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Revenue Policy and Administration
Public Finance and Management Course, World Bank, May 1,
2006Richard M. Bird
Overview Revenue-expenditure linkages
Macro – MTFF, stabilization, elasticity Micro – decentralization, earmarking, charges
Questions considered Who pays? How? What difference does it make?
Sources of Revenue Charges and fees Earnings – SOEs, etc. Regulatory taxes Seignorage Inflation tax Borrowing General taxation
An Example: User Charges Should use them if you can But few do, for good reasons and bad:
publicness, excludability, externalities, supply conditions, policy objectives
If you do charge, it’s important to do it right
But this too is seldom done: it’s not all that easy
It’s Not Just Pricing – It’s Marketing Know the product Know the data Adjust data as necessary Set the prices Justify any subsidy clearly Think through how to implement it Sell the scheme to both clients and
suppliers
Taxes: Key Questions How do tax systems differ across
countries? What can, or should, taxes do? What criteria are useful in thinking about
the design and operation of tax systems? What constraints may limit the tax policy
options available in a particular country?
Tax revenue (% of GDP)
0
5
10
15
20
25
30
35
40
45
50
0 5000 10000 15000 20000 25000 30000 35000 40000
Per capita GDP (PPP)
The Tax Burden
18.3%
22.5%
29.4%
23.2%
0%
5%
10%
15%
20%
25%
30%
35%
Low Middle High Total$0 - $4999 $5000 - $19999 $20000 +
Tax Revenue as a Percentage of GDP by GDP/Capita Category, 1999-2001
Tax Capacity (2001)
What explains differences?
Different demands and tastes for government services
Different capacities to tax Level of economic development Size of informal economy
Different abilities to impose and collect taxes
Other revenue sources
Tax Instruments:Differences by Region over Time
Total Individual CorporateSocial
Security TotalGeneral
Consumption ExcisesInternational
Trade
North America
1975-1980 61.0% 44.3% 15.9% 21.4% 11.7% 6.0% 5.1% 5.2%
1986-1992 57.3% 46.2% 10.5% 26.8% 12.4% 7.1% 4.6% 3.1%
1996-2002 82.4% 65.6% 15.7% 41.2% 14.7% 8.7% 5.1% 1.8%
Latin America
1975-1980 25.9% 8.8% 13.9% 21.3% 32.0% 13.6% 15.3% 21.2%
1986-1992 25.3% 7.0% 14.4% 18.6% 38.5% 17.0% 17.1% 17.5%
1996-2002 29.2% 5.9% 17.8% 24.9% 54.0% 32.6% 15.5% 12.8%
Western Europe
1975-1980 27.5% 21.4% 5.5% 30.8% 32.6% 18.4% 10.6% 4.3%
1986-1992 28.0% 21.3% 6.0% 31.2% 34.4% 21.6% 9.6% 2.1%
1996-2002 44.4% 30.8% 12.2% 50.1% 49.3% 29.8% 14.1% 0.3%
Asia
1975-1980 37.2% 22.0% 19.7% 0.1% 35.7% 13.7% 17.6% 23.1%
1986-1992 37.2% 19.7% 18.2% 0.4% 37.4% 16.4% 15.8% 20.1%
1996-2002 44.6% 23.0% 20.3% 3.7% 38.2% 18.6% 14.5% 12.3%
Africa
1975-1980 28.9% 13.2% 14.5% 6.5% 26.7% 16.6% 12.1% 34.4%
1986-1992 24.7% 13.2% 10.3% 5.9% 28.8% 16.5% 10.7% 36.7%
1996-2002 29.6% 17.1% 11.2% 6.2% 35.0% 21.1% 10.9% 32.0%
CEEME
1975-1980 -- -- -- -- -- -- -- --
1986-1992 34.9% 10.1% 23.1% 20.9% 30.6% 23.3% 6.1% 11.3%
1996-2002 29.0% 13.9% 14.8% 40.2% 52.1% 31.8% 14.3% 14.2%
Income Tax Domestic Goods and Services
Tax Instruments:Regional Differences in Reliance
Latin America: Percentage of Total Tax Revenue, 1975-2002
0%
10%
20%
30%
40%
50%
60%
1975-1980 1986-1992 1996-2002
IncomeDomestic ConsumptionInternational TradeSocial Security
Tax Instruments:Regional Differences in Reliance
Africa: Percentage of Total Tax Revenue, 1975-2002
0%
5%
10%
15%
20%
25%
30%
35%
40%
1975-1980 1986-1992 1996-2002
Income Domestic ConsumptionInternational Trade Social Security
Relative Use of Different Tax Instruments... Factors influencing relative mix of different
tax instruments Revenue considerations Administrative considerations Fairness considerations Transition and political considerations
Trends in Tax Reform Increased reliance on VAT Increased pressure to reduce trade taxes Increased tax competition for foreign
investment Reduction in top tax rates under individual
income tax system Reduction in top tax rates under business
profits tax Flat taxes?
Predictions for Future Tax design will be largely dictated by domestic
considerations But no tax system can now be designed without
regard to tax systems of other countries Globalization will increase challenges in taxing
income from capital Possibly ….regional cooperation may lead to
increased harmonization of tax systems
What Can Taxes Do? Raise revenue to fund government
operations Assist in redistribution of wealth or income Encourage or discourage certain activities At a cost in terms of efficiency and growth
Competing Government
Objectives What considerations exist in choosing
among the different objectives? The real and perceived role of taxes in
Encouraging economic growth Reducing disparity between the rich and the
poor Reducing poverty Sharing the cost of government fairly Favoring the ‘good’, discouraging the ‘bad’ –
walk very carefully in these treacherous grounds
Criteria for Evaluating Taxes
Revenue productivity Efficiency Fairness Administrative feasibility As an available policy instrument – Yes,
but…..
