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

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Government fiscal policies and redistribution in Asian countries

Iris Claus

Treasury Guest Lecture

28 February 2012

Treasury Guest Lecture 1 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Acknowledgement and disclaimer

• This work is joint with Jorge Martinez-Vazquez and

Violeta Vulovic (Georgia State University).

• The views expressed are our own and do not necessarily

reflect the views or policies of the Asian Development Bank or its board of governors or the governments they represent.

Treasury Guest Lecture 2 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Motivation of paper

• There are many reasons why countries adopt redistributive

policies

• . . . to pursue social justice
• . . . to achieve efficiency with equity (i.e. to grow the pie

by cutting it more fairly)

• Redistribution may be achieved through taxation and

government expenditures.

Treasury Guest Lecture 3 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Purpose of this paper

• Assess the impact of government fiscal policies on income

distribution in Asia

• Review the international literature on the role and

effectiveness of redistributive fiscal policies

• Quantify the impact of taxation and government

expenditures on income disparity in Asia

• Discuss how the effectiveness of fiscal policies in

Asia may be improved

Treasury Guest Lecture 4 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Tax and expenditure incidence analysis

• ... assesses the impact of fiscal policies on income

distribution and on the poor.

• ... is an effective tool to review whether policies have the

desired impact.

• Who pays a tax is often different from who is legally liable

to make the payment (e.g. payroll taxes and social security contributions).

• Not all expenditures benefit people of different income

levels to the same extent.

• E.g. more spending on primary education and less on

college education should benefit the poor.

• But the effects may be mitigated by the lack of access of

the poor in rural areas to schools.

Treasury Guest Lecture 5 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Tax incidence

• Tax incidence analysis needs to take into account:
• different types of tax
• tax expenditures (exemptions, rebates, deductions,

tax credits, special tax rates)

• negative income taxes (cash transfers)
• in-kind transfers (food stamps, voucher programs)
• It is difficult to measure.
• Agents can shift the burden of taxes, e.g. via changes in

prices charged to consumers, wages paid to workers.

• Taxes impose costs beyond the amounts collected by

governments (excess burden or deadweight losses).

• What is the appropriate counterfactual to use as a

benchmark?

Treasury Guest Lecture 6 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Tax incidence: three methodologies

1 Microsimulation models

. . . make certain assumptions about taxes and allocate tax burdens to different income groups.

2 General equilibrium models

. . . contain less detail on different income groups. Tax incidence is determined by the structure of the economy.

3 Regression based estimates

. . . use time series analysis for particular country, cross country and panel data sets.

Treasury Guest Lecture 7 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Microsimulation models

• ... use household or consumer income and expenditure

surveys and tax administrative data.

• For each tax, a portion of the total revenues collected is

imputed as tax burden to each income group.

• E.g. excise taxes on tobacco are allocated to different

income groups in proportion to their relative share in the consumption of tobacco products.

• The incidence for each tax is calculated for each income

group and added up across all taxes to give a total tax burden for each income group

• ... expressed as an average total tax rate, i.e. the

proportion of income paid in taxes by each income group.

Treasury Guest Lecture 8 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Microsimulation models: assumptions

• ... must make explicit assumptions about shifting and final

incidence of taxes based on theory and/or estimation.

• Typically there is agreement on the assumptions used for

the different taxes

• ... and where there is no consensus, sensitivity analysis is

performed.

• Personal income taxes are typically assumed not to be

shifted and to be paid by the recipients of income.

• With progressive tax rates, this tax usually has a

progressive incidence.

• Payroll and social security taxes are typically assumed to

be fully shifted to workers.

• In the presence of a cap on income for contributions, its

incidence is regressive.

Treasury Guest Lecture 9 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Microsimulation models: assumptions

• For corporate income taxes a variety of shifting

assumptions have been proposed and analyzed (i) no shifting at all so that shareholders pay the full tax (ii) shifting to all capital owners through an equalization

• f after-tax rates of return for all capital

(iii) backward shifting to workers in the form of lower wages (iv) forward shifting to consumers in the form of higher consumer prices (depending on the degree of monopoly power

in markets)

• Typically, half of the tax burden was assumed to be paid

by all owners of capital and the other half by consumers.

• With more open economies and mobile capital, a

significant part of the tax is now assumed to be paid by workers.

Treasury Guest Lecture 10 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Microsimulation models: assumptions

• Taxes on goods and services (sales taxes, value added

taxes, excises) are typically assumed to be regressive and shifted forward to consumers.

• The incidence of sales taxes is complicated by the presence
• f cascading and multiple rates and exemptions.
• The regressivity of value added taxes may be reduced with

differential rates (lower for necessities and higher for luxury items) or exemptions for basic commodities and necessities.

• Value added and excise taxes have been found to be less

regressive or even neutral when analyzed over a longer time frame or on life time basis rather than current income.

Treasury Guest Lecture 11 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Microsimulation models: assumptions

• Excise taxes can have a progressive impact as in the case
• f luxury goods (gasoline, cars, expensive liquor, perfumes)
• ... and also a regressive impact (kerosene fuel used for

cooking, tobacco products or cheap liquor).

