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Tax Increment Financing for Pakistan. Salman Ahmed Shaikh [email protected] PhD Scholar & Economics Faculty IBA Karachi. Presentation Outline. Introduction Mathematical Model Possible Hindrances in TIF Application in Pakistan Pre-Requisites for TIF in Pakistan - PowerPoint PPT Presentation
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TAX INCREMENT FINANCING FOR
PAKISTANSalman Ahmed Shaikh
[email protected] PhD Scholar & Economics Faculty
IBA Karachi
Presentation Outline Introduction Mathematical Model Possible Hindrances in TIF Application in
Pakistan Pre-Requisites for TIF in Pakistan Welfare Benefits of TIF in Pakistan
Introduction Housing Needs: 8 Million (Source: World Bank).
Urban Population Growth > Total Population Growth
Reason: Urban Centric Development
Result: Increased Cost of Living
House Rent Inflation
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0.16
0.18
House Rent Inflation
House Rent Inflation Linear (House Rent Inflation)
Source: Economic Survey of Pakistan 2012-13
Introduction Need: Develop New Cities
Reason: Developing Cities Have Positive Externalities
Who Must Initiate? Cities Are Public Goods
Problem: Funding Development Expenditure
Solution: One of the Many, TIF.
Basic Idea of TIF When a public project such as a road, school, or hazardous waste
cleanup is carried out, there is often an increase in the value of surrounding real estate and new investment.
This increased site value and investment sometimes generates increased tax revenues.
The increased tax revenues are the "tax increment".
TIF dedicates tax increments within a certain defined district to finance debt issued to pay for the project.
TIF is a tool to use future gains in taxes to finance current improvements which will create the conditions for those future gains. This tool is widely used in U.S and in Europe.
Basic Idea of TIF
Mathematical Model
Tax on property (𝑇) function is based on two components, i.e. tax rate on property (𝑡𝑝) and taxable base value of property (𝐵𝑉𝑝). 𝑇= 𝑡𝑝 𝑥 𝐵𝑉𝑝 --- (1) The taxable base value (𝐵𝑉𝑝) can be decomposed into its own components, i.e. number of properties in a locality (𝑁𝑝) times market value of each property (𝑀𝑉𝑝): 𝑇= 𝑡𝑝 𝑥 [𝑁𝑝 𝑥 𝑀𝑉𝑝] --- (2)
Mathematical Model
In our model, the number of properties (𝑁𝑝) is a function of three variables:
1. Urban population growth rate (𝑁𝑢) which is a sum of natural rate of increase in population plus the net migration rate.
2. Level of public capital including physical infrastructure for sustaining basic urban lifestyle (𝐾𝑝).
3. Net capital inflows (𝑁𝐶𝐼) into the country which includes remittances and foreign direct investment in production sector. It may include foreign aid as well but it excludes foreign portfolio investment for our model.
𝑁𝑝 = 𝑓(𝑁𝑢,𝐾𝑝,𝑁𝐶𝐼) --- (3)
Mathematical Model
Assuming a simple Cobb-Douglas functional form for 𝑁𝑝, we have: 𝑁𝑝 = 𝑁𝑢𝛼𝐾𝑝𝛽𝑁𝐶𝐼𝛾 --- (4) We can represent (𝑀𝑉𝑝) as a function of (𝐾𝑝) and governance (𝐺): 𝑀𝑉𝑝 = 𝐾𝑝 𝑥 𝐺 --- (5)
Mathematical Model
If we put (4) and (5) in (2), we get: 𝑇= 𝑡𝑝 𝑥 [𝑁𝑝 𝑥 𝑀𝑉𝑝] 𝑇= 𝑡𝑝 𝑥 𝑁𝑢𝛼𝐾𝑝𝛽𝑁𝐶𝐼𝛾 𝑥 𝐾𝑝 𝑥 𝐺 𝑇= 𝑡𝑝 𝑥 𝑁𝑢𝛼𝐾𝑝1+𝛽𝑁𝐶𝐼𝛾 𝑥 𝐺
Finally, assuming a Laffer curve relation between 𝑡𝑝 and 𝑇, we put 𝑡𝑝𝛿 in place of 𝑡𝑝 where 𝛿 <1 for diminishing marginal contribution in taxes of increase in 𝑡𝑝. 𝑇= 𝑡𝑝𝛿 𝑥 𝑁𝑢𝛼𝐾𝑝1+𝛽𝑁𝐶𝐼𝛾 𝑥 𝐺 --- (6)
Mathematical Model
