Public finance for development: Strengthening the connection between revenues expenditures Pablo Sanguinetti Research Director CAF- Development Bank of Latin America Brookings Institution June, 24 th, 2013
Accountability STATE administration) CITIZEN Reciprocity
Public as a % of the GDP in Latin America 27,8% 22,9% 8,3% 20 years 4,8% 1990-1992 2007-2009 administration))
Social public expenditure explained most of the growth in public expenditures during 1990-2009 4,8% administration))
22,9% 12% 4,9% Social public expenditure Education Social Security social assistance 20 years 27,8% 18% 8,3% 3,2% 4,8% 1990-1992 2007-2009 administration))
Public s Improves income distribution I. Access to public goods III. Subsidies (ej. Energy) II. Income transfers Taxes administration))
Total redistributive effect of public expenditure ( taxes) in selected countries Cumulative variation (%) of the Gini Index 0% Perú Bolivia México Brasil Argentina -5% -10% -2% -3% -2% -2% -6% -7% -4% -5% -5% -6% -8% -4% -15% -15% -20% -25% -20% -23% Source: own elaboration based on Lustig (2012). administration))
Total redistributive effect of the public expenditure ( taxes) in selected countries Cumulative variation (%) of the Gini Index 0% -5% -10% -1% Perú Bolivia México Brasil Argentina 0% -2% -3% -2% -2% -6% -7% -2% -2% -4% -5% -1% -4% -5% -6% -8% -15% -15% -20% -25% -20% -23% (1) Efecto Effect of de direct los impuestos taxes directos social security y las contribuciones contributions a la seguridad social (2) = (1) + Efecto de las transferencias monetarias directas (3) = (2) + Efecto de los impuestos y subsidios indirectos (4) = (3) + Efecto de las transferencias en especie (educación, salud, etc.) Source: own elaboration based on Lustig (2012). administration))
Total redistributive effect of the public expenditure ( taxes) in selected countries Cumulative variation (%) of the Gini Index 0% -5% -10% Perú Bolivia México Brasil Argentina 0% -1% -2% -2% -3% -2% -6% -7% -2% -2% -4% -5% -5% -6% -1% -8% -4% -15% -15% -20% -25% -20% -23% (1) Efecto Effect of de direct los impuestos taxes directos social security y las contribuciones contributions a la seguridad social (2) = (1) + Efecto Effect of de direct las transferencias monetary transfers monetarias directas (3) = (2) + Efecto de los impuestos y subsidios indirectos (4) = (3) + Efecto de las transferencias en especie (educación, salud, etc.) Source: own elaboration based on Lustig (2012). administration))
Total redistributive effect of the public expenditure ( taxes) in selected countries Cumulative variation (%) of the Gini Index 0% -5% -10% Perú Bolivia México Brasil Argentina 0% -1% -2% -2% -3% -2% -6% -7% -1% -2% -2% -4% -4% -5% -5% -6% -8% -15% -15% -20% -25% -20% -23% (1) Efecto Effect of de direct los impuestos taxes directos social security y las contribuciones contributions a la seguridad social (2) = (1) + Efecto Effect of de direct las transferencias monetary transfers monetarias directas (3) = (2) + Efecto Effect of de indirect los impuestos taxes y subsidies subsidios indirectos (4) = (3) + Efecto de las transferencias en especie (educación, salud, etc.) Source: own elaboration based on Lustig (2012). administration))
Total redistributive effect of the public expenditure ( taxes) in selected countries Cumulative variation (%) of the Gini Index 0% -5% -10% Perú Bolivia México Brasil Argentina 0% -1% -2% -1% -2% -3% -2% -2% -2% -4% -4% -5% -5% -6% -7% -6% -8% -15% -15% -20% -25% -20% -23% (1) Efecto Effect of de direct los impuestos taxes directos social security y las contribuciones contributions a la seguridad social (2) = (1) + Efecto Effect of de direct las transferencias monetary transfers monetarias directas (3) = (2) + Efecto Effect of de indirect los impuestos taxes y subsidies subsidios indirectos (4) = (3) + Efecto Effect of de non las cash transferencias income transfers en especie (education, (educación, health, salud, etc.) etc.) Source: own elaboration based on Lustig (2012). administration))
Access to public goods services, transfers subsidies Equality in income distribution An efficient management is a moral obligation for public administrators But efficiency also matters Permits the saving of resources improves the impact of redistributive programs Efficiency of public expenditure is important to strength reciprocity administration))
Inputs Enviroment Results Efficiency administration))
Density function Density function Density function Distributions of the SIMCE grades efficiency levels by type of institution (average 2004-2010) SIMCE Grades Efficiency scores SIMCE Grades Municipal schools Private schools Efficiency scores Perú (2010) Efficiency scores Public schools Efficiency scores Private schools administration))
Tax revenues (percentage of the GDP) Improving the quantity quality of public goods requires the strengthening of the tax collection Is Latin America making all the necessary effort at tax collection? Tax collection GDP per capita Main determinants: 1. Tax Structure 2. Tax Administration GDP per capita (USD 2005, PPA) administration) )
Main taxes The low tax effort is originated, in part, by a low participation of direct taxes in total tax revenues: Evolution of main taxes inside the average tax structure of Latin America (% of total tax revenues) General taxes on goods services Income capital gains taxes Social Security contributions Specifics taxes on goods services International trade duties Property taxes Other taxes 0 5 10 15 20 25 30 35 40 Relative participation (percentage of total tax revenues) 1990-1992 1999-2001 2008-2009 administration) )
The tax evasion rate of the VAT in Latin America is 27% 38% in Nicaragua 11% in Chile The low tax effort is also related with weaknesses The evasion in rate tax in control 64% in Ecuador USA is 16% 41,6% in Mexico The evasion rate of the income tax in Latin America is 51,4% Impuestos (Estructura y administración) Gasto (Bienes públicos y redistribución)
Virtuous circle? Accountability More taxes, more empowerment accountability STATE administration) CITIZEN Reciprocity Better expenditures, more willingness to pay taxes
According to the CAF survey, the families in Latin America are more willing to pay taxes if the government performs better (www.caf.com/investigacion) Remove corruption: 11,5% will pay more Better health education: 11,5% Taxes Reciprocity More citizen security: 11,4% More protection to the poor: 9,2%
Complementary evidence: Experiment in 17 cities of the region: rom assignment of information about the performance of local governments Rio de Janeiro: positive information about the local government Increase willingness to pay taxes on vehicles to reduce VAT evasion Timmons, 2011 : Corruption reports in Brazilian Municipalities Lower tax collection after the information was made public Taxes Reciprocity
Taxes Accountability Citizens doesn t like to pay taxes Historical evidence: independence episodes But when citizens pay taxes, they feel they have more rights to ask for a good public administration 72,6% of households in Latin America have this opinion
Taxes Accountability Evidence supports the existence of this virtuous circle: The size of the public sector increases as a share of GDP along the development path Reciprocity
Direct Taxes Transparency in the use of natural resources revenues A professional independent Tax Administration
Taxes strengthen democracy Taxes