ABSTRACT
A major problem of developing countries and economies in transition is low tax effectiveness - the so-called 'tax gap', by which a substantial proportion of the maximum potential revenue from a given tax structure remains uncollected. The natural response of economists, thinking of the theory of the firm, is to say that resources should continue to be employed in tax administration up to the point at which marginal cost equals marginal revenue. The most famous and thorough example of this kind of work by a revenue department is the discriminant function analysis until recently undertaken by the Internal Revenue Service of the United States, leading to the Discriminant Index Function. The overall weight of evidence from various kinds of research suggests the importance of commitment to obey the law for tax compliance. The relationship between the taxpayer and the tax office is an important element in achieving compliance.