• Taxes on imports are typically assumed to have the same

regressive incidence as sales and value added taxes for lack

• f better information.
• Property tax incidence is more controversial.
• Some studies assume no shifting with the tax paid by the
• wners of the property or shifted to all owners of capital,

in which case the tax is progressive.

• Others assume the forward shifting of property taxes to

renters or users of the property, in which case they can be regressive.

Treasury Guest Lecture 12 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Microsimulation models: pros and cons

• The methodology is relatively simple and easy to

implement.

• The underlying assumptions are transparent and the

implications of alternative assumptions can be easily compared.

• The analysis can include large samples of taxpayers.
• But good information on income (and expenditure)

distribution is not always available.

• Second round feedback effects are typically ignored when

assessing tax policy changes.

• Most importantly, the shifting assumptions have been

criticized for “stipulating” the incidence of various taxes.

Treasury Guest Lecture 13 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

General equilibrium models

• ... were pioneered by Harberger (1962).
• Computable general equilibrium models are numerically

solved using data from the national accounts, household expenditure surveys and taxpayer data.

• ... analyze the incidence of taxes within the economy,

without making explicit assumptions about the final shifting of taxes.

• Tax incidence depends on the values of several critical

parameters in the economy (capital-labor ratios in different

sectors, elasticities of substitution in production among the different factors).

• It is measured by the differences in the vector of

equilibrium prices before and after a tax change.

Treasury Guest Lecture 14 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

General equilibrium models: pros and cons

• General equilibrium models employ an explicit structural

model of the economy with utility/demand functions and production/supply functions.

• They offer transparency in how incidence results are linked

to assumptions on fundamental parameters.

• They take into account indirect or second round feedback

effects of taxation (or government expenditure) changes.

• But they are operationally intensive and the number of

taxpayers represented needs to be small.

• And even though this approach does not “stipulate”

incidence results

• ... it does “stipulate” critical parameters.

Treasury Guest Lecture 15 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Regression based estimates

• A limited number of recent studies have used multivariate

econometric analysis

• ... to investigate the impact of taxes on the distribution of

income (typically measured by gini coefficients) across countries.

• Cross-section or panel data

Treasury Guest Lecture 16 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Regression based estimates: pros and cons

• The econometric approach allows analyzing the impact of

large variations in the level and structure of taxes across countries,

• ... variations that are unlikely observed within the context
• f a single economy.
• But the impact of the different elements of the tax

structure on income distribution cannot be examined in any detail,

• ... at least not to the extent allowed by the general

equilibrium approach and especially microsimulation models.

Treasury Guest Lecture 17 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Tax incidence: international evidence

1 Tax systems tend to be progressive even though some

taxes within them are regressive.

2 Incidence analysis needs to be performed within the big

picture (revenue mobilization, excess burden, administration and compliance costs).

3 Overall, tax systems do not have a large impact on the

distribution of income.

Treasury Guest Lecture 18 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Expenditure incidence

• . . . is difficult to measure.
• Public goods and services are often provided without

direct charges and there are no market prices to infer the marginal benefits.

• Even when a fee is charged, this price cannot be

interpreted as the marginal benefit for individuals

• . . . because the supply of most public goods and services

is subsidized or rationed and does not respond directly to demand.

Treasury Guest Lecture 19 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Expenditure incidence: three approaches

1 Benefit incidence

. . . measures by how much the income of a household would have to be raised if the household had to pay for the subsidized public services at full cost.

2 Behavioral approach

. . . estimates demand functions for public goods and services to generate price elasticities and marginal willingness to pay.

3 Regression based estimates

. . . use time series analysis for a particular country, cross country and panel data sets.

Treasury Guest Lecture 20 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Benefit incidence

• ... measures by how much the income of a household

would have to be raised if the household had to pay for the subsidized public goods and services at full cost.

• ... uses information on the costs of publicly provided

goods and services and on their uses by different income groups to arrive at estimates of the distribution of benefits.

• Information on individual or household use of the public

goods and services is typically obtained from surveys.

• Benefit incidence has been estimated for three main

categories: education, health and some types of infrastructure.

Treasury Guest Lecture 21 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Benefit incidence: pros and cons

• The approach provides simplicity and transparency of

estimation procedures.

• It allows studying which public expenditures are most

effective in reaching and improving the status of the poor.

• But the cost measures may not be a good approximation
• f the true benefits or marginal valuations of the public

goods and services provided.

• It cannot incorporate changes in the behavior of

individuals in response to changes in public expenditure.

• The analysis is limited to public expenditure programs for

which private beneficiaries can be identified.

• It can also ignore important interaction effects with the

private sector.

Treasury Guest Lecture 22 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Behavioral approach

• ... takes people’s preferences to derive marginal willingness

to pay as the measure of benefit from public expenditures.