In our model, 𝛽 > 0 and hence 1+ 𝛽 > 1 and hence we have increasing returns in taxes with additional investment in public infrastructure 𝐾𝑝. In our model, 𝛾 > 0 and has no upper bound as it is possible to have a value greater than 1 for 𝛾 especially in developing countries with high rates of growth. Lastly, we assume that 𝐺 will also be positively related to 𝑀𝑉𝑝 and hence also with amount of 𝑇 that can be collected in the economy. Hence greater the value of 𝛼,𝛽 and 𝛾 and base values of 𝐾𝑝 and 𝑁𝐶𝐼, greater will be the value of 𝑁𝑝 and hence a circular complimentary process will lead to increase in both 𝑁𝑝 and 𝑇 leading to more accumulation of 𝐾𝑝 and subsequent increase in 𝑀𝑉𝑝 in an iterative process.
Possible Hindrances in TIF Application
Low Rate of Savings
Source: Handbook of Statistics on Pakistan EconomyIt is hard to attract investment funds in a country with very low rate of savings.
Possible Hindrances in TIF Application
Tax Haven for Elite Class Lowest Tax to GDP Ratio among IMF
Classification of Middle Income Countries. Only 2% population are registered taxpayers.
India
Pakist
an
Sri La
nka
Sub Sa
haran
Africa
World
High Inc
ome
Middle I
ncome
0
10
20
30
Tax to GDP (%)
Tax to GDP (%)
Source: Ministry of Finance Source: IMF
Possible Hindrances in TIF Application
Fiscal Deficit Eats Up Development Funds
Source: Ministry of Finance
Possible Hindrances in TIF Application
Lack of Documentation
Large Informal Economy. ‘Benaam Zameen’. Flawed Documentation with False Valuation. Capitalistic Democracy Provides Status Quo
Incentives
Possible Hindrances in TIF Application
Lack of Investor Confidence in Public Policies.
Policy Reversals Case in Point: Engro Case in Point: Uncertainty in Energy
Distribution
Possible Hindrances in TIF Application
Inefficiency in Public Sector
Lack of Trust Poor Delivery & Service Record Corruption & Governance Failures DFIs Prefer NGOs Over Government
Possible Hindrances in TIF Application
Lack of Political Will
Capitalistic Democracy Provides Status Quo Incentives
Pre-requisites for TIF in Pakistan Engage Remitters & Big Investors for
Seed Capital Remittances Increased After 9/11
Went in Stock Market & Real Estate Mostly Potential: People Prefer Real Estate Investments After
Market Crash
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
-15.00%
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
Growth in HS Growth in Construction Remittances Growth
Source: Economic Survey of Pakistan 2012-13
Pre-requisites for TIF in Pakistan Engage Banking Liquidity for Initial Funding.
Banks Prefer T-Bill Investments Over Private Lending Islamic Banks Have ADR of 35% Only.
0.000.100.200.300.400.500.600.700.800.90
ADR
ADR
Source: Islamic Banking Bulletin, SBP, Various Issues
Pre-requisites for TIF in Pakistan Connect TIF with Tax Amnesty. Connect TIF with REITs. Compliment TIF with Energy Financing.
Welfare benefits of TIF in Pakistan Reduce urban congestion Reduce urban crimes Reduce prices of real estate Widen the urban centers Generate employment in new urban centers Facilitate closer migration to wide choice of urban
centers Create new growth nodes and production zones. Reduce ethnical conflicts that arise from ethnical
diversity in congested urban centers.
Thank You
For Feedback & Queries
Salman Ahmed ShaikhIBA City Campus, Garden Kiyani Road,
Karachi, PakistanPh# 0334 – 3193395
Email: [email protected]: www.islamiceconomicsproject.wordpress.com