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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

  • 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 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?
  • 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?
  • 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’
  • 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’