Revenue Policy and Administration

1. Revenue Policy and Administration Public Finance and Management Course, World Bank, May 1, 2006 Richard M. Bird

2. Overview • Revenue-expenditure linkages • Macro – MTFF, stabilization, elasticity • Micro – decentralization, earmarking, charges • Questions considered • Who pays? • How? • What difference does it make?

3. Sources of Revenue • Charges and fees • Earnings – SOEs, etc. • Regulatory taxes • Seignorage • Inflation tax • Borrowing • General taxation

4. 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

5. 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

6. 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?

8. The Tax Burden Tax Revenue as a Percentage of GDP by GDP/Capita Category, 1999-2001

9. Tax Capacity (2001)

10. 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

11. Tax Instruments:Differences by Region over Time

12. Tax Instruments:Regional Differences in Reliance Latin America: Percentage of Total Tax Revenue, 1975-2002

13. Tax Instruments:Regional Differences in Reliance Africa: Percentage of Total Tax Revenue, 1975-2002

14. Relative Use of Different Tax Instruments... • Factors influencing relative mix of different tax instruments • Revenue considerations • Administrative considerations • Fairness considerations • Transition and political considerations

15. 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?

16. 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

17. 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

18. 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

19. Criteria for Evaluating Taxes • Revenue productivity • Efficiency • Fairness • Administrative feasibility • As an available policy instrument – Yes, but…..

20. 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?

21. 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

22. 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?

23. 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

24. 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

25. Tax Policy and Tax Administration • Tax policy + no administration = 0 • No policy + administration = ‘policy’ • Tax policy + administration = real policy

26. 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

27. What Have We Learned? • Know the environment – economic, legal, ‘social capital’, • Keep it simple • Taxpayers as “clients” – the marketing problem of self-assessed systems

28. 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

29. Facilitating Compliance • Identification – finding taxpayers • Assessment – determining tax bases • Collection – getting the revenue • Service – too often forgotten but a critical investment

30. 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)

31. 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.

32. International evidence: Business income taxes

33. Keeping Taxpayers Honest • Know the problem – know your clients; estimate tax gaps • Monitor closely – registration, filing, payment, appeal • Enforce – penalties, dispute settlement

34. 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.

35. 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’

36. 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

37. Varieties of Earmarking

38. Earmarking in Korea

39. 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

40. 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?

41. 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

42. 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?

43. An Example: 30 Years of Reform in Colombia • Gradualism • Duration • Education • Did it Matter? The Question of ‘Fiscal Equilibrium’

44. 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’