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Comments on: Orazio P. Attanasio: “Taxes and Equity in Middle Income C ountries”. Michael Keen, IMF World Bank Conference on Equity, Development and Policy June 10, 2011. Integrating tax and public spending . Exaggerating ( a bit) common advice is:

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comments on orazio p attanasio taxes and equity in middle income c ountries

Comments on:Orazio P. Attanasio: “Taxes and Equity in Middle Income Countries”

Michael Keen, IMF

World Bank Conference on Equity, Development and Policy

June 10, 2011

integrating tax and public spending
Integrating tax and public spending

Exaggerating (a bit) common advice is:

“Use taxes to raise revenue, redistribute on the spending side”

—meaning (and rationale) differs between advanced/emerging/developing

  • But advice and analysis (and policy) on the two sides are rarely joined up—which matters for non-revenue neutral reforms
slide3

And joining them up raises deep analytical issues:

    • What if capacity weak on both tax and spending?
      • E.g. theoretical case for uniform VAT weakest in low income countries, practical case strongest
    • Modeling the benefits of public spending is tough…
    • ….not least those from fiscal sustainability
  • Making better links may matter for governance—but how to do it, without earmarking?
incidence ignorance and neglect
Incidence—Ignorance and neglect

“[The enquiry is]…absolutely useless…. I cannot help it if the House of Commons has asked you to do it.” Edwin Cannan, 1926

  • Incidence assumptions matter
    • For the big picture: Whalley (1984)
    • And in detail: VAT threshold can have big effect on its distributional impact (Jenkins et al, 2006)
slide5

But our ignorance is vast…:

    • E.g. How far does capital mobility mean corporate tax falls on labor? How much do employers gain from EITC?
  • …so we end up ignoring important (maybe) things:
    • IETU, IDE in Mexico
    • Tariffs in developing countries
  • Focus on informality critical…

—though isn’t it really compliance that matters?

  • …and corruption too in many developing countries
from analysis to change
From analysis to change

How to move from first-rate analysis to action?

  • Bitter experience I: Convincing well-intentioned policy makers something is unfair and inefficient doesn’t mean they will change it
    • E.g. ‘Everyone ‘ knows we can eliminate zero-rating in UK, protect the poor and raise £11 bn. So why doesn’t it happen?
slide7

Bitter experience II: Expenditure-based distributional analysis is a hard sell

—need also to show mobility?

  • Dimensions other than income inequality?
    • Rural-urban
    • Regional (e.g. border region VAT in Mexico)
    • Horizontal inequity: Another topic so tough we have given up on it…..