PROGRESSIVITY IN TAX DESIGN. Michael Keen International Monetary Fund

Transcription

1 PROGRESSIVITY IN TAX DESIGN Michael Keen International Monetary Fund The 5th IMF-Japan High-Level Tax Conference for Asian Countries Tokyo, April 21, 2014

2 CONTEXT

3 Inequality has been increasing Gini coefficient Latin America and Caribbean (19) Advanced (21) Asia and Pacific (14) Emerging Europe (21) Middle East and North Africa (12) Sub-Saharan Africa (22)

4 ..notably at the very top Percent United Kingdom Australia Canada South Africa India United States France Germany Japan Netherlands especially in Anglo-Saxon countries Sweden

5 What role for taxation? Most redistribution is through spending, for advanced From taxes From transfers Average market income Gini: 0.43 Average disposable income Gini: DNK CZE BEL SVN NOR GBR FIN AUT SWE LUX DEU FRA AUS IRL NLD ISR CAN USA EST ITA GRC ESP KOR TWN Absolute Gini reduction and likely true for developing too

6 To bear in mind Will focus on instruments most directly related to progressivity, but Governments have their own equity views All taxes matter for fairness Progressivity can refer to impact on either: Distribution of after-tax income Distribution of tax payments E.g. $1 paid only by richest person is very progressive in latter sense, but not in former

7 PERSONAL INCOME TAX (PIT)

8 A modest share of GDP AFR APD EUR MCD WHD...which limits its redistributive effect

9 ALTERNATIVE PIT MODELS Global Apply schedule to sum of income of all kinds Dual Flat rate on all capital income (= lowest rate on labor) Flat tax Single positive marginal rate on labor income (Not really a distinct category, but much attention since Russian 2001 reform)

10 RATE STRUCTURE Much (too much?) interest in top rate afr apd eur mcd whd Downward trend but surprisingly little variation

11 The optimal rate balances Revenue gain from higher top marginal rate against Discouragement of effort Impact on evasion/avoidance Both captured by elasticity of taxable income (ETI) Welfare loss of those affected

12 For advanced economies.. Revenue maximizing rate: 80 Range of revenue-maximizing rates Actual top rate PRT FRA JAP NZL ITA DEN ESP SWE IRL NOR AUS CAN GBR CHE DEU USA

13 Where capacity is less well developed? Might expect ETI to be higher E.g. strong compliance improvement from cutting top rate (30% to 13%) in Russia (but not enough to make it self-financing!) Hence optimal top rate to be lower But not entirely clear Because issue is marginal effect, not level Much to be learned!

14 THRESHOLD A key parameter Choices vary widely..with only weak tendency to decrease (as would recommend?) at higher income levels ngdpdpc threshgdppc Fitted values

15 To illustrate significance Several flat taxes had higher thresholds: Progressive tax Tax due Flat tax Income So winners were at top AND towards bottom

16 BASE EROSION Special provisions favoring better off Mortgage interest relief, deductions for health, charitable contributions commonly undermine progressivity And are often ineffective To limit them, as well as setting caps: Replace deductions by credits at basic rate: same value for everyone

17 TAXING CAPITAL INCOME Progressivity alone might call for relatively heavy taxation though how large a redistributive effect? But potentially high efficiency costs: Distortion to savings, hence growth effects High international mobility

18 Dual income taxation? Pioneered by Nordics where equity a concern Increasingly popular, if not always under that name Achilles heel is need to distinguish capital from labor income for small and closely held firms But their treatment is highly problematic in lower income economies anyway. And can facilitate more uniform treatment different forms of capital income

19 OTHER TAXES

20 Recurrent real estate taxes attractive Wealthy hold much of their wealth in real estate Immobile Scope in many countries to do more: Bhutan Kuwait Maldives Jamaica Peru St. Vincent and the Ganadine Thailand Estonia Armenia Ukraine Egypt Lithuania Japan Congo Rep. of Iran Slovak Republic Paraguay Vietnam Croatia Moldova Czech Republic Honduras Bosnia and Herzegovna Latvia Swaziland Chile Austria Slovenia Georgia Kazakhstan Romania Costa Rica China,.R. Macau Italy Hungary Ireland Germany Greece Singapore Poland Finland Sweden San Marino Norway Portugal Mauritius Bulgaria Belarus Luxembourg Morocco Malta New Zealand South Africa Netherlands Switzerland Barbados Iceland Argentina Australia China PR: Hong Kong Israel Bolivia St. Kitts and Nevis Spain United States Belgium Canada Property Tax(% GDP)

21 Wealth taxes? Wealth is much more unequally distributed than income Wealth taxes have rarely been effective, and have been dying but now a change? Becoming more feasible? Combine real estate tax with (lower rate) on financial assets? (A)EOI a game-changer?

22 Inheritance and gift taxes? To address intergenerational transmission of inequality Practical challenges less than for wealth taxes? Since can draw on legal framework for inheritance But may still be considerable Often riddled with exemptions, like wealth taxes How distortionary? Depends on motive of giver

23 CONCLUDING

24 Tax systems seem to have been becoming less progressive over last twenty years or so Reflecting politics and globalization Effective tax progressivity in many countries likely to have been low A mistake to introduce PIT in same form as advanced economies? But are the mood and possibilities now changing?