Government fiscal policies and redistribution in fiscal policies - PowerPoint PPT Presentation

Motivation Redistributive Government fiscal policies and redistribution in fiscal policies Asian countries Tax incidence Expenditure incidence Empirical Iris Claus estimates Taxation Treasury Guest Lecture Government expenditures Fiscal policies 28 February 2012 in Asia Summary and conclusions Treasury Guest Lecture 1 / 61

Acknowledgement and disclaimer Motivation Redistributive fiscal policies • This work is joint with Jorge Martinez-Vazquez and Tax incidence Violeta Vulovic (Georgia State University). Expenditure incidence • The views expressed are our own and do not necessarily Empirical reflect the views or policies of the Asian Development estimates Bank or its board of governors or the governments they Taxation represent. Government expenditures Fiscal policies in Asia Summary and conclusions Treasury Guest Lecture 2 / 61

Motivation of paper Motivation Redistributive • There are many reasons why countries adopt redistributive fiscal policies policies Tax incidence • . . . to pursue social justice Expenditure incidence • . . . to achieve efficiency with equity (i.e. to grow the pie Empirical estimates by cutting it more fairly) Taxation • Redistribution may be achieved through taxation and Government expenditures government expenditures. Fiscal policies in Asia Summary and conclusions Treasury Guest Lecture 3 / 61

Purpose of this paper Motivation Redistributive • Assess the impact of government fiscal policies on income fiscal policies distribution in Asia Tax incidence Expenditure - Review the international literature on the role and incidence effectiveness of redistributive fiscal policies Empirical estimates - Quantify the impact of taxation and government Taxation expenditures on income disparity in Asia Government - Discuss how the effectiveness of fiscal policies in expenditures Fiscal policies Asia may be improved in Asia Summary and conclusions Treasury Guest Lecture 4 / 61

Tax and expenditure incidence analysis • ... assesses the impact of fiscal policies on income distribution and on the poor. Motivation • ... is an effective tool to review whether policies have the Redistributive fiscal policies desired impact. Tax incidence • Who pays a tax is often different from who is legally liable Expenditure incidence to make the payment (e.g. payroll taxes and social Empirical security contributions). estimates • Not all expenditures benefit people of different income Taxation Government levels to the same extent. expenditures • E.g. more spending on primary education and less on Fiscal policies in Asia college education should benefit the poor. Summary and conclusions • But the effects may be mitigated by the lack of access of the poor in rural areas to schools. Treasury Guest Lecture 5 / 61

Tax incidence • Tax incidence analysis needs to take into account: Motivation - different types of tax Redistributive - tax expenditures (exemptions, rebates, deductions, fiscal policies tax credits, special tax rates) Tax incidence - negative income taxes (cash transfers) Expenditure incidence - in-kind transfers (food stamps, voucher programs) Empirical estimates • It is difficult to measure. Taxation • Agents can shift the burden of taxes, e.g. via changes in Government expenditures prices charged to consumers, wages paid to workers. Fiscal policies • Taxes impose costs beyond the amounts collected by in Asia governments (excess burden or deadweight losses). Summary and conclusions • What is the appropriate counterfactual to use as a benchmark? Treasury Guest Lecture 6 / 61

Tax incidence: three methodologies Motivation 1 Microsimulation models Redistributive . . . make certain assumptions about taxes and allocate tax fiscal policies burdens to different income groups. Tax incidence Expenditure incidence 2 General equilibrium models Empirical . . . contain less detail on different income groups. Tax estimates incidence is determined by the structure of the economy. Taxation Government 3 Regression based estimates expenditures Fiscal policies . . . use time series analysis for particular country, cross in Asia country and panel data sets. Summary and conclusions Treasury Guest Lecture 7 / 61

