts to push forward tax reform have been confronted, among other things, with the government’s inability to efficiently administer taxes. Research and evidence suggest that this is due mainly to a ambiguous and complicated tax regime and a lack of a uniform information system. On the other hand, LFMI’s work on deregulation indicates that there is a bunch of government agencies that constantly require that private enterprises report ever-new information. Such an unsystematic and inconsistent approach imposes a binding constraint on businesses, scatters the information here and there, and fails to ensure its privacy. The introduction of a uniform information system would allow to curtail government interference in private business activity and to implement a major and long overdue tax reform. It is worth mentioning that two years ago LFMI brought forward a proposal to unify the tax collection mechanisms of the tax inspectorate and the state social insurance fund. This measure, which will allow to trim government, provoked intense public debates but is now close to being implemented. The present article delineates LFMI’s recommendations regarding the creation of a workable information system, another major step towards a limited and efficient government.
The Purpose of the System
The purpose of a uniform information system is to create technical and technological methods for the introduction of an effective, reliable and economically viable tax system.
Attempts have been made lately to bolster tax revenues by tightening up on the responsibility for tax evasion as well as utilizing new administrative methods and forced control institutions. Yet, most of these measures are short-term and ineffective from a macroeconomic point of view.
In order to create a viable and acceptable tax system, it is necessary that the system as a whole and every tax in particular comply with the following principles:
1. clarity and simplicity;
2. universality, unavoidability and automaticity of taxes;
3. efficient tax administration;
4. one-time taxation;
5. minimal effects of taxes on economy;
6. the depletion of the general tax burden.
Much attention should be paid to the revision of the legal framework. However, in seeking to implement a viable tax reform, it is essential to create a solid information infrastructure of tax administration, i.e. appropriate hardware and software, creating preconditions for effective tax administration and monitoring of budget revenues.
The information system of tax administration should be:
Universal. It must include all taxpayers in Lithuania. It is, however, not essential to cover all taxes at once. The first step should be from the largest part of budget revenues, the VAT, also introducing legal amendments to ensure that the tax comply with the aforesaid principles attached to the tax system.
Integrated. In an integrated system the same entity is recognized by the same identificators throughout the whole information system and by all users.
There are two alternatives:
One of them is to preserve the existing separate information systems (ISs), but create supplemental systems, gathering data from the former and allowing them to operate as if they were in one system (information would not overlap, the same entities-companies or individuals-would have the same codes, and it would be possible to introduce new data and functions). If the existing ISs are retained, the employees of these institutions will not be exposed to any radical changes. This, however, is a complicated and hazardous method from a technical point of view. It requires a complete analysis of the existing (outmoded) IS, and the expenditures of time and money are difficult to predict.
The other alternative is to create a global information system from scratch, disregarding the existing ISs. In this case, the quality of the system would be the only demand, not restricted by maintaining the existing ISs. Here the main problems can be related to human hazards: a strong political will is needed to implement such a project, especially since the institutions whose ISs would be destroyed will not be inclined favourably.
From a financial point of view, the creation of a global universal IS is a long-term investment whose size and effects can be calculated, whereas the integration of the existing ISs is a short-term investment with parameters difficult to calculate.
Safe. Institutions as holders of information have to strictly adhere to the categories of user access to information and thus guarantee the privacy of information. Responsibility for violations of the rules of information provision must be stipulated in legal acts prior to the IS introduction.
A successful implementation of this project would not only create the technical foundation for an effective tax system, but would also achieve other RESULTS:
· tax compliance and administration costs would decline for both the state and tax payers;
· the state would have access to complete and accurate information on tax collection;
· a clear, neutral and automatic tax system would alter the taxpayer’s attitude toward taxes, tax administrators and the state, as well as undermine the incentives to engage in shadow activities;
· the investigation of criminal business activities, such as double bookkeeping, fictitious transit, contraband, illegal work, would improve, and conditions would be created to guarantee the privacy of information.
The main functions of IS
1. To collect and administer information. Since streams of information are large and intensive, they have to be compiled according to established order. By implementing the integration principles, copies of all data would be identical and contradictory data would be avoided. Also, it would be essential to introduce a unified state register, starting from the largest and most important register-the register of legal entities. Well organized information can be swiftly and easily found, sorted, indexed, grouped according to indicators, calculated, and compared.
2. To formalize the intercourse procedures between taxpayers and tax administrators by implementing the principles of tax universality and unavoidability. The simplification and formalization of tax payment procedures depersonalize taxpayers and their relationships with tax administrators, thus making tax administrators treat all taxpayers equally.
3. To make the calculation of taxes automatic. It is essential to revise and set out in detail the rules for calculating taxes, removing any existing ambiguities. Yet, these tasks have to be carried out regardless of whether or not the system is computerized.
The prospects of implementation
The customer of the project
The essential problem is to have an institution that will recognize the necessity of such a project and thus create a prerequisite for the realization of the national interest. This high-ranking customer (most likely the government or the Finance Ministry) will have to make political decisions (regarding the size of the project, its financing, the choice of alternatives) and define the task.
The execution of the project
As the experience of computerization projects (Lithuania 2000, VADIS) shows, improper management of projects is always harmful. Most often such large and complicated projects are divided into smaller components, so that these are planned and implemented concurrently. It is therefore important that the management group be competent and work consistently.
Legal obstacles have to be identified during the research phase. The concern of the system customer will be to initiate amendments to relevant laws (e.g. the legalization of electronic signatures and electronic entries).
The government today borrows extensively and in large quantities, dispensing loans to the private sector as well as giving guarantees for loans to private companies. To a great extent these loans are ineffective and fail to be repaid, placing a burden on the whole private sector.
In view of the decisive effects of the proposed system on the private sector and state governance as well as its rapid repayment, the investment for creating an information system for tax administration should become a priority of the state investment program. When a mechanism breaks down, one should replace it and not fight its consequences.