Recent Tax Policy Trends A Global Perspective

1
Recent Tax Policy Trends A Global Perspective

• Tax Reform Seminar
• Tbilisi, Georgia
• May 27, 2007
• John Norregaard

2
Overview

• Factors shaping tax reforms
• Recent reform initiatives and discussions
• Issues in corporate taxation
• Issues in personal taxation
• Labor tax wedges
• International tax coordination initiatives
• Issues in indirect taxation
• Concluding remarks where are we heading?

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Factors shaping global tax reforms

• Globalization
• Implications for capital and labor tax policy
  design
• Employment creation
• Reduction of tax wedges and reform of social
  security
• Equity-efficiency tradeoff changing views?
• Move towards DIT, consumption taxes, away from
  integration of CIT and PIT
• Herd behavior
• Flat taxes, green taxes, spreading of tax
  incentives, cutting corporate taxes or
  yardstick competition?
• Regional economic policy coordination
• Tax harmonization and devolution, FTAs
• Natural resource taxes, environmental taxes, and
  climate change
• Cyclical factors is tax policy reform
  pro-cyclical?

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Georgia two core issues to be considered for
future tax reform

• Has tax reform been pro-cyclical?
• Impact on FDI and other flows does not depend on
  Georgian tax system alone

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Implications for Georgia 1 pro-cyclicality

• Extraordinary economic expansion (worldwide) may
  have affected tax policies
• This could have weakened automatic fiscal
  stabilizers and the fiscal stance
• Tax policy should not be pro-cyclical
  structural balance over the cycle
• Need for analytical capability to gauge
  structural balance and cyclical phase

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Implications for Georgia 2 other tax systems
and non-tax factors also matter!

• Tax policy cannot be determined in isolation
• Tax practices in other countries e.g. USA, Japan,
  UK key capital exporting countries
• Operate residence based (or worldwide income) tax
  systems grant tax credits for foreign tax paid
  against domestic tax liabilities
• Capital importing (host) countries often offer
  lower tax rates
• However MNE based in USA, Japan, or UK will be
  able to claim fewer foreign tax credits against
  home country tax obligations
• Host country tax incentives therefore
  ineffective
• Tax policy only one element in attracting FDI
• macro-economic stability, quality of
  infrastructure labour force, size of the
  domestic market, labour and product market
  regulations
• (Buettner and Ruf, 2007, Hines and Dharmapala,
  2006, Hajkova, Nicoletti, Vartia and Yoo, 2006)
• Financing public sector expenditures

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Corporate income tax (1)

• Striking decline in statutory tax rates
  worldwide
• Base-broadening in OECD but not in poor countries

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Corporate income tax (2)

• Experiments with fundamental restructuring
• Move towards integration and then away
  (Australia, NZ ltgt UK, Germany, Italy and then
  the US)
• Recent restructuring reforms
• ACE (Croatia, Belgium)
• Cash-flow taxation (East Timor?)
• Abolishing the CIT (Estonia)
• Curtailing interest deductibility (DK, Canada,
  Germany)

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Estonia

• Abolished conventional corporate income tax in
  2000 and adopted Zero CIT on retained earnings
  and 20 tax on (grossed up) profit distributions
• Pros transparency, simplicity (no measurement),
  lowers costs of compliance/adm., no distortions
  caused by tax exemptions, limits corruption,
  increase investment by exempting retained
  earnings, signal of business friendly environment
• Cons young firms may need injections of equity,
  so may discourage investment, vulnerability to
  tax avoidance strategies (transfer pricing),
  profits locked in (distortions), incentive to
  incorporate, EU-incompatible, loss of revenue,
  revenue uncertainty

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Corporate income tax (3)

• Tax harmonization and coordination
• OECD harmful tax competition (practices)
• Low tax rates no exchange of information or
  trans-parency ring-fencing lack of substantial
  ec. Activity
• Forum list of uncooperative tax havens (34ltgt6)
• Assets in offshore centers US 5,000-7,000
  billion
• EU harmonization to eliminate tax obstacles
• Code of conduct to eliminate harmful tax regimes
• State aid rules, to restrict tax subsidies to
  business
• Common Corporate Consolidated Tax Base (CCCTB)
• Savings directive (but only for PIT)

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Moving towards thePersonal income tax (1)

• Personal income tax rates have also been cut
• In part from globalization pressures on capital
  income taxes, in part to stimulate employment

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Moving towards the Personal income tax (2)

• Two major structural innovations
• (includes also CIT)
• The dual income tax (DIT)
• The flat tax

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Moving towards the Personal income tax (3)

• The Dual Income tax
• Originated in Nordic countries 1990s
• Uniform (flat) low tax on all capital income and
  progressive tax on labor income
• Pros address mobility/theoretical
  under-pinning/final withholding/no arbitrage
• Cons need for split of business income is
  Achilles-heel of DIT, equity aspects

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Moving towards the Personal income tax (4)

• Flat taxes
• Starting in Estonia (1994), popular in Eastern
  Europe (some 13 countries, Montenegro)
• Progressive income tax replaced by uniform (flat)
  and low rate on labor income, sometimes similar
  to CIT rate
• Significant differences among countries (rates,
  CIT, size of basic allowance (Georgia none), tax
  on capital incomediffer from flat tax on labor
• Pros simple, positive supply-side
  effectsincluding better compliance (low rate?),
  can be made progressive through the basic
  allowance
• Cons no clear supply effect (Laffer curve),
  compliance did improve in Russia but probably tax
  adm. factors? Complexity comes typically from
  exemptions and schedular rates which continued
• Jury is still out more analysis is needed

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Social Security Contributions and Tax Wedges (1)

• 10 percentage point drop in wedge gt would reduce
  unemployment by 2.8 points
• Reform trends are not uniform (EU15 ltgt EU10), but
  many countries consider to reduce wedges and move
  towards consumption taxes (e.g., Belgium)

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Social Security Contributions and Tax Wedges (2)

• Large variations across countriesGeorgia
  relatively well-placed

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International Tax Coordination

• OECD against harmful tax practices or tax
  havens (low rate, no transparency or information
  exchange, ring-fencing, no substantial economic
  activity (list of tax havens 34ltgt6). US 5-7
  billion offshore
• EU package 2003 code of conduct against
  harmful tax regimes savings directive eliminate
  source taxes on cross-border flows of dividend
  and interest guidelines for business subsidies.
  CCCTB

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Taxing consumption (1)

• Issues
• Increasing revenue mobilization from indirect
  taxes (globalization?)
• Not least following the spread of the VAT see
  MAP!

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Taxing consumption (2)

• Spread of the VAT effective tax neutral towards
  trade and savings/investment decisions related
  to drive for economic integration (EU membership)
• Outstanding VAT problems
• fraud (carousel or missing trader) costs 340
  billion. Variety of solutions debated (origin
  based Common VAT (EU) PVAT CVAT VIVAT reverse
  charge)
• Taxation of financial services (NZ)
• EU initiatives underway
• Trade liberalization low-income countries
  mobilize domestic taxes to recover lost trade tax
  revenues (not OECD problem)

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Natural Resource and Environmental Taxation

• Natural resource taxation dominant recent issue
• Green taxes increasingly used
• But discussion superseded by need to address
  climate change tax or cap-and-trade

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Looking forward

• Experiments with fundamental restructuring of
  direct taxes continues
• As does rate reductionsto a degree?
• VAT solutions to address fraud
• Measures to address tax havens
• Carbon taxes to address cc high priority
• Trade liberalization with multitude of FTAs
• Stronger international tax policy coordination

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Thank you

• Comments/feedback to jnorregaard_at_imf.org