Microsimulation models • ... use household or consumer income and expenditure Motivation surveys and tax administrative data. Redistributive • For each tax, a portion of the total revenues collected is fiscal policies imputed as tax burden to each income group. Tax incidence Expenditure • E.g. excise taxes on tobacco are allocated to different incidence income groups in proportion to their relative share in the Empirical estimates consumption of tobacco products. Taxation • The incidence for each tax is calculated for each income Government group and added up across all taxes to give a total tax expenditures Fiscal policies burden for each income group in Asia • ... expressed as an average total tax rate, i.e. the Summary and conclusions proportion of income paid in taxes by each income group. Treasury Guest Lecture 8 / 61

Microsimulation models: assumptions • ... must make explicit assumptions about shifting and final incidence of taxes based on theory and/or estimation. Motivation • Typically there is agreement on the assumptions used for Redistributive the different taxes fiscal policies Tax incidence • ... and where there is no consensus, sensitivity analysis is Expenditure performed. incidence • Personal income taxes are typically assumed not to be Empirical estimates shifted and to be paid by the recipients of income. Taxation • With progressive tax rates, this tax usually has a Government expenditures progressive incidence. Fiscal policies • Payroll and social security taxes are typically assumed to in Asia be fully shifted to workers. Summary and conclusions • In the presence of a cap on income for contributions, its incidence is regressive. Treasury Guest Lecture 9 / 61

Microsimulation models: assumptions • For corporate income taxes a variety of shifting assumptions have been proposed and analyzed Motivation (i) no shifting at all so that shareholders pay the full tax Redistributive (ii) shifting to all capital owners through an equalization fiscal policies of after-tax rates of return for all capital Tax incidence (iii) backward shifting to workers in the form of lower Expenditure incidence wages Empirical (iv) forward shifting to consumers in the form of higher estimates consumer prices ( depending on the degree of monopoly power Taxation in markets ) Government expenditures • Typically, half of the tax burden was assumed to be paid Fiscal policies in Asia by all owners of capital and the other half by consumers. Summary and • With more open economies and mobile capital, a conclusions significant part of the tax is now assumed to be paid by workers. Treasury Guest Lecture 10 / 61

Microsimulation models: assumptions • Taxes on goods and services (sales taxes, value added Motivation taxes, excises) are typically assumed to be regressive and Redistributive shifted forward to consumers. fiscal policies • The incidence of sales taxes is complicated by the presence Tax incidence Expenditure of cascading and multiple rates and exemptions. incidence • The regressivity of value added taxes may be reduced with Empirical estimates differential rates (lower for necessities and higher for Taxation luxury items) or exemptions for basic commodities and Government necessities. expenditures Fiscal policies • Value added and excise taxes have been found to be less in Asia regressive or even neutral when analyzed over a longer time Summary and conclusions frame or on life time basis rather than current income. Treasury Guest Lecture 11 / 61

Microsimulation models: assumptions • Excise taxes can have a progressive impact as in the case of luxury goods (gasoline, cars, expensive liquor, perfumes) Motivation • ... and also a regressive impact (kerosene fuel used for Redistributive cooking, tobacco products or cheap liquor). fiscal policies Tax incidence • Taxes on imports are typically assumed to have the same Expenditure regressive incidence as sales and value added taxes for lack incidence of better information. Empirical estimates • Property tax incidence is more controversial. Taxation • Some studies assume no shifting with the tax paid by the Government expenditures owners of the property or shifted to all owners of capital, Fiscal policies in which case the tax is progressive. in Asia • Others assume the forward shifting of property taxes to Summary and conclusions renters or users of the property, in which case they can be regressive. Treasury Guest Lecture 12 / 61

Microsimulation models: pros and cons • The methodology is relatively simple and easy to implement. Motivation Redistributive • The underlying assumptions are transparent and the fiscal policies implications of alternative assumptions can be easily Tax incidence compared. Expenditure incidence • The analysis can include large samples of taxpayers. Empirical estimates • But good information on income (and expenditure) Taxation distribution is not always available. Government expenditures • Second round feedback effects are typically ignored when Fiscal policies assessing tax policy changes. in Asia • Most importantly, the shifting assumptions have been Summary and conclusions criticized for “stipulating” the incidence of various taxes. Treasury Guest Lecture 13 / 61