evasion. Finally, lack of trust between the stakeholders involved may increase their risk aversion and thereby maintain and even reinforce the existing tax structure. Most likely the combined effects of these factors contribute to explain the existing situation. But here again there may be variations between councils.
Options for fiscal reforms
It is clear from the above analysis that the local government tax system in Tanzania is overripe for reform. The current local tax system is partly a result of poor administrative capacity for tax collection and tax design, as well as political pressure and lack of co-ordination between the local and central government. Thus, redesigning the tax structure and building local administrative capacity for collection may reduce revenue losses caused by inefficiency and corruption. However, tax resistance is likely to continue (and increase) if service provision does not improve, necessitating costly and coercive methods of tax enforcement further undermining the legitimacy of the government. Improvement in service delivery - a key objective of public sector reforms in Tanzania - is therefore a necessary condition to improve tax compliance.
In this setting, the fundamental issues to be addressed in the context of local government fiscal reforms are:
(1) to redesign the current revenue structure; and
(2) to enhance tax compliance through improved service delivery.
Redesigning the current revenue structure
There is undoubtedly room for improved fiscal and financial management in local authorities as well as improved co-ordination between the different levels of government. A recent report to the Government suggests measures to improve capacity building for revenue mobilisation and collection (Price Waterhouse,
1998). However, attempts to squeeze additional revenues from poorly designed taxes may exacerbate the negative effects of the tax system on the economy and the society in general. Clearly, improved tax administration cannot compensate for bad tax design. Thus, reforming the tax structure should precede the reform of tax administration since there is not much merit in making a bad tax system work somewhat better.
In redesigning the tax structure, the following options should be considered:
(1) abolition of unsatisfactory local taxes;
(2) improvements to remaining revenue bases; and
(3) cost recovery through user charges.
Abolition of unsatisfactory local taxes
Given the poor performance of many local taxes, any reform programme should include the abolition of a large number of these taxes. In particular, the head tax ‘development levy’ should be abolished. This is a tax that we have found costly to enforce. The levy is extremely unpopular among taxpayers and tax resistance is widespread.
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