Revenue Policy and Administration

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Revenue Policy and Administration

• Public Finance and Management Course, World Bank,
  May 1, 2006
• Richard M. Bird

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Overview

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

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Sources of Revenue

• Charges and fees
• Earnings SOEs, etc.
• Regulatory taxes
• Seignorage
• Inflation tax
• Borrowing
• General taxation

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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, its important to do it right
• But this too is seldom done its not all that
  easy

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Its Not Just Pricing Its 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

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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?

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The Tax Burden
Tax Revenue as a Percentage of GDP by GDP/Capita
Category, 1999-2001
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Tax Capacity (2001)
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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

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Tax InstrumentsDifferences by Region over Time
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Tax InstrumentsRegional Differences in Reliance
Latin America Percentage of Total Tax Revenue,
1975-2002
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Tax InstrumentsRegional Differences in Reliance
Africa Percentage of Total Tax Revenue, 1975-2002
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Relative Use of Different Tax Instruments...

• Factors influencing relative mix of different tax
  instruments
• Revenue considerations
• Administrative considerations
• Fairness considerations
• Transition and political considerations

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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?

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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

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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

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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

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Criteria for Evaluating Taxes

• Revenue productivity
• Efficiency
• Fairness
• Administrative feasibility
• As an available policy instrument Yes, but..

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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?

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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 costsespecially for economies
  where resources are scarce
• Focus on minimizing tax costs

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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?

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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

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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

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Tax Policy and Tax Administration

• Tax policy no administration 0
• No policy administration policy
• Tax policy administration real policy

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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

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What Have We Learned?

• Know the environment economic, legal, social
  capital,
• Keep it simple
• Taxpayers as clients the marketing problem of
  self-assessed systems

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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

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Facilitating Compliance

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

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What are Compliance Costs?

• Citizens 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)

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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.

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International evidence Business income taxes
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Keeping Taxpayers Honest

• Know the problem know your clients estimate
  tax gaps
• Monitor closely registration, filing, payment,
  appeal
• Enforce penalties, dispute settlement

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Controlling Corruption

• Incentives CM D A limit opportunities,
  raise opportunity costs (positive and negative)
• Training professionalism
• Organization performance evaluation, etc.
• Monitoring internal audit, etc.

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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

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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

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Varieties of Earmarking
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Earmarking in Korea
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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

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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?

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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

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Lessons from Developing Countries

• Timing, timing, timing
• Simplify dont complify
• Sequencing and Scope
• Clarity (versus the political advantages of
  keeping tax matters in decent obscurity)
• Details matter
• Incrementalism
• Politicsalways and everywhere
• There is No Such Thing as a Politician-Proof
  Policy but should there be?

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An Example 30 Years of Reform in Colombia

• Gradualism
• Duration
• Education
• Did it Matter? The Question of Fiscal
  Equilibrium

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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