Transcript Revenue Policy and Administration

Revenue Policy and
Administration
Public Finance and Management
Course, World Bank, May 1,
2006
Richard 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)
50
45
40
35
30
25
20
15
10
5
0
0
5000
10000
15000
20000
25000
Per capita GDP (PPP)
30000
35000
40000
The Tax Burden
Tax Revenue as a Percentage of GDP by GDP/Capita Category, 1999-2001
35%
29.4%
30%
25%
20%
23.2%
22.5%
18.3%
15%
10%
5%
0%
Low
$0 - $4999
Middle
$5000 - $19999
High
$20000 +
Total
Tax Capacity (2001)
Tax
Income Taxes Trade
GDP Taxes on
Taxes
ratio
Goods
GDPpc
+ive, +ive, +ive, -ive,
2%
1%
1%
1%
OIL
-ive,
-ive,
-ive,
-ive,
NS
NS
3%
NS
Transition +ive, -ive,
+ive, -ive,
1%
1%
1%
1%
RSq
0.315 0.288 0.209 0.211
101 countries;
Log Tax/GDP regressed on Log GSDPpc
NonTax
+ive,
NS
+ive,
1%
-ive,
8%
0.365
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
Income Tax
Domestic Goods and Services
Total
Individual
Corporate
Social
Security
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%
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%
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%
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%
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%
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%
Total
General
Consumption
Excises
International
Trade
North America
Latin America
Western Europe
Asia
Africa
CEEME
Tax Instruments:
Regional Differences in Reliance
Latin America: Percentage of Total Tax Revenue, 1975-2002
60%
50%
Income
Domestic Consumption
International Trade
Social Security
40%
30%
20%
10%
0%
1975-1980
1986-1992
1996-2002
Tax Instruments:
Regional Differences in Reliance
Africa: Percentage of Total Tax Revenue, 1975-2002
40%
Income
International Trade
Domestic Consumption
Social Security
35%
30%
25%
20%
15%
10%
5%
0%
1975-1980
1986-1992
1996-2002
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


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
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
Country
Australia
Canada
Hong Kong
Israel
Malaysia
Netherlands
New Zealand
Norway
Sweden
UK
USA
USA
RANGE
percentages of tax revenue of relevant tax
Corporation
Year
PAYE
Other business taxes
tax/ Income tax
1994-95
6.8
1.3
8.0
17.1 (S)
2.5 (S)
11.9 (S)
1994-6
4.6-4.9
1987
1.5
1987
2.2
1994
0.36
c. 1994
4.0
1989-90
1.3
6.3
1987
8.8
1993
1.7
0.34
2.6
1996
2.2
1.9
3.7
2000
26.9-28.0
1992
3.2
--0.36-28.0
0.34-1.9
2.6-8.0
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 Earmarking
Table 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 Korea
Table 9. Characteristics of Earmarking in Korea
Tax
Transportation tax
(85.8%)
(14.2%)
Rural development tax
Education taxes
Liquor tax
Tobacco tax (45%)
Special excise tax on automobiles
(72%)
(28%)
Internal taxes
(15%)
(13%)
Expenditure
Specific (Road, railroad, port, etc.)
Specific (Environment, from 2005)
Broad (Variety of uses)
Specific (Education)
Broad (Local expenditure)
Specific (Education)
Linkage
Loose
Rationale
Mixed
Tight?
Loose
Loose
Loose
Loose
None
None
None
None
Mixed
Loose
None
Specific (Road)
Broad (Local expenditure)
Broad (Local expenditure)
Specific (Education)
Taxes and Globalization


Increased pressure to reduce trade taxes
Increased pressure on corporate tax revenue

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

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


Services and intangibles larger part of value-added
Digitized products
Increased pressure on VAT revenue
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






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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’
