More than revenue: Taxation as a Development Tool Vicente Fretes Cibils March 7, 2014 Budapest, Hungary
Contents The Tax Forest 1 Undressing the Myths 2 The Politics of Taxation 3 Tax Systems for a Smooth Ride 4 Beware of Informality 5 Local Taxes for Local Development 6 Making the Most of Tax Administration The Trees: Tax by Tax 7 Personal Income Tax: An Empty Shell 8 Corporate Income Tax: The Art of Competing for Investment and Increasing Revenue 9 Value Added Tax: Let It Be 10 Taxing Commodities with the Future in Mind 11 Protecting Goods by Taxing Bads 12 Heterodox Taxes: The Good, the Bad, and the Ugly Harvesting for Development 13 Growing a Reform Agenda
Taxation as a Development Tool Fight inequality Promote productivity Protect the future
Myths Taxation as a Development Tool Content Essentials Some policy reforms 1
Taxation in LAC: Myth or Reality Myths? 1. Low tax burden 2. Regressive taxes 3. Large evasion 2
Taxation in LAC: Myth or Reality Myths? 1. Low tax burden Reality Yes particularly in personal income tax but most significant rise in overall tax burden in the world 3
Low tax burden in LAC Tax Burden as Percentage of GDP (simple average, 2008-2010) OECD Eastern Europe 25 24 Latin America and the Caribbean Asia Africa 17 17 16 3 Middle East 7 0 5 10 15 20 25 30 4
Low tax burden in LAC Tax Burden as Percentage of GDP (simple average, 2008-2010) OECD Eastern Europe 25 24 Latin America and the Caribbean 17 3 Asia 17 Africa Middle East 7 16 Potential given development level 0 5 10 15 20 25 30 4
Percentage of GDP but not so if considering the Adjusted Fiscal Burden (% GDP), 2010 35 OECD average 30 25 20 15 10 5 0 BE PN CR NI HO ES RD GU PRM AR BR BA TT UR BO CH EC JA CO PY ME PE Ingresos Net income tributarios taxes netos Contribuciones Social Security Contributions* a la seguridad social* Recursos Natural resources naturales Source: BID-CIAT (2012) Social Security Contributions include public and private pensions and health systems 5
90-94 06-10 90-94 06-10 90-94 06-10 96-00 06-10 90-94 06-10 90-94 06-10 90-94 06-10 90-94 06-10 91-95 06-10 90-94 06-10 90-94 06-10 Fiscal Burden per capita per tax in US$ still the Adjusted Fiscal Burden per capita is 10 times less than OECD average 16.000 14.000 12.000 10.000 8.000 6.000 4.000 2.000 0 34,9 35,6 19,1 21,2 21,8 17,1 21,4 26,9 10,2 16,3 12,0 17,5 9,3 13,0 16,5 22,7 19,2 19,7 19,5 16,0 18,7 24,1 1.600 1.400 1.200 1.000 800 600 400 200 0 Fiscal Burden per capita per tax in US$ OECD PA CR BE RD ES GU HO NI CA, PA y RD AL & Caribe IVA Renta CSS Otros ingresos Presión fiscal ajustada 90-94 (%PIB) Presión fiscal ajustada 06-10 (%PIB) 6
but it is converging with OECD 1,0 0,8 0,67 0,87 0,68 0,88 0,77 0,92 0,77 1.00 0,69 0,6 0,56 0,4 0,44 0,44 0,2 0,19 0,20 0,16 0,16 0,07 0,09 0,15 0,24 0,17 0,22 0,08 0,11 0,0 90-94 06-10 90-94 06-10 90-94 06-10 90-94 06-10 90-94 06-10 90-94 06-10 A. Lat. y Caribe Sudamérica CA, PA y RD Caribe Mercosur Países Andinos GDP per capita ratio 90-94 GDP per capita ratio 06-10 Ratio PIB per cápita 90-94 Ratio PIB per cápita 06-10 7
and largest increase in burden Changes in the Tax Burden between 1990 and 2010 (simple average, percentage of GDP) Latin America and the Caribbean Eastern Europe Middle East Africa Asia OECD -0,5 0,0 0,5 1,0 1,5 2,0 2,5 3,0 8
