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An introduction to tax policy appraisal

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This manual provides a simple framework for tax policy practitioners to use in assessing tax policy options. Drawing on the practices of the UK Treasury and Office for Budget Responsibility (OBR), and the experience of the Centre for Tax Analysis in Developing Countries (TaxDev), this approach is intended to guide policy officials through the ex ante appraisal of proposed tax policy changes, particularly in low- and middle-income country contexts. It is intended to support evidence-based analysis of the strengths, weaknesses and impacts of a proposed policy, which can be used to inform policy decisions. This approach has been applied with the support of TaxDev by tax policy analysts in the Ministries of Finance in Ethiopia, Ghana and Uganda to gather evidence and draft briefings for senior management and ministers.

The manual is an introductory guide and is not a comprehensive ‘how-to’ for every element of the process (e.g. policy modelling approaches). For further guidance on the estimation of revenue impacts, a more in-depth policy costing manual (Phillips, Tyskerud and Warwick, 2021) is available; further reading has been provided at the end for other parts of the process.

The approach to policy appraisal set out in this manual follows a step-by-step process with examples and suggested resources for further learning. The framework is accompanied by a policy appraisal template in Annex I that can be used to guide tax policy practitioners in applying the framework to their own policy examples. Annex II also provides an example template for comparison of options and impact
scenarios arranged in a costing table.

Policy appraisal process

1. Definition. Clear statement of the features of the proposed policy change compared with the current situation (e.g. changes to the rate or base of a tax).

2. Rationale. Justification for the proposed policy change based on economic reasoning, in response to a policy ‘problem’.

3. Evidence. Data or qualitative information that support the rationale, and any relevant case studies, benchmarks or evidence on the likely channels of impact.

4. Estimated cost. Quantitative estimation of the revenue cost/yield from the proposed change, including any assumptions and uncertainties.

5. Groups affected. Consideration of which individuals, groups, sectors, etc., the proposed change is aimed at, or could affect directly or indirectly, and how.

6. Wider impacts. Other effects over and above those considered so far, including potential unintended effects.

7. Legal and administrative issues. Legislative amendment process required and factors affecting efficiency of policy implementation.

8. Alternatives. Consideration of why the proposed policy change would be more effective than alternative tax or other policy options.

9. Assumptions and uncertainties. Clear statement of the assumptions required for the appraisal, and uncertainties surrounding them.

10. Monitoring and evaluation. How the results of the proposed policy change would be measured against intended objectives.

This manual is part of a wider set of resources developed by TaxDev that have been designed to support tax policymakers during the policy appraisal and costing processes. It can be used alongside the policy costing manual outlined above (Phillips, Tyskerud and Warwick, 2021), and – where relevant – in conjunction with the associated policy appraisal and costings templates.

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An introduction to tax policy costing: a manual and worked examples.