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Comments: Revenue assignments and administration

Comments: Revenue assignments and administration. Ehtisham Ahmad Manila November 28, 2012. Political economy case for own-source revenues. Need own-source revenues for accountability At margin, local inhabitants pay for own responsibilities ( Ambrosiano and Bordignon , 2006)

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Comments: Revenue assignments and administration

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  1. Comments: Revenue assignments and administration Ehtisham Ahmad Manila November 28, 2012

  2. Political economy case for own-source revenues • Need own-source revenues for accountability • At margin, local inhabitants pay for own responsibilities (Ambrosiano and Bordignon, 2006) • Needed to ensure hard budget constraints (links with overall borrowing and ability to pay) • Does not imply that a local tax administration is needed for each own-source tax • Piggy-backed arrangements for broad based taxes for intermediate levels (including large metropolitan areas) • Various gradations of tax functions for local government possible for property taxes • Policy agenda is critical and determines the success or not of assigned administrative arrangements

  3. Case for broad-based taxes (provinces/states: intermediate level) • As argued in Tanzi (2011) and Ahmad and Best (2012) • VAT works best with a single rate structure, and full coverage, with no exemptions or special regimes • Countries that introduce special provisions for specific sectors, open the floodgates for “rent-seeking”; evasion and informality • Splitting bases with subnational governments and holes for special interests • (REPECOS and maquiladoras; border regions in Mexico; services and exemptions in Pakistan) introduces further complexity • Making it impossible to implement effectively • Adds to rent seeking; loses revenues; • Does not lead to effective “own-source” revenues at the subnational level: • difficulty in adjusting rates or bases—loses accountability before the administrative costs are addressed

  4. VAT reforms: Examples from Australia and China • China: moving away from split administration for the same base • China set up a VAT in 1994 together with a new central tax administration • Shared revenues • Initially an Investment-type; now Consumption-type • Spectacular performance, both in terms of the establishment of a new modern tax administration and revenues generated • Australia:2001 VAT introduced replacing myriad state level taxes and levies • Assigned to Central Tax Administration • Revenues returned to states through Commonwealth Grants Commission • Both cases avoided complex base-splitting; or joint occupancy

  5. Local taxes • Design of the property tax • Setting of rates • Avoid race to the bottom • Self-assessment principles • Experiences from Latin America (Bogotá) • Cadaster and valuation • Scope for technical assistance—registers for transactions • Business taxes/user charges • In lieu of fees for locally provided services • Linkage with the benefit principle

  6. Political economy and administration • Complex and implementable policies combined with weak local administrations • Do not lead to effective own-source revenues for subnational governments • Conducive to additional rent-seeking behaviour and inefficient tax wars/evasion (‘invoice sight seeing in Brazil’); Pakistan • Sharing or even piggy-backed options with single administration better for broad based taxes • US IRS; Australian/Chinese VAT • But do the local governments trust central tax administrations? • With revenue-sharing the risks are minimized • With more appropriate local taxes, subnational administration is easier • Asymmetric options still possible (especially with respect to valuation and recording/property registers) Kelly (2011)

  7. Degree of subnational autonomy/accountability

  8. Typology for local taxation and policy 1a 1b 2a 2b 3a 3b Central Tax Shared taxes Own-revenue/ Surcharge Local Tax Key Factors Joint- Admin Central Admin Joint- Admin Local Admin Joint- Central Rate/base CG CG CG LG LG LG LG Revenue CG CG / LG CG / LG LG LG LG LG Administration Registration CG CG CG CG CG LG LG Valuation CG CG CG CG CG LG LG Assessment CG CG CG CG CG LG LG Bill Delivery CG CG CG/LG CG/LG CG LG LG Collection CG CG CG CG CG LG LG Enforcement CG CG CG CG CG LG LG Services CG CG CG/LG CG/LG CG LG LG Local Autonomy Central Control

  9. Lessons on transfer design • Transfers based on gap-filling “fiscal dentistry” • Destroy all other good incentives • GovindaRao (Indian examples) • Moving from standardized bases for calculation (China, Australia, Scandinavian countries) to actuals • Results in gap-filling • Equalization should be restricted to clearly defined current responsibilities • Major investment gaps to be addressed by targeted investment transfers, preferably on performance basis • As in China (VAT and revenue-sharing) and recently in Mexico (IETU), use changes in transfer design to facilitate major tax reforms

  10. Possible support from multi-lateral agencies • Help to clarify policy options, given international experience and cutting-edge research • Support for federal agencies, operating for multi-level governments • Issues of credibility, and assurance that interests will not be jeopardized • Audit criteria and IT • Support for local administrations • Organizational design and operations • IT support • Cadaster; and valuation

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