The Hidden Fiscal Costs of Administrative Burdens

The Administrative Burden Framework, defined as the ‘experience of policy implementation as onerous,’ was first conceived by Burden et al. (2012) and later operationalized into learning, compliance, and psychological costs by Moynihan et al. (2015). It has largely been studied in social policy and means-tested welfare programs, with implications for equity, civic participation, trust in government, and the uptake of services. More recently, it has been expanded to include diverse areas such as higher education, foreclosure programs, cash transfer programs, and immigration. Yet, the administrative burdens framework has not been used to study the impact on fiscal policy, taxation, budgeting, and economic activity, where it can be particularly insightful for policymakers.

Administrative burdens can have a profound impact on fiscal policy and economic activity through four channels. First, from the revenue-generation perspective, administrative burdens can have acute effects on fiscal policymaking, especially taxation. For example, countries such as Pakistan and Bangladesh have very low tax-to-GDP ratios, hovering around 10.8% and 8.3%, respectively, compared with a South Asian regional average of 18% and an Emerging Market and Developing Economy (EMDE) average of 24%. One reason for the low tax-to-GDP ratios in these countries has been the challenges associated with filing taxes—that is, the learning, compliance, and psychological burdens associated with filing tax returns—which keeps people from filing their taxes in a timely manner. These learning and psychological costs manifest themselves as reluctance to file taxes because people perceive the process as grueling, time-consuming, and onerous. They may also fear that filing taxes may expose them to the risk of some form of government investigation. Such burdens compound to reduce the number of people filing taxes, keeping the tax-to-GDP ratio perennially low and leaving many people outside the tax net, ultimately affecting the fiscal balance and increasing deficits.

The second dimension through which administrative burdens can affect fiscal policy is the expenditure side. From this perspective, the government wastes its own money through inefficiency. When policymakers impose undue burdens on citizens participating in public programs through eligibility determinations, fraud-prevention measures, or verification and documentation requirements, such burdens come at a monetary cost. The state has to expand its administrative machinery to enforce these burdens, as substantial administrative resources are usually needed for verification and eligibility determinations, thereby directly inflating state expenditures. However, in many such cases, the administrative cost of maintaining this extensive apparatus exceeds the financial losses it was intended to prevent.

Third, administrative burdens can have a direct bearing on corruption. At the individual level, people resort to corruption to evade taxes or to access public services to which they may or may not be entitled. Corruption associated with administrative burdens can also have an impact at the macro level. For example, complex tax-filing mechanisms and the associated learning and compliance burdens can foster the shadow economy. When intricate tax codes and cumbersome filing procedures feel regressive to individuals and small and medium-sized enterprises (SMEs), they may resort to underreporting or move into the informal economy. Similarly, burdens experienced by citizens and SMEs at customs enforcement points can work to reduce trade volumes, affecting the collection of import duties, and potentially leading to smuggling. Corruption may not only increase costs for otherwise eligible beneficiaries but also severely erode government revenues.

Lastly, these burdens can stifle economic activity. For example, many such burdens are found in programs such as cash transfers or food benefits. If citizens are prevented from accessing these benefits because of such burdens, not only are citizens disadvantaged, but the small businesses where these benefits are redeemed are also affected, ultimately constraining broader economic activity.

Therefore, policymakers must recognize that administrative burdens profoundly affect fiscal policy by eroding revenues, inflating expenditures, and constraining overall economic activity. They can determine how citizens comply with tax-related rules. Just as the World Bank introduced the Business Ready (B-READY) indicators to identify business-related bottlenecks, it is time for policymakers to comprehensively audit the administrative burdens associated with broader fiscal policies, especially tax filing and compliance, to make these processes seamless.

While deploying technology and artificial intelligence can streamline compliance for many, doing so can also permanently marginalize users who are not technologically proficient. Therefore, relying on traditional systems, such as Integrated Financial Management Information Systems (IFMIS), without simplifying the underlying legal and administrative requirements may not be an ideal solution. Ultimately, the most sustainable path forward requires simplifying procedures, offering tailored solutions, and actively educating tax filers to make compliance seamless.