View
4
Download
0
Category
Preview:
Citation preview
Designed for Growth: Taxation and Productivity
CHAPTER 2 OF THE APRIL 2017 FISCAL MONITOR
PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS
APRIL 13, 2017
Outline
Motivation
Gains from reducing resource misallocation
How much can we expect from tax policy and revenue
administration?
Conclusion
Motivation
3
Raising productivity is a top challenge
-3
-2
-1
0
1
2
3
1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015
Growth in Total Factor Productivity, 1990―2016
(Five-year average growth rate, percent)
1. Advanced Economies 2. Emerging Market Economies 3. Low-Income Developing Countries
Source: Adler and others 2017.
Note: Group averages are weighted using GDP at purchasing power parity.
By pushing out the technology
frontier (April 2016 FM)
By narrowing the productivity
gap between firms (this FM).
How can fiscal policy help?
Source: Dabla-Norris and others (2015)
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
75
77
79
81
83
1983-93 1990-00 1997-07
TFP Frontier Growth Rate
(percent)
Average TFP Level
(percent of frontier)
Advanced economies: Stochastic Frontier Analysis,
by Country-Sector
Gains from reducing resource misallocation
6
Economy without Resource Misallocation
How does misallocation hurt productivity?
Sources: Dias, Marques, and Richmond 2014
wage wage
Share of workersA Share of workersB
Share of workersA + Share of workersB = Total workers
Marginal Product
of LaborA * PriceA
Marginal Product
of LaborB * PriceB
Economy with Resource Misallocation
How does misallocation hurt productivity?
Marginal Product
of LaborA * PriceA
Marginal Product
of LaborB * PriceB
(1+taxA) * wage
(1+taxB) * wage
Share of workersA + Share of workersB = Total workersSources: Dias, Marques, and Richmond 2014
Share of workersA Share of workersB
Deadweight Loss from Resource Misallocation
How does misallocation hurt productivity?
Lost production due to
misallocation
Sources: Dias, Marques, and Richmond 2014
Marginal Product
of LaborA * PriceA
Marginal Product
of LaborB * PriceB
(1+taxA) * wage
(1+taxB) * wage
Share of workersA + Share of workersB = Total workers
Share of workersA Share of workersB
What does misallocation look like?
0
4
8
12
16
20
24
28
32
0.0
3.0
6.0
9.0
12
.0
15
.0
18
.0
21
.0
24
.0
Pe
rce
nt o
f firm
s
Firm revenue productivity
More efficient country
Less efficient country
Distribution of Firm-Level Revenue Productivities
Sources: ORBIS; and IMF staff estimates.
Note: The figure shows the distribution for firms in the manufacturing sector for each country. More (less) efficient country is defined as a country at the 75th (25th) percentile of the distribution of
resource allocation efficiency, based on the ORBIS sample.
0
5
10
15
20
25
30
35
40
-2.6
-1.8
-1.0
-0.2
0.6
1.4
2.2
3.0
Perc
ent of firm
s
Log of firm revenue productivity scaled by corresponding country-industry average
What is at stake?
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
AEs EMEs LIDCs
Re
al G
DP
gro
wth
(p
erc
en
t)Estimated Annual Real GDP Growth Effects from Reducing Resource Misallocation
Sources: ORBIS; World Bank, Enterprise Surveys; and IMF staff estimates.
Note: The figure shows medians across country groups. Estimates are computed based on the assumption that the other sectors could achieve TFP gains similar to those estimated for
the manufacturing sector and that there are no adjustment costs. AEs = advanced economies; EMEs = emerging market economies; LIDCs = low-income developing countries.
Adds
1% to
real
GDP
growth
How much can we expect from tax policy and revenue administration?
12
Upgrading the tax system reduces misallocation
Selection of tax distortions that discriminate across:
1. Capital asset types
2. Sources of financing
3. Formal and informal firms
4. Small and large firms
13
Reducing these
distortions can add
¼ percent to annual
real GDP growth in
developing countries
1. Tax Distortions across Capital Asset Types
14
Developing Countries: Machinery as a Share of Total Assets,
by Industry (Percent of total assets)
Sources: Oxford University Center for Business Taxation; World Bank, Enterprise Surveys; and IMF staff estimates.
Note: Tax disparity is the effective marginal tax rate (EMTR) on machinery minus the EMTR on buildings. Countries with high (low)
EMTR disparity are those with EMTR differences above (below) the median across countries. Total assets are measured as the sum of
machinery and buildings.
40 45 50 55 60 65 70 75 80
Paper
Electronics
Nonmetallic and plastic materials
Textiles
Metals and machinery
Other manufacturing
Garments
Auto and auto components
Chemicals and pharmaceutics
Other transport equipment
Leather
Food and beverage
Wood and furniture
Countries with low tax disparity Countries with high tax disparity
Tax disparities across
capital asset types steer
investors toward lower-
return, tax-favored,
investments
2. Tax Distortions across Sources of Financing
15
Corporate debt bias
affects investment
decisions that depend
more on equity, such as
R&D
0.0
5.0
10.0
15.0
20.0
25.0
30.0
0.0 5.0 10.0 15.0 20.0 25.0 30.0
Exte
rna
l e
qu
ity d
ep
en
den
ce
R&D Intensity
Sources: Brown and Martinsson (2016); and IMF staff estimates.
Note: R&D intensity is the average of industrial research and development expenditures normalized by vale
added across OECD countries). External equity dependence is the net external equity issues to total assets ratio
for the median U.S firm in each industry.
Advanced Economies: R&D Intensity and External Equity
Dependence, by Industry
3. Tax Distortions across Formal and Informal Firms
16
Source: WBES, and IMF staff estimates.
Note: Cheats are defined as registered firms associated with reporting less than 100 percent of their sales for
tax purposes. TFP was calculated at the firm-level, using the Levinsohn and Petrin (2004) method. EME =
Emerging market economies; LIDC = Low income developing countries.
4
4.2
4.4
4.6
4.8
5
Tax compliant Cheats
LIDCEME
Developing Countries: TFP across Tax Compliant Firms and Cheats
Tax evasion allows
“cheats” to stay in
business despite low
productivity
4. Tax Distortions across Small and Large Firms
17
Preferential tax treatment
based on size stunts firm
growth
1
2
3
4
5
<10
11
―2
0
21
―3
0
31
―4
0
40+
Ave
rag
e n
um
ber
of e
mp
loye
es (
resca
led
so
firm
s le
ss th
an
fiv
e y
ea
rs o
ld =
1)
Firm age (years)
Countries with lower tax rate for small firms
Countries without a lower tax rate for small firms
Sources: KPMG; World Bank, Enterprise Surveys; and IMF staff estimates.
Note: Lines represent the median for each group.
Developing Countries: Employment by Firm Age
What specific tax policies can help reduce misallocation?
Minimize differentiated tax treatment across assets and financing
Allowance for corporate equity (ACE); Cash Flow Tax
Level the playing field across firms
Lower tax compliance costs
Strengthen tax enforcement capacity
Target tax relief to new rather than small firms
18
Conclusion
19
To raise productivity:
Narrow the productivity gap between firms
Reducing distortions can lift annual real GDP growth rates by
1 percentage point
Developing countries can achieve ¼ of these gains by
improving the design of their tax system
Push out the technology frontier, through support to
R&D
Growth-friendly fiscal policies
Thank you!
21
22
Tax system affects long-term growth by affecting:
Allocative efficiency
Productive efficiency
State capacity
Resource misallocation arises from policies/practices that discriminate across firms:
Legislated provisions
Discretionary provisions
Market imperfections
Recommended