Transcript Revenue Policy and Administration

Revenue Policy, Revenue
Administration, and
Decentralization
Public Finance and Management
Course, World Bank, April 23,
2007
Richard M. Bird
Overview
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Revenue-expenditure linkages
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Macro – Fiscal space: MTFF, stabilization,
elasticity
Micro – decentralization, earmarking, charges
Questions considered
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Who pays?
How?
What difference does it make?
Potential Sources of Revenue
Charges and fees
 Earnings – SOEs, etc.
 Regulatory taxes
 Seignorage
 Inflation tax
 Borrowing
 General taxation
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For Example - User Charges
In principle, user charges for services are
excellent sources of revenue, especially
local revenue
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They are economically efficient
They can also be fair and equitable
User Charges
But in practice, they are not used as
extensively as they should be and are
seldom well-designed.
Too often, user charges are
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Inefficient
Inequitable
Costly to administer
User Charges
These problems arise largely because most user
charges are imposed simply for revenue purposes
with no real attention to their design.
Moreover, even well-designed charges are seldom
politically popular, especially if they are imposed
for a service that has previously been underpriced.
User Charges
How to Do It – in principle
1.
2.
3.
4.
Impose charges only where it pays to do so –
especially public utilities such as water and
electricity
Design such charges efficiently
Ensure public acceptance of charges e.g.
through attention to distributional aspects
Avoid “nuisance” charges
Why Introducing or Increasing User
Charges is Tricky in Practice
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You have to
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Know the product
Know the data
Adjust data as necessary
Set the prices
Justify any subsidy clearly
Think through how to implement it
And, importantly, sell the scheme to both clients and
suppliers
Of course can say much the same about any
change in revenue policy but budgetary impacts
usually larger so more likely to pay attention to
(most of) these points
Turning to 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?
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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
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Level of economic development
Size of informal economy
Different abilities to impose and collect
taxes
 Other revenue sources
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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...
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Factors influencing relative mix of different
tax instruments
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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?
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Predictions for Future
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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
 But always at some cost in terms of
efficiency and growth
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Competing Government Objectives
What considerations exist in choosing
among the different objectives?
 The real and perceived role of taxes in
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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’ –
one must walk very carefully in these
treacherous grounds
Criteria for Evaluating Taxes
Revenue productivity
 Efficiency
 Fairness
 Administrative feasibility
 As an available policy instrument – Yes,
but…..
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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
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Taxes influence behavior
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Work vs. leisure
Save vs. spend
Choice of products
Choice of organizational and financial structure
Choice of location for investment
Operate in formal economy vs. operate in informal economy
“Deadweight” or “distortion” costs
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Almost all taxes distort
Costs are real costs—especially for economies where resources
are scarce
Focus on minimizing tax costs
Minimizing Deadweight Costs of
Taxation is not a simple OT problem
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?
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Fairness
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Different ways to think about fairness
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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 – perceptions
are reality in politics
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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
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Tax Policy and Tax Administration
Tax policy + no administration = 0
 No policy + administration = ‘policy’
 Tax policy + administration = real policy
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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
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Benchmarking: The Concept
Standards or norms:
 Tax system performance
 Tax structure
 Tax administration structures
 Tax administration resources
 Tax administration IT systems
What is benchmarked, and how?
Tax structure and performance
 Organization
 Legal framework
 Enforcement
 Collections
 Systems and resources
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Example:Tax structure and performance
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No. of taxes comprising 75% of total
% of taxpayers providing 75% of total
Tax ratio
Indirect as % total
No. of tax rates
VAT rates
VAT collections as % total
Administrative cost
VAT productivity
IT productivity
Example: Enforcement
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Taxpayer current account
Unbiased audit selection
Auditors as % staff
Use of external data
Stop-filers as % active filers
Crossing information among taxes
No. of officials per 1000 population
Active taxpayers per official
Performance indicators for auditors
% taxpayers subject to audit
Unified audit
The Revenue Process
Transformation
Inputs
Productivity
Efficiency
Systems
Framework
Management
Environment
Uses and Limits of Benchmarking
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Uses
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To
To
To
To
reduce subjectivity of comparative exercises
help detect and understand problem areas
uncover information gaps
help determine reform strategy
Limitations
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Must be collaboratively derived, not imposed
Need to factor in critical environmental factors
Inevitable bias towards quantifiable
What Have We Learned?
Know the environment – economic, legal,
‘social capital’,
 Keep it simple
 Taxpayers as “clients” – the marketing
problem of self-assessed systems
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Tax Administration Reform
The will to do it – A Champion
 Strategy – IT is not the answer (but it is
usually part of it); nor are RAs
 Matching the Task to Resources
 Tax Architecture, Tax Engineering, and Tax
Management
 A Problem in Risk Management
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Facilitating Compliance
Identification – finding taxpayers
 Assessment – determining tax bases
 Collection – getting the revenue
 Service – too often forgotten but a critical
investment
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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)
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Administration costs versus CCs
Substitutes…usually
 Other things equal, social cost
considerations should dictate the choice
between compliance requirements and
administration responsibilities
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EG: Official versus self-assessment
Other things may not be equal…
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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
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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.
