The Plato Index of tax justice: what it is, where we are and where we are going Valpy FitzGerald Oxford University
"When there is an income tax, the just man will pay more and the unjust less on the same amount of income" The Republic, bk. I, 343-D What is he Plato Index? How much progress have we made so far? What do we plan to do next?
The problem International comparisons of tax burdens use GNP as the denominator. Distributional incidence ( progressivity ) is not compared, nor is the effective income base for direct taxation identified. Few countries have official incidence statistics, nor do international organisations address this issue systematically. Welfare and poverty reduction in developed countries based on progressive fiscal transfers with a progressive (income/wealth) tax base. Developing countries have severe inequality problems (direct transfers difficult) and chronic fiscal imbalances. Yet direct tax reform not on agenda.
UK tax burden by income decile 40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 1 2 3 4 5 6 7 8 9 10 Direct tax as % of gross income Indirect tax as % of disposable income
The Plato Index Defined as the ratio of all direct tax revenue (income, property, corporate) to the gross income of the top quintile of households. Proxies direct tax incidence for middle and upper classes that are main direct tax base. Π= t d α. T. Y H where Π the Plato Index T Government Current Revenue / national income GNI t d Direct tax revenue / government current revenue α Share of top quintile in gross household income Y H Gross income of households/gni
Validity of the PI PI combines information on income distribution and tax pressure to give a measure of tax justice : for a given direct tax rate, worse income distribution should mean higher direct tax yield. The assumption that the top quintile provides the main direct tax base is valid for developing countries, but requires (downward 5-10%) adjustment for OECD countries with better reach. Currently we are recalibrating on OECD countries. Measurement problems still to be resolved: Taxation of foreign companies/nationals Royalties etc Federal vs Unitary fiscal systems
Recent Progress Compiling a data base of direct tax income and income distribution by for up to 100 countries over 25 years (1980-2005) Initial empirical results indicate wide variations over time and region; and tendency for PI to fall BUT enough variation and counterexamples to clearly show policy space for progressive change Research on tax design theory reveals logical flaws in arguments against direct taxation
Initial estimates of PI "THE PLATO INDEX" around 2000 around 2000 Plato Income Shares Gini dirtax/ govrev/ dirtax/ Index Top 10% Top 20% coeff cgovrev GDP GDP A B C D E F=D*E F/(B+F) Argentina 38.9 56.4 52.2 17.9 14.9 2.7 4.5 Brazil 40.7 64.4 59.1 19.4 25.9 5.0 7.2 Chile 47.0 62.2 57.1 20.3 19.2 3.9 5.9 Colombia 46.5 61.8 57.6 34.2 13.3 4.6 6.9 Mexico 43.1 59.1 54.6 34.0 14.4 4.9 7.7 Venezuela 36.3 53.4 49.1 19.6 20.5 4.0 7.0 UK 28.5 44.0 36.0 39.7 30.0 11.9 21.3 Greece 28.5 43.6 35.4 22.7 30.2 6.9 13.6 Ireland 27.6 43.3 35.9 41.8 29.0 12.1 21.9 Spain 25.2 40.8 32.5 29.7 19.5 5.8 12.5 Korea 22.5 37.5 31.6 26.4 20.3 5.4 12.5 Philippines 36.3 52.3 46.1 39.8 15.0 6.0 10.3 Turkey 30.7 46.7 40.0 33.5 28.4 9.5 16.9 Source HDR HDR HDR GFS IFS
UK PI over time: direct tax pressure stable but increasingly unjust 45 40 35 30 25 20 15 10 5 0 1970 1972 1974 top quintile gnp share PLATO INDEX direct tax/gnp 1976 1978 1980 1982 1984 1986 1988 1990
0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 Comprehensive PI estimates, 2000 Plato Plato Guatemala Brazil India Mexico Thailand Kenya Philippines Ghana Portugal Spain France South Africa Greece Sweden UK
Tax design principles Widely argued (e.g. World Bank) that a single rate of tax on income/consumption combined with equal per capita social benefits would stimulate productivity and be strongly redistributive But: Evidence on disincentive effects on work and investment very weak Developing countries not in equilibrium Evidence that tax competition is ineffective/degrading Excessive claims made for distributive effect of public goods (e.g. security expenditure).
AND But: Indirect taxes highly regressive (as in UK) unless large VAT exemptions on food etc; need progressive direct tax to balance Social benefits can be regressive (e.g. education) and require large cash transfers to the poor (as in UK) to be progressive Claims for egalitarian benefits of public goods (e.g. law, security) are excessive
Tax instruments In developing countries, need to find domestic tax bases that reflect wealth and are assessable urban property an obvious target. Possibility (Tanzi & Zee) of taxing corporate fixed assets rather than income; on UN rather than OECD principles (until data on worldwide consolidated income available). Plato results strongly support measures for international tax coordination as domestic tax bases are eroded by global money flows
Future directions Econometric work to establish relation between Plato Index and welfare levels, growth potential etc Outreach initiatives to introduce concept and relate to other human development campaigns Development of analysis to engage with policy design
Analytical work Plato Index in (econometric) exploration of determinants of welfare levels: do high PI countries have HDI>GDP rankings? Using the PI in growth determination models: does high PI promote or retard growth and convergence? Our preliminary estimates for OECD countries indicate a marginal positive relationship. Exploring political economy models: is low PI in democracies and the median voter paradox
Outreach: fiscal inequality and poverty Key input to Christian Aid campaign on tax justice. Initiative to include Plato Index in the Human Development Report (UNDP) Work with Initiative for Policy Dialogue (Columbia/Stiglitz) on the social contract in Middle Income Countries (MICs)
Policy development: instruments and linkages Relate PI issue to the current flat tax, targetted spend mantra; and relate to the social contract Develop appropriate direct tax instruments for MICs, including asset taxes and international cooperation Link to issues of international tax evasion, OFCs and black money flows (EUSECON project).