The Tax System and. John Scott, CIDE, CONEVAL Mexico THE MIRRLEES REVIEW: TAX REFORM FOR A MODERN ECONOMY

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1 The Tax System and Tax Institutions in Mexico John Scott, CIDE, CONEVAL Mexico THE MIRRLEES REVIEW: TAX REFORM FOR A MODERN ECONOMY May 4, 2012, Friday Ceylan Intercontinental Taksim Istanbul

2 Contents Tax benefit reform issues: renewing the social contract Recent reform initiatives The tax benefit system: who pays? who benefits? L f b fi f (i hi h i li Lessons for tax benefit reforms (in high inequality, middle income, low revenue economies)

3 Mexico and Turkey: growth & distribution GDP per capita, PPP (constant 2005 international $) IMR (per 1000 live births) MEX TUR 0 0 MEX TUR MEX TUR OECD Gini coefficient of income inequality Poverty headcount ratio at $2 a day (PPP) MEX TUR

4 Mexico and Turkey: tax revenue & structure

5 Tax benefit reform issues Low tax revenues: lowest non oil revenues in OECD and LAC Oil curse : unstable and uncertain oil revenues (1982 debt crisis) used to finance growing current spending (00 s) Large, distortionary, regressive petrol subsidies (06 ) Low tax efficiency, complex, narrow base: costly and inequitable it tax expenditures Quality and equity of public transfers: tax compliance, net incidence

6 Tax benefit reform issues Public spending requirements: Growing, unfunded public pension deficits Public goods: infrastructural investment, public security, Increasing coverage and quality of social services Universalizing i social ilprotection/security. i Contraints on labor markets, growth and equity, g q y from dual social security/protection system

7 Tax benefit reform issues High inequality traps/equilibria require broad and deep reform efforts: high inequality limits growth, but also fiscal/redistributive capacity. New Social Contract: broad based taxes, universal benefits, towards a more inclusive, equitable & pro growth equilibrium (Acemoglu & Robinson 2012)

8 Recent reforms and reform initiatives Broad dt tax/benefit reforms in 90 s and 00 s Fiscal discipline (vs. 80s): eliminating inflation tax Increasing share of public spendingallocated to social services: from 30% to 60% Increasing equityof social spending: eliminating urban bias, increasing coverage & progressivity of basic education and health services, CCT (Oportunidades) Recent reform initiativesi i i VAT: 1% increase in 2010 (proposal: 2% generalized), following decadeof failed initiatives to reduceexemptions exemptions. Direct: minimum tax on business income (IETU, 2008), tax on cash deposits, temporary increase of top rate corporate & personal income tax (28 to 30%).

9 Recent reforms and reform initiatives Institutional l( (post 2000) Transparency, accountability: political culture & legislation National Evaluation Council for Social Policy (CONEVAL), National Institute for Educational Evaluation Tax/benefitincidence, incidence, fiscal expenditureestimates, estimates, and individual program evaluations mandated as inputs for the budgetary process Tax incidence id simulator: Center of public finance studies (CEFP), Lower Chamber (eliminated with change of political leadership) electoral platform of leading (PRI) candidate: p g ( ) Universal social protection financed through generalized VAT 16% (following Levy, 2008).

10 Redistributive fiscal illusions Tax progressivity ii vs. redistributive ib i impact of taxbenefit system Under conditions of high inequality, tax revenue/efficiency more important for redistributive impact than tax progressivity the share in national income of the poorest decile is 1%, so a 10% flat tax financing a neutral transfer almost doubles income of poorest decile: 0.1% + 1% Redistributive intentions and rethoric vs. redistributive impact: regressive transfers (in absolute terms) defended on progressive agendas: generalized consumption subsidies, bidi public sector subsidies and agricultural subsidies

11 Direct taxes and VAT: Tax revenue/g GDP 6.0% 5.0% 4.0% 3.0% 2.0% 5.5% 4.7% 4.9% 5.1% 5.2% 5.2% 5.0% 4.7% 4.5% 42% 4.3% 4.0% 4.2% 3.4% 3.6% 3.5% 3.4% 3.3% 3.4% 3.7% 3.6% 3.8% 3.9% 3.9% 3.4% 1.0% 0.0% PIC, CIT (ISR, IETU, IDE) VAT