The cost of collecting taxes
Costs of taxation Excess burden of taxes Excess burden of tax evasion Tax administration costs Compliance - and avoidance - costs. Psychic and social costs?
Efficiency Taxes influence behavior
Work vs. leisure Save vs. spend Choice of products Operate in formal economy vs. operate in informal economy Choice of location for investment
“Deadweight” or “distortion” costs Almost all taxes distort Costs are real costs—especially for economies where resources
are scarce Focus on minimizing tax costs
Minimize Deadweight Costs of Taxation Tax bases should be as broad as possible Tax rates should be as low as possible Careful attention must be paid to taxes on
production BBLR vs. interventionist strategy?
Fairness Different ways to think about fairness
Horizontal and vertical equity Focus on single tax provision, single tax, or tax
system as a whole Focus on government activity as a whole
Tax incidence Actual vs. perceived fairness
Costs of Redistribution through Taxation Trade-off of equity and efficiency Costs of higher tax rates depends in part
on the elasticity of wage supply – and on that of capital
Capital flight – into gray or black economy or out of the country
Tax Policy and Tax Administration Tax policy + no administration = 0 No policy + administration = ‘policy’ Tax policy + administration = real policy
Task of Tax Administration How much administration? – setting the
budget: Lessons from history and experience?
How to administer? – organization (RA, LTO, etc.) and strategy
How far to push it? – choices at the margin
What Have We Learned? Know the environment – economic, legal,
‘social capital’, Keep it simple Taxpayers as “clients” – the marketing
problem of self-assessed systems
Tax Administration Reform
The will to do it – A Champion Strategy – IT is not the answer (but it is
usually part of it) Matching the Task to Resources Tax Architecture, Tax Engineering, and
Tax Management
Facilitating Compliance Identification – finding taxpayers Assessment – determining tax bases Collection – getting the revenue Service – too often forgotten but a critical
investment
What are Compliance Costs? Citizen’s costs of meeting tax obligations Excludes actual taxes paid and excess
burdens. Includes avoidance (“tax planning”) and
evasion costs. Includes costs of taxpayers, non-filers,
third parties (banks, tax withholders, helping others)
Administration costs versus CCs Substitutes Other things equal, social cost
considerations should dictate the choice between compliance requirements and administration responsibilities EG: Official versus self-assessment
Other things may not be equal… Documents enclosed with tax returns Desk versus field audits, etc.
International evidence: Business income taxes
Keeping Taxpayers Honest Know the problem – know your clients;
estimate tax gaps Monitor closely – registration, filing,
payment, appeal Enforce – penalties, dispute settlement
Controlling Corruption Incentives – C=M +D – A: limit
opportunities, raise opportunity costs (positive and negative)
Training – professionalism Organization – performance evaluation,
etc. Monitoring – internal audit, etc.
Taxes and Decentralization Increasingly important to focus on
assigning taxing and spending authority to lower levels of government
Decentralization may improve government service by increasing accountability
Not a panacea, but a potentially important linkage fostering ‘trust’
Earmarking: Good, Bad, and Symbolic Good when good user charges OK when benefit linkage Sometimes useful for ‘trust’ building Bad when none of the above
Varieties of EarmarkingTable 1. Varieties of Earmarking
Variety Expenditure Linkage Rationale Example
A Specific Tight Benefit Public enterprise
B Specific Loose Benefit Gasoline tax and road finance
C Broad Tight Benefit Social security
D Broad Loose Benefit Tobacco tax and health finance
E Specific Tight None Environmental taxes and clean-up programs
F Specific Loose None Payroll tax and health finance
G Broad Tight None Revenue sharing to localities
H Broad Loose None Lottery revenues to health
Earmarking in KoreaTable 9. Characteristics of Earmarking in Korea
Tax Expenditure Linkage Rationale
Transportation tax Loose Mixed (85.8%) Specific (Road, railroad, port, etc.) (14.2%) Specific (Environment, from 2005)
Rural development tax Broad (Variety of uses) Tight? None
Education taxes Specific (Education) Loose None
Liquor tax Broad (Local expenditure) Loose None
Tobacco tax (45%) Specific (Education) Loose None
Special excise tax on automobiles Loose Mixed (72%) Specific (Road) (28%) Broad (Local expenditure)
Internal taxes Loose None (15%) Broad (Local expenditure) (13%) Specific (Education)
Taxes and Globalization Increased pressure to reduce trade taxes Increased pressure on corporate tax revenue
Tax competition Intra-company trade increases opportunity for tax
evasion Increased pressure on individual tax revenues
Easier to work or invest outside of country of residence Increased pressure on VAT revenue
Services and intangibles larger part of value-added Digitized products
Tax Reform: The Key Questions What is to be done? How is it to be done? Who is to do it? When is it to be done? What will happen as a result?
Lessons from Developed Countries Need for a Champion Both Wrapping and Contents of Package
Matter Visible benefits essential Adequate discussion – virtues and
limitations (from tax reform perspective) of democracy
Lessons from Developing Countries Timing, timing, timing Simplify – don’t “complify” Sequencing and Scope Clarity (versus the political advantages of keeping
tax matters in ‘decent obscurity’) Details matter Incrementalism Politics…always and everywhere There is No Such Thing as a ‘Politician-Proof
Policy’: but should there be?
An Example: 30 Years of Reform in Colombia Gradualism Duration Education Did it Matter? The Question of ‘Fiscal
Equilibrium’
Conclusion The Optimist - ‘Taxes are the price we pay
for civilized society’ The Pessimist - ‘To tax and be loved is not
possible’ The Realist? -‘Above all, do no harm – or at
least as little as possible’