and in (almost) all taxes (and revenues) Structure of Fiscal Revenue in Latin America and the Caribbean (percentage of GDP) 25 4.3 20 15 10 2.8 1.1 3.0 1.9 0.4 2.7 1.9 4.2 1.6 0.5 1.7 6.3 5 0 4.3 1.9 3.4 1.6 2.0 1990-95 2006-10 Personal income Corporate income VAT Trade Property Excises Social Security Natural resources Other 9
in (almost) all countries in LAC Changes in the Tax Burden since the Early 1990s (percentage of GDP) OECD Argentina Ecuador Bolivia Colombia Peru Dominican Rep. Paraguay Jamaica Costa Rica El Salvador Barbados Brazil Uruguay Latin America and the Caribbean Belice Guatemala Nicaragua Panamá Chile Honduras Venezuela Mexico Trinidad and Tobago -2.9-1.9-1.1-0.1 0.0 0.8 0.6 0.5 2.3 3.0 2.7 3.2 3.1 3.1 3.6 3.5 3.4 3.8 3.7 4.5 4.4-4 -2 0 2 4 6 8 10 12 14 6.0 7.9 11.9 10
however the gap continues specially for income taxes Total Brecha Tax de Burden carga impositiva Gap, 2007-2009 total, 2007-09 Income Tax Burden Gap, 2007-2009 Brecha de la carga del impuesto a la renta, 2007-09 (Percentage (puntos porcentuales points of del GDP) PIB) (puntos (Percentage porcentuales points del of GDP) PIB) Europa del Este OCDE África Asia América Latina y el Caribe Oriente Medio Brasil Barbados Belice Jamaica Argentina Nicaragua Uruguay Honduras Bolivia Chile Perú Colombia Ecuador Haiti Rep. Dominicana Paraguay El Salvador Costa Rica Venezuela Guatemala Trinidad y Tobago Panamá México Teniendo Taking into en account cuenta el GDP PIB -15-10 -5 0 5 10 Teniendo Taking into en cuenta account otras other variables OCDE Asia África Europa del Este América Latina y el Caribe Oriente Medio Jamaica Barbados Nicaragua Belice Brasil Chile Honduras Perú Colombia Trinidad y Tobago Haití Ecuador Venezuela Bolivia El Salvador Panamá Guatemala Paraguay México Rep. Dominicana Costa Rica Argentina Uruguay -6-5 -4-3 -2-1 0 1 2 3 11
Where are the differences between LAC y OECD? Difference LAC with OECD Average 2000-2010 Corporate Renta empresas taxes 4% 4% Others Otros 44% Personal Renta personas taxes 52% 52% Source: Own calaculations: OECD Revenue Statistics, European Commission (Eurostat), DataBase BID-CIAT, IMF- WEO 2012 y World Tax Database (University of Michigan). 12
Taxation in LAC: Myth vs. Reality Myths? 1. Low tax burden 2. Regressive taxes Reality Yes particularly in personal income tax but most significant rise in overall tax burden in the world Maybe with losses to avoid VAT regressivity and to promote progressivity of personal income taxes 13
Regressive VAT? Measurement matters Incidence of VAT by income and consumption deciles 15 10 5 Average effective rate (percentage of consumption) Average effective rate (percentage of income) 0 1 2 3 4 5 6 7 8 9 10 Income and consumption deciles 14
Productivity and efficiency of VAT C-Efficiency (VAT Revenue Ratio, VRR) measures the difference between the VAT revenue actually collected and what would theoretically be raised if VAT was applied at the standard rate to the entire potential tax base 15
Tax expenditure/revenue (in percent) Tax expenditure not always yields progressivity Tax Expenditure and Progressivity 0,9 0,8 Costa Rica Dominican Rep. 0,7 Nicaragua 0,6 Honduras 0,5 El Salvador 0,4 Panama Guatemala 0,3 0,2 Colombia Uruguay Ecuador Peru 0,1 Argentina Brazil Chile 0 0,0 0,5 1,0 1,5 2,0 2,5 3,0 3,5 4,0 4,5 Ratio of effective tax rates of deciles 1 and 2 with respect to 9 and 10 16