12 PIC revenue: from 323to % GDP PIT CIT Ta xrevenue/gdp (%) México Corea Rep. Eslovaca Turquía Japón Alemania Polonia Hungría Grecia Francia España Estados Holanda Rep. Checa Irlanda Austria Suiza Reino Unido OECD Italia Islandia Canadá Suecia Bélgica Australia Finlandia Luxemburgo Nueva Noruega Dinamarca

13 Petrol taxes Price per literof regular unleaded petrol(usd, 2009) ) México Estados Unidos Canada Nueva Zelanda Australia Japón Corea Polonia Hungría España Suiza Grecia República Checa Austria Luxemburgo Irlanda República Eslovaca Reino Unido Suecia Francia Italia Portugal Dinamarca Finlandia Belgica Holanda Noruega Alemania Turquía OCDE-IEA, Energy Price and Taxes, Quarterly Statistics: 3 rd Quarter, 2009.

14 Generalized energy subsidies: 10% of GDP in (cummulative) Energy tax revenu ue/gdp (% ) Gas LP Electricidad Gasolina (IEPS)

15 Tax expenditures reduce tax revenues by a third

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17 40 Public social and education expenditure: (%GDP) 35 cation spendin ng/gdp (%) Social and edu Public social expenditure (non income tested) (2007) Income tested programmes (2007) Public education spending (2008) *Turkey education spending: 2006

18 Generalized subsidies cancel out the redistributive effect of targeted transfers Subsidios dirigidos y generalizados: pesos anuales por persona (GP 2008) 2,500 14,000 12,000 2,000 1,500 10,000 8,000 6,000 1,000 4, Apoyo Alimentario Oportunidades Seguro Popular 2, Apoyo Alimentario Oportunidades Seguro Popular Subsidio Gasolina & Gas LP Subsidio Eléctrico Residencial IVA Gasto Fiscal

19 Wide range of redistributive efficiency of public benefits: Concentration/Gini coefficients, Oportunidades (CCT) IMSS Oport. (Health unisured) NC Pensions (States) Seguro Popular (Health uninsured) Procampo (agricultural transfer) SSA (Health uninsured) PAL food program NC Pensions federal l(70 y más) á) Workfare (Empleo Temporal) Primary Edu Pre school Edu Lower Sec. Education Smaller social programs Total Education Total in kind Total Health Upper Sec. Edu. Total Electricity Subsidy Other Scholarships IMSS Health Gas Subsidy (LP) Total indirect subsidies Employmentsubs. (neg. income tax) Tertiary Edu Gasoline Subsidy (IEPS) IMSS Contr. Pensions (subsidy) NC Pension (Adultos Mayores DF) ISSSTE Health Market income ISSSTE Contr. Pensions (subsidy) Tax deductions private schools Inequality increasing Progressive in absolute terms: pro poor Legend: Education Health Targeted Transfers Pensions Indirect subsidies Market income Regressive in absolute terms: not pro poor

20 Progressive but inefficient taxes, neutral transfers: direct taxes/transfers very progressive, but small Taxes Transfers Conc entration shar res Incidence (% NMI) Deciles Total Direct Indirect Total Direct Indirect In kind monetary Subsidies Education Health 1 0.8% 0.1% 1.1% 9.9% 22.2% 3.6% 11.5% 10.4% 2 1.5% 0.3% 2.2% 9.5% 13.7% 4.9% 11.3% 9.8% 3 2.1% 0.7% 3.3% 9.5% 10.6% 6.2% 11.2% 9.7% 4 2.8% 1.2% 4.5% 9.8% 9.5% 7.7% 11.2% 9.7% 5 3.6% 1.5% 5.8% 9.5% 8.0% 8.4% 10.4% 9.6% 6 4.6% 0.6% 6.8% 9.8% 6.9% 9.7% 10.1% 10.0% 7 6.8% 1.8% 9.0% 9.9% 6.5% 11.0% 9.7% 10.1% % 6.7% 11.7% 10.0% 5.3% 12.3% 9.3% 10.3% % 18.4% 17.2% 10.4% 5.5% 14.6% 8.6% 10.6% % 77.4% 38.4% 11.7% 11.6% 21.6% 6.8% 9.9% Total 100% 100% 100% 100% 100% 100% 100% 100% % 0.19% 6.47% % 22.30% 13.53% 72.07% 37.20% % 0.35% 6.12% 64.50% 6.42% 8.65% 33.16% 16.27% % 0.58% 6.23% 44.41% 3.41% 7.47% 22.49% 11.04% % 0.71% 6.45% 35.11% 2.32% 7.10% 17.24% 8.44% % 0.73% 6.57% 27.00% 1.55% 6.19% 12.61% 6.65% % 0.22% 6.13% 22.11% 1.07% 5.68% 9.86% 5.50% % 0.56% 6.45% 17.79% 0.81% 5.08% 7.50% 4.40% % 1.56% 6.40% 13.72% 0.50% 4.36% 5.44% 3.42% % 2.98% 6.55% 9.87% 0.36% 3.58% 3.49% 2.44% % 4.96% 5.75% 4.37% 0.30% 2.09% 1.09% 0.90% Total 8.77% 2.62% 6.15% 15.34% 1.05% 3.97% 6.59% 3.73%

