Transcript Tax and social policy reform

Tax and social policy
reform: Some
lessons from new EU
member states
Ben Slay
Senior economist
UNDP Bureau for Europe and CIS
12 January 2000
Presentation topics

Tax reform and:
– EU accession
– Links to social policy, labour market reform

Initial lessons from 5 new member states
that have:
– Combined these reforms
– Introduced flat taxes

Tentative conclusions:
– Reforms have been successful
– Useful experience for Turkey?
GDP in the EU NMS: How
does Turkey compare?
100
91
90
71
68
63
62
56
56
44
39
42
0
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Ro
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2008 per-capita GDP (in PPS terms, EU average = 100), Eurostat data
Which countries?
Estonia
What’s a flat tax?
Key feature: A single, proportionate tax
rate
 Other common features:

– Fewer exemptions, deductions
– Same rate for different taxes (PIT, CIT, VAT
...)
– Attempt to align de jure tax systems with
de facto capacity
Are flat taxes “fair”?


“It depends”—differing normative views
Literature says:
– “Vertical equity” may be violated . . .
– . . . But a high taxable income threshold can
protect low-income taxpayers . . .
– . . . And better compliance increases de facto
progressivity

For a flat tax to work, taxpayers have to
believe that rates on “legalised” incomes
won’t be raised
“Flat tax” countries
examined here
PIT rates
CIT rates
Year
adopted
2007
Pre-reform
2007
Pre-reform
Estonia
1994
22%
16% - 33%
22%
35%
Lithuania
1994
27%
18% - 33%
18%
29%
Latvia
1997
25%
10%, 25%
15%
25%
Slovakia
2004
19%
10% - 38%
19%
25%
Romania
2005
16%
18% - 40%
16%
25%
Country
Source: Business Eastern Europe, 22 January 2008, pp. 1-2.
Social policy reform

Restructure social service provision to
improve quality, reflect trends in:
– Demographics
– Labour markets
– State budgets

Social protection:
– Reduce benefit dependency


End ”poverty traps”
“Make work pay”
– Better target social assistance
Labour market

Labour code reform, to:
– Make redundancies easier, to strengthen
employer hiring incentives
– Promote “non-standard” employment
– Support new “public private partnerships”



“Welfare to work” programmes
Allow private job placement firms to compete with state
employment offices
Get links to social, tax policies right
– Goal: Reduce high marginal tax rates for lowincome workers (“unemployment traps”)
Performance criteria for
assessing reforms’ impact
Output (GDP)
 Labour market:

– Employment
– Unemployment
Fiscal trends
 Poverty and
inequality

Performance: Good
on GDP growth . . .
5.7%
6%
3%
2.4%
2.2%
1.3%
1.0%
2.4%
0.7% 0.8%
0%
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0%
EU
NMS
Average annual GDP growth 2005-2008
% points above NMS average
. . . And on employment
1.9%
2%
2%
1.4%
0.8%
1.5%
0%
0.5%
0.0%
-0.6%
-2%
EU
NMS
Average annual employment growth 2005-2007
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0%
-1.7%
% point difference from NMS average
Reforms have not upset
fiscal balance . . .
50%
47%
41%
40%
Spending
Balance
39%
36%
36%
35%
34%
30%
20%
10%
1.8%
0%
-2.2%
-1.9%
-3.6%
-1.8%
-0.9%
-1.1%
-10%
EU
NMS
SLO
ROM
LAT
EST
LIT
General government budget (% of GDP), annual averages for 2002-2007 period. Eurostat data.
. . . Or produced large
public debts
60%
59%
39%
31%
29%
17%
13%
10%
4%
0%
EU
NMS
SLO
LIT
ROM
LAT
General government debt, % of GDP, 2007
EST
TUR
Unemployment rates
fall, both overall . . .
12%
2004
2007
10.1%
9.0%
30%
26%
20%
7.1%
6.4%
15%
6%
10%
2%
0%
-10%
-16%
-20%
ia
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tv
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a
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Average annual unemployment rates
a
NMS
ni
ua
EU
to
Es
th
Li
0%
% deviation from average NMS decline
. . . And for youth
unemployment
24%
2004
2007
21.9%
30%
28%
18%
18.4%
15.3%
5%
14.1%
3%
0%
-28%
-30%
ia
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tv
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a
Average annual youth unemployment rates
a
ni
NMS
ni
ua
EU
to
Es
th
Li
0%
% deviation from average NMS decline
“Unemployment trap”
revisited

Example: Family of four
– 2 parents, two children
– 1 parent works, earns 33% of average
wage

Benefit eligibility:
– Unemployment benefits (for other parent)
– Child allowance (for children in lowincome families)
– Supplement for low-income families
Question: Do benefits fall as
earned income rises?
Answer: Yes, a lot
EU
80%
NMS
Effective tax rate on additional earned
income, in form of lost benefits
60%
Q: Why take the work? (Unemployment trap)
40%
2001 2002 2003 2004 2005 2006 2007
“Unemployment trap”:
Getting weaker?
80%
63%
50%
29%
21%
20%
0%
EU
NMS
SLO
EST
ROM
Marginal tax rate on income earned by worker supporting family of 4 at 33% of national wage
Absolute poverty rates
correlate with GDP
$25,000
Per-capita GDP
poverty rate
$20,000
40%
30%
$15,000
20%
$10,000
$5,000
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2005 World Bank, UNDP data, based on PPP exchange rates, $4.30/day poverty threshold
10%
0%
Relative poverty: Do Ginis
point to problems?
0.4
0.3
NMS
Estonia
Latvia
Lithuania
Romania
Slovakia
0.2
1981 1984 1987 1990 1993 1996 1999 2002 2005
Gini coefficients, World Bank data
Conclusions

Tax reform: Not only about growth
– It’s also about poverty reduction, social inclusion

Key questions—Links between taxes and:
– Labour, social policy
– Joint inclusion memorandum (in accession
negotiations)

When “done right”, flat tax reform can:
– Reduce poverty
– Support social solidarity
– Perhaps at the cost of higher inequality