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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’
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Overview of Decentralization
The what, why, and why not of
decentralization
 How to do it: a case study
 Financing sub-national government
 Some questions for discussion
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To Decentralize or Not to
Decentralize?
Is
it really the question?
Decentralization is seldom ‘chosen’
Perhaps it should be…the
economics…
But no one gives up power easily and
that’s what it’s really about: who
decides what?
Choosing decentralization?
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Some countries are born decentralized
Some choose to become decentralized
And some have decentralization thrust upon them –
for many diverse reasons
But no matter why a country is (to some degree)
decentralized, it has to work out just what
decentralization means and how to do it.
Modes of Decentralization
Administrative decentralization – the
centre decides, the regions and localities
administer
 Political decentralization – sub-national
governments decide
 Fiscal decentralization
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Done right: how to make political
decentralization efficient and effective
Done wrong: how to make a mess of things –
by decentralizing the wrong things or doing the
right things badly
Potential Benefits
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Efficiency gains
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‘Laboratory’ for innovation
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The right services to the right people in the right amounts
Creating incentives for growth
More heads are better than fewer
Learning from success…and failure
Revenue mobilization – broaden the base?
Political aspects
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Improve governance
Restoring (or redressing) regional balance
Helping to build (or rebuild, or hold together) a nation
Potential Costs
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Macroeconomic concerns
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Equity concerns
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Runaway deficits
Unsustainable borrowing
More local revenues increase regional imbalance
Is local control helpful or harmful to the poor?
Efficiency and effectiveness – can LG really do the job?
Capacity – can LG really do the job?
Critical infrastructure from a national perspective
Corruption – more …or less?
Political concerns – exit and loyalty
Striking the Balance
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Much discussion but little solid evidence
Complex, multi-faceted issue
Some general ‘lessons’
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Hard budget constraint - accountability
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Make rules clear to all
Finance follows function
Need for financial control system
Some local revenue flexibility
Get intergovernmental transfers right
Borrowing – keep an eye open for problems
Asymmetry – the big, the small and those in-between
Universal problems, local solutions
Strategy, process (‘buy-in’), time…..
How to Decentralize
Make local government responsible for
some appropriate services and some
appropriate revenues – get the balance
right
 Make LG accountable to local people - and
also to central government through good
financial management system
 Let LG decide priorities
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How to Do It Successfully
Seize on local willingness to act
 Build trust within LG and between LG and
CG
 At the same time build legitimacy and
sustainability for system
 Communicate, communicate,
communicate
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Fiscal Decentralization: The basic
questions
Who should do what?
 How should it be accounted for?
 Who should pay?
 Determining local revenue sources
 Closing the ‘fiscal gap’ and designing
intergovernmental transfers
 What is role of borrowing?
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What taxes for SNG?
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Common criteria
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Usual results
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Revenue adequacy, buoyancy
Correspondence principle, local accountability
Administrative and compliance cost
Latitude for corruption
Political acceptability
Distortionary impact
Effects on regional disparities
Equity
User fees, property taxes (esp. residential)
Business taxes?
Sales and income taxes – not in most cases
Conclusion – usually unimportant or transfer dependent
What powers should LG have?
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To
To
To
To
To
decide what taxes and charges to levy?
decide what rates to impose?
identify and assess taxes?
bill and collect taxes?
spend the proceeds freely?
Local Tax Administration
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Is it necessary?
Not for any economic purpose. What sub-national governments need
are taxes for which they are economically and politically accountable – but
this does not require that they necessarily administer such taxes.
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Is it desirable?
There may be some informational and accountability advantages.
If others administer local taxes, will the money come to local government?
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Is it feasible?
But there may also be serious resource and political constraints on local capacity to
administer many taxes well.
Consider splitting the task? (e.g. assessment)
Improving local government
accountability
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Financial accounting –the essential base
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Monitoring – Error correction
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Framework laws
Training, pilot projects
Budgeting, reporting, auditing
Policy, analysis, audit, feedback
Dealing with hard cases
Transparency and democracy
Fiscal transfers
Close the ‘fiscal gap’
 Equalize fiscal capacity and need
 Adjust for spillovers
 Increase leverage of central expenditures
 Serve political ends
 Key point is that transfers are
instruments: it’s outcomes that matter
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Closing the Gap
Change revenue and/or expenditure
assignments
 Control/restrain local spending
 Enhance local fiscal effort
 Any form of fiscal transfer?
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Equalization
A matter of taste
 Equalize governments, not people. If
concern is poverty alleviation, transfers
are not the way to go
 Unconditional – let them spend as they
wish?
 Avoid ‘fiscal dentistry’ – capacity measure
is the (seldom used) key
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Some Key Design Issues
The ‘distributable pool’
 Formulas incorporating elements related
to objectives
 Objectives drive design
 Nothing stays the same
 Should everyone be treated the same?
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Borrowing
Borrowing for local capital investment
sometimes makes sense…when it is
possible (capital markets exist) and when
bailouts are ruled out (so that HBC is in
place).
 Usually, however, neither of these provisos
holds, so any borrowing needs to be
carefully watched
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Back to the National Level. A Last Look
at 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?
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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
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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’
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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’
 The Realistic Optimist – Focus on
improving the knowledge base and
capacity for countries to solve their own
problems – NOSFA rules!
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