21 Kakw wany inde ex Tax progressivity vs. redistributive impact: Kakwani index (C G) for PIT and VAT 0.4 PIT 0.3 VAT Source: Mexico 2008 (Scott), rest (Lora, 2007, Trends and Outcomes of Tax Reform, in The State of State Reform in Latin America (Table 6.8, p. 204).

22 Tax progressivity vs. redistributive impact: generalized 2% VAT, vs. 1% VAT with exemptions 2% generalized VAT, 1% VAT with exemptions, 2% generalized VAT, Targeted transfer Targeted transfer Neutral transfer Net transfer Net transfer Net transfer HH deciles VAT MP hh Incidence VAT MP hh Incidence MP hh Incidence month (% DI) month (% DI) month (% DI) 1 $50 $ % $10 $ % $74 2.6% 2 $65 $ % $13 $69 1.5% $59 1.3% 3 $75 $ % $16 $32 0.5% $48 0.8% 4 $85 $13 0.2% $18 $8 0.1% $38 0.5% 5 $96$ $24$ 0.3% $22$ $3$ 0.0% $28 0.3% 6 $105 $69 0.7% $26 $16 0.2% $18 0.2% 7 $122 $96 0.8% $32 $25 0.2% $2 0.0% 8 $143 $ % 09% $39 $37 0.3% 03% $19 0.1% 01% 9 $183 $ % $54 $52 0.3% $60 0.3% 10 $306 $ % $101 $99 0.3% $ % Nacional $123$ $33$ Sources: own calculations using ENIGH 2008, and CEFP tax incidence simulator.

23 140% The incidence of net benefits is highly progressive, but much less so if oil taxes are included: oil taxes are equivalent to poll taxes Inciden nce of tax bu urdens & net benefits (% NMI) 120% 100% 80% 60% 40% 20% 0% 20% Oil tax Non oil tax Net benefits w oil tax Net benefits w/o oil tax

24 Redistributive effect of taxes and transfers in LAC and OECD: monetary transfers vs. social services 0.60 Gini Argentina Bolivia Brazil Mexico Peru Market Income Net Market Income Disposable Income Post fiscal Income Final Income Evidence based tax/benefit reforms requires comparable/standarized taxbenefit incidence methodologies Commitment to Equity (CEQ) LAC proyect (coordinated by Nora Lustig) World Bank: long tradition of Benefit Incidence Analysis but no standarized base OECD, 2011, Divided We Stand: Why Inequality Keeps Rising.

25 In countries with large indirect taxes, these may cancel the benefits received fromdirect transfers and indirect subsidies even for the poor

26 Lessons for tax benefit reforms Growth of fiscal capacity is endogenous to the construction of universal and effective public services, not viceversa (history of welfare states: Lindert 2004, Growing Public). Tax capacity and efficiency, and the quality and coverage of public benefits more important for redistributive impact than tax progressivity. Generalized consumption subsidies (VAT exemptions or energy subsidies) are distortionary and inefficient redistributive instruments compared to targeted or even universal benefits.

27 Lessons for tax benefit reforms Universal social secuirity, financed through general taxation: dual contributibutive/con contributive social security/protection systems distort labour marketsandand harm growth. More generally, basic universal benefits/flat tax (Atkinson, 1995), can be efficient & equitable in high inequality settings