Transcript Tax Increment Financing for Pakistanx

TAX INCREMENT FINANCING IN PAKISTAN
SALMAN AHMED SHAIKH
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
 Juvenile delinquency refers to criminal acts committed by children or teenagers.
 Though the causes of juvenile delinquency are debated and controversial as well.
 Parents may defined delinquent behavior as;
 Disobedience fighting with siblings, damaging property, stealing money from family
members or threatening parents with violence.
 School staff members often regard delinquent behavior as;
 Interruption or disturbance of classrooms violates the school code of conduct and
threatens the safety of faculty and students.
 Mental health view about juvenile delinquency
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
House Rent Inflation
18.00%
16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
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 = 𝑁𝑢 𝛼 𝐾𝑝 𝛽 𝑁𝐶𝐼𝛾 ---
(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 𝑁𝑢 𝛼 𝐾𝑝 𝛽 𝑁𝐶𝐼 𝛾 𝑥 𝐾𝑝 𝑥 𝐺
𝑇 = 𝑡𝑝 𝑥 𝑁𝑢 𝛼 𝐾𝑝 1+𝛽 𝑁𝐶𝐼 𝛾 𝑥 𝐺
Finally, assuming a Laffer curve relation between 𝑡𝑝 and 𝑇, we put 𝑡𝑝 𝛿 in place of 𝑡𝑝 where 𝛿 <1
for diminishing marginal contribution in taxes of increase in 𝑡𝑝 .
𝑇 = 𝑡𝑝 𝛿 𝑥 𝑁𝑢 𝛼 𝐾𝑝 1+𝛽 𝑁𝐶𝐼𝛾 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
It is hard to attract investment funds in
a country with very low rate of savings.
Source: Handbook of Statistics on Pakistan Economy
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.
Tax to GDP (%)
30
25
20
15
10
5
0
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
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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
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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
30.00%
20.00%
10.00%
0.00%
-10.00%
-20.00%
FY06
FY07
Growth in HS
FY08
FY09
Growth in Construction
FY10
FY11
FY12
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.
ADR
0.90
0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00
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
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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 Shaikh
IBA City Campus, Garden Kiyani Road,
Karachi, Pakistan
Ph# 0334 – 3193395
Email: [email protected]
Web: www.islamiceconomicsproject.wordpress.com