In 1989, the Brazilian tax collection authority introduced a bonus programme to reward tax
officials for their performance in collecting overdue federal taxes. New research by Professors
Charles Kahn, Emilson Silva and James Ziliak, published in the latest issue of the Economic
Journal, indicates that this incentive reform was very successful, leading to an extraordinary 75%
increase in fines collected per inspection. This could be a good way for governments elsewhere to
increase their revenues, particularly in countries where tax evasion is widespread.
The study uses unique panel data from the Brazilian tax collection authority to examine the
effectiveness of the incentive programme known as the Retribuição Adicional Variável (RAV).
Since the bonuses amount to about 11% of the total taxes and fines collected, the average bonus
paid is quite large. Bonuses frequently triple the basic salary of tax collectors.
The total bonus paid to a tax official has two components: an individual reward and a group
reward. Both types of reward increase with the amount of fines collected, so both the individual
and the group have incentives to increase their productivity. Group rewards are paid with 30% of
available monthly revenues, while individual rewards are paid with the remaining 70%. The group
reward, calculated according to the efficiency of the agency relative to other agencies in the
country, equally compensates all officials within a given tax agency. The individual reward
compensates the official for his/her individual productivity and is based on individual monthly
evaluation of performance executed by supervisors of tax agencies.
The researchers use two separate sets of data, covering auditing and collection activities for the
years 1987-92: three years before and after the reform. One set contains data for each of the 10 tax
regions in Brazil on fines collected and resources devoted to fine collection, including the number
of inspections, the average number of auditors and high-level supervisors assigned, and employee
hours. The other data set contains information from external examinations of fines collected and
hours spent in collection activities for each of 25 different types of tax, such as income and excise
taxes. This second set makes it possible to isolate the effects introduced by the RAV reform from
tax compliance effects brought about by a concurrent income tax reform.
The findings are stark. From 1987-9, fine collections were relatively stable. But a significant break
in fine-collection growth rates occurred after 1989. The estimates indicate that after the reform,
fine collections per inspection were about 75% above what they would have been in the absence
of the programme. The results also reveal substantial differences in the impact of the taxcollection
reform across tax regions, ranging from an increase of 19% to an increase of 145%.
While the Brazilian bonus programme was very successful in boosting fine collections, it also has
potential drawbacks. On the one hand, there is evidence that the programme has been watered
down over time, with the link between reward and performance loosened, reducing the incentives
for collectors to work as hard. On the other hand, it is possible that a too tight link between
collections and compensation can make tax collectors overzealous, resorting to extortion in
collecting overdue taxes.
ENDS
Note for Editors: 'Performance-Based Wages in Tax Collection: The Brazilian Tax Collection
Reform and Its Effects' by Charles Kahn, Emilson Silva and James Ziliak is published in the
January 2001 issue of the Economic Journal. Kahn is at the University of Illinois at Urban-
Champaign; Silva is at Tulane University; and Ziliak is at the University of Oregon.
For Further Information: contact Emilson Silva on 001-504-862-8354 (email:
emilson@tulane.edu); RES Media Consultant Romesh Vaitilingam on 0117-983-9770 or 07768-
661095 (email: romesh@compuserve.com); or RES Media Assistant Niall Flynn on 020-7878-
2919 (email: nflynn@cepr.org).