Rate Personal income tax: Design on paper Maximum Marginal Rate for Each Income Level, 2010 35 30 25 Other middle-income countries 20 15 10 Latin America and the Caribbean 5 0 0 1 2 3 4 5 6 7 8 9 10 Income level (number of times per capita income) 17
40 35 that barely reaches wealthy households Tax Wedge for Employee without Children in Sixth decil (Percentage of the salary) 30 13 25 20 9 11 15 10 5 0 15 13 OECD OCDE Latin América America Latina and y el the Caribe Caribbean Contrib. Social security a la seguridad contribution social by del employer empleador Contrib. Social security a la seguridad contribution social by del employee trabajador Impuesto Personal Income a la rentax 18
Average effective rate and ends up an empty shell Incidence of Personal Income Tax 4 3 2 Poor design 80% of population pays 0% Generous deductions Evasion The very rich pay only 4% 1 0 1 2 3 4 5 6 7 8 9 10 Income decile 19
Average effective rate and ends up an empty shell Incidence of Personal Income Tax 4 3 2 1 Poor design 80% of population pays 0% Generous deductions Evasion The very rich pay only 4% Change in income distribution before and after taxes = 0.008 Progressive on paper with NO real redistributive power 0 1 2 3 4 5 6 7 8 9 10 Income decile 19
Taxation in LAC: Myth vs. Reality Myth? 1. Low tax burden 2. Regressive taxes 3. Large evasion Reality Yes particularly in personal income tax but most significant rise in overall tax burden in the world Maybe with losses to avoid VAT regressivity and to promote progressivity of personal income taxes Yes in income taxes (lower in VAT) It s easy and risk free to evade 20
Tax Evasion Rates (percentage) Large evasion: A blow to equality Corporate Income Tax Personal Income Tax VAT 0 10 20 30 40 50 60 21
with minimum chances of being audited 3% Mass audits 22
with minimum chances of being audited 0.2% In-depth audits 3% Mass audits 22
Nonetheless, positive results from reforms 1990-2004 Note: "Increase" refers to those reforms that implied the creation of a tax, the broadening of the tax base, or a rate increase 23
2009 with advances on environmental taxes Japan Swizerland Australia United Kingdom Netherlands Korea Mexico Colombia Peru Argentina Uruguay Chile Guatemala Costa Rica Dominican Rep. 0 0,5 1 1,5 2 2,5 3 3,5 4 4,5 % of GDP 24
and with necessity to promote productivity 2009/10 Source: World Bank, World Development Indicators 2009 and Schneider, F., A. Buehn and C. Montenegro (2010), shadow economy uses multiple indicator multiple cause (MIMIC) model to estimate the shadow economy econometrically with a structural equation with one latent variable 25
To collect is essential but not enough some policy reforms Personal Income Tax Reduce minimum exempt level Cap deductions progressively Adopt a dual income tax Corporate Income Tax Phase out special regimes Reduce tax incentives Decrease rates? VAT Eliminate exemptions; unify rates Compensate poor households Reduce payroll taxes? Revenue Equity Efficiency?? 26
To collect is essential but not enough some policy reforms Personal Income Tax Reduce minimum exempt level Cap deductions progressively Adopt a dual income tax Corporate Income Tax Phase out special regimes Reduce tax incentives Decrease rates? VAT Eliminate exemptions; unify rates Compensate poor households Reduce payroll taxes? Revenue Equity Efficiency?? 26