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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?

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Revenue policy and administration

Revenue Policy and Administration

Public Finance and Management Course, World Bank, May 1, 2006

Richard M. Bird


Overview
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
Sources of Revenue

  • Charges and fees

  • Earnings – SOEs, etc.

  • Regulatory taxes

  • Seignorage

  • Inflation tax

  • Borrowing

  • General taxation


An example user charges
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
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
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?


The tax burden
The Tax Burden

Tax Revenue as a Percentage of GDP by GDP/Capita Category, 1999-2001



What explains differences
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
Tax Instruments:Differences by Region over Time


Tax instruments regional differences in reliance
Tax Instruments:Regional Differences in Reliance

Latin America: Percentage of Total Tax Revenue, 1975-2002


Tax instruments regional differences in reliance1
Tax Instruments:Regional Differences in Reliance

Africa: Percentage of Total Tax Revenue, 1975-2002


Relative use of different tax instruments
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
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
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
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
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
Criteria for Evaluating Taxes

  • Revenue productivity

  • Efficiency

  • Fairness

  • Administrative feasibility

  • As an available policy instrument – Yes, but…..


The cost of collecting taxes
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
Efficiency

  • Taxes influence behavior

    • 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
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
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
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 and Tax Administration

  • Tax policy + no administration = 0

  • No policy + administration = ‘policy’

  • Tax policy + administration = real policy


Task of tax administration
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
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
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
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
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
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.



Keeping taxpayers honest
Keeping Taxpayers Honest

  • Know the problem – know your clients; estimate tax gaps

  • Monitor closely – registration, filing, payment, appeal

  • Enforce – penalties, dispute settlement


Controlling corruption
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
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
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




Taxes and globalization
Taxes and Globalization

  • Increased pressure to reduce trade taxes

  • Increased pressure on corporate tax revenue

    • 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

  • Increased pressure on VAT revenue

    • Services and intangibles larger part of value-added

    • Digitized products


Tax reform the key questions
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
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
Lessons from Developing Countries

  • 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
An Example: 30 Years of Reform in Colombia

  • Gradualism

  • Duration

  • Education

  • Did it Matter? The Question of ‘Fiscal Equilibrium’


Conclusion
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’


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