Controlling for per capita income, cross country comparison suggests that Bangladesh, along with a few other countries, is at the bottom of the tax effort list. With its present per capita income, Bangladesh should be collecting at least 12-13 percent of GDP as tax revenues.

Broadly speaking, the tax ratio tends to rise as income grows, although this relationship does not always hold at very high per capita income levels. For example among OECD countries, Sweden obtains an astounding 50 percent of GDP as tax revenues whereas US, with higher per capita income, obtains some 25 percent. This suggests that the tax ratio depends not only on per capita income but also on the readiness of citizens to let their governments partake a large part of their income for the use of the state. So, the search for an optimal tax ratio is futile. Rather, this is an exercise in political economy and the ratio will vary from country to country based on the political discourse between citizens and the state.

Nobody likes to pay taxes. History is full of examples of tax rebellion and tax related conflicts. What makes it possible for OECD countries like Sweden to collect some half of its GDP as taxes? Even at the lower end, countries like Japan and US collect a quarter of its GDP. Clearly, a part of the answer must lie in the willingness of citizens to pay. This in turn depends upon services provided by the state. But willingness is only one element. Even if I like the services provided by the state, I don't necessarily benefit in proportion to the taxes I pay. Furthermore, since states tend to provide many "public goods" why not I let my neighbours pay and I can be a "free rider"? Thus, capacity to pay (per capita income), willingness to pay (services provided by the state) and incentive to pay (free rider problem) are all important factors in determining the tax outcome.

What can Bangladesh learn from the experience of OECD countries? Countries are different with different levels of per capita income, different endowments of natural resources, composition of economic activities, social and political environment, etc. So the experience of one country does not automatically translate into a one-to-one correspondence to some other country context. Yet, some broad generic lessons of experience are possible from the tax effort in OECD countries.

As an illustration, I use my own experience as a tax payer in the United States. My family and I fall in the category of ordinary tax payers and our experience may not fully reflect all the complexities that some other US tax payer with a more complicated situation may have faced, but the process is broadly applicable to most tax payer situations. Over the past 30 years or so that I have lived in the US, I have filed applicable taxes for myself and my family. In this long episode, I have never used a tax lawyer; I have never been in direct contact with a tax authority staff, all transactions including tax filing, payments and reimbursements from the US Treasury when necessary has happened through the mail or electronically. I have never been delinquent nor have I ever been late in filing the required tax papers. On average I have spent 3-4 hours per tax filing and in many cases the tax form has been a one page document called 1040EZ.

If one reflects carefully on this experience, this tells a powerful story of a tax system and administration that has lots of attraction and relevance to the Bangladesh case. Let's first start with the last point: the ease of tax filing. This is simply a reflection of the fact that income tax laws are pretty straight forward and simple for most citizens whose income sources are from wages and interest income from bank deposits and who are happy to take standard deductions. The tax filing gets a bit more involved as other sources of income, such as rental income or income from self employment are involved or when itemized deductions are sought. Even then, the process is relatively straightforward and filing is not a big hassle.

This illustrates two of the fundamental principles of a good tax system: transparency and simplicity. Tax system should be transparent so that informed tax payers understand how taxes are assessed and be simple enough for most tax payers to have the option to do their own filing. Of course, special provisions are there to handle complex cases including income from business, multiple sources of income, complicated itemized deductions, special treatments, etc. Tax accountants and tax lawyers typically handle those cases, but these provisions are not essential for most wage earners who can be regarded as ordinary tax payers.

The fact that I have never seen a tax official and yet always filed my tax return on time suggests another powerful characteristic of a good tax system: voluntary compliance with self assessment. An environment must be created whereby most citizens would voluntarily file their taxes on time. This is partly related to the first two principles of transparency and simplicity noted above. If I know my tax obligations and can file my tax return without any hassle or complicated filing process, my incentives to file taxes voluntarily increases manifold.

The most attractive feature of the US experience is that tax filing and related transactions do not require direct dealings between the tax payer and the tax authority unless there are problems. I file my taxes through the mail. I also send my payment through mail. If there is an over payment through withholding or other means, I have always gotten back the amount owed to me by the Treasury without any follow up. This is a remarkably hassle-free aspect of the tax system which makes voluntary tax compliance so much more acceptable. It also has the powerful incentive that it eliminates any kind of tax fraud or avoidance through collusion with the tax official. The system cuts through this aspect of corruption directly at the source, which is a great feature in the context of the corruption-ridden environment of Bangladesh.

Self assessment and voluntary compliance are backed by a well crafted follow-up system to ensure proper compliance with tax laws. This is chiefly built on the principle of selective audits. The audits are done very carefully. This requires good report keeping and computerization of tax record. In this 21st century these requirements are quite easy to implement. In the US audits are done selectively (less than 2 percent of tax cases per year) but vigorously. Anybody familiar with the US tax system knows that penalties for tax fraud can be very severe and without exception. The legal cover against tax fraud and hundred percent implementation of legislated sanctions are essential ingredients of a tax system based on voluntary compliance and self assessment.

The tax authority needs to be empowered so that it can do its job without undue political influence. Many countries have found it useful to have an autonomous tax department. It also has to be adequately staffed and with the right kind of expertise. A modern tax department cannot be run on the basis of civil service staff that transfer jobs frequently as a part of routine rotations. This needs to be run as a business with seasoned professional staff. Since the tax department has lots of power and can be a source of exploitation or fear, OECD countries have emphasized the concept of a "tax service authority" with the emphasis on service. The customers (tax payers) are treated as clients who need services of the tax department. The tax department staff are required to treat customers with respect and care when there is a need for interaction. However, most tax forms and publications are available electronically and direct interaction for these is not necessary. Tax forms and publications are routinely mailed to tax payers well ahead of time. These documents are also available in post offices, public libraries as well as in tax offices.

What is the way forward for Bangladesh? It is understandable that given the low per capita income, the low level of education and weak administrative capacity the Bangladesh Tax Department is not likely to convert to the Internal Revenue Service (IRS) department of the US Treasury. But there is no reason why the way in which income taxes are collected cannot change fundamentally as illustrated above. First, the tax laws ought to be radically simplified and streamlined to make it possible for most ordinary tax payers to file their income tax through a one page form like the 1040EZ. The forms and documentation requirements can increase progressively to handle complicated filing needs.

Secondly, the arms-length relationship between the tax payer and the tax authority must be established as a top priority. There is no earthly reason why a citizen cannot file the tax return through mail. Where payments are involved, these could be deposited in a Treasury account established with a number of commercial banks. The main point is that there should be no opportunity for collusive behavior between the tax payer and the tax collector.

Third, a system of rigorous audits must be established. The audits should be highly selective but enforced with the full force of law and without exception. Finally, thought must be given to establishing an autonomous and professional Tax Service Authority (TSA). The TSA must hire competent professionals, should have automated record system, and must be oriented to provide service to the tax payer.

The relationship should be one of client and service provider rather than based on threat and fear. A tax system based on voluntary tax compliance is the only hope for long-term progress with tax reform. The earlier the government recognizes this and establishes the environment for this, the better off are the tax payers and the prospects for enhanced tax revenues.

The author is Sector Director Poverty Reduction, Economic Management, Finance and Private Sector Unit of the South Asia Region of the World Bank, Washington D.C. The views expressed in this piece are those of the author and not necessarily the views of the World Bank Group.