• ... uses econometric methods to exploit variations in

behavior in the use of public goods and services, prices, incomes and other household characteristics across individuals and time

• ... to derive demand functions,
• ... price elasticities and willingness to pay.
• With that information one can estimate the incidence of

public spending programs

• ... and the response to any changes in costs associated

with the use of a public good or service.

Treasury Guest Lecture 23 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Behavioral approach: pros and cons

• The approach is more theoretically sound with clear

foundations in microeconomics.

• It allows the estimation of incidence for public

expenditures for which specific users cannot be identified.

• It incorporates individual behavioral responses
• ... and thus provides guidance for policy reform and better

design and targeting of public policies to the poor.

• But it is more data intensive and methodologically more

complex.

Treasury Guest Lecture 24 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Regression based estimates

• A limited number of recent studies have used multivariate

econometric analysis

• ... to investigate the impact of government expenditures
• n the distribution of income (typically measured by gini

coefficients) across countries.

• Cross-section or panel data

Treasury Guest Lecture 25 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Regression based estimates: pros and cons

• The econometric approach allows analyzing the impact of

large variations in the level and composition of government spending across countries,

• ... variations that are unlikely observed within the context
• f a single economy.
• But it does not allow analyzing the specific details of

policies and institutions

• ... that can make a significant difference on the

effectiveness and overall impact of public expenditure policies.

Treasury Guest Lecture 26 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Expenditure incidence: international evidence

1 Spending programs on social welfare and the social sectors

can significantly reduce income inequality.

2 More effective redistributional policies, especially for the

poor, can be implemented with government expenditure than with taxes.

3 But the impact of policies depends crucially on the

targeting of expenditures to the poor and lower income groups.

Treasury Guest Lecture 27 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Empirical estimation: evidence for Asia

• To quantify the impact of taxation and government

expenditures on income inequality in Asia, measured by gini coefficients

• Panel data analysis uses 150 countries with data between

1970 and 2009.

• 23 Asian countries are included.
• Taxes and government expenditures are considered

individually and jointly.

• Asia specific tax and government expenditure effects are

identified using dummy variables.

Treasury Guest Lecture 28 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

All regressions

• . . . include lagged inequality
• ... dummy variables to account for differences in the

computation of gini coefficients across countries (gross/net

income, expenditure)

• ... a set of control variables that are commonly used in the

literature to explain income inequality (population growth,

youth dependency, old-age dependency, a globalization index, per capita GDP, long-term unemployment, perception of corruption, schooling and size of government)

• ... and inflation.

Treasury Guest Lecture 29 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Fiscal variables: tax

• Tax variables include personal income taxes, corporate

income taxes, social security contributions and payroll taxes, general taxes on goods and services, excises and customs duties, all measured as a percent of GDP, and a progressivity measure.

• The progressivity measure is Sabirianova Peter, Buttrick

and Duncan’s (2010) average rate progression variable.

• It is based on countries’ personal income tax system

(statutory tax rates, tax brackets, country-specific tax legislation, basic allowances, standard deductions, tax credits, national surcharges and local taxes).

Treasury Guest Lecture 30 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Fiscal variables: progressivity measure

• Average tax rates are computed for each country for each

year at 100 different levels of pre-tax income, which are evenly spread in the range from 4 to 400 percent of a country’s GDP per capita.

• The average rates (for each country and each year) are

then regressed on the log of the 100 pre-tax income data points that are formed around per capita GDP.

• A country’s tax structure in a particular year is interpreted

as progressive, neutral or regressive if the estimated slope coefficient is positive, zero or negative.

Treasury Guest Lecture 31 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Fiscal variables: public spending

• Government expenditures include spending on social

protection, education, health and housing, all measured as a percent of GDP.

• Ideally, subcomponents would have been included (e.g.

basic education, primary health).

• But internationally comparable disaggregated data are not

available.

Treasury Guest Lecture 32 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Personal income taxes

Estimated marginal impact on inequality (percentage points) Asia Rest of the world Personal income tax

• 0.573
• 0.041

Personal income tax * progressivity

• 0.002
• 0.005
• Personal income taxation reduces income inequality.
• The effect is significantly larger in Asia than in other

countries.

• The greater effect in Asia may be due to a larger number
• f people not paying income tax.
• The impact of progressive income tax scales is modest and

somewhat smaller in Asia than in the rest of the world.

Treasury Guest Lecture 33 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Corporate income taxes

Estimated marginal impact on inequality (in percentage points) Asia Rest of the world Corporate income tax 0.598

• 0.338

Corporate income tax * globalization

• 0.017

0.005

• Corporate income taxes (CIT) reduce income disparity in

the rest of the world but is regressive in Asia.

• ... possibly due to larger tax concessions and subsidies for

Asian firms.

• CIT interacted with globalization lowers inequality in Asia
• ... which is the opposite from what is expected and what

is observed in the rest of the world

• ... possibly due to higher effective tax rates for foreign

firms in Asia compared to domestic firms and than in the rest of the world.

Treasury Guest Lecture 34 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Social security contributions and payroll taxes

Estimated marginal impact on inequality (in percentage points) Asia Rest of the world Social security and payroll taxes 1.324 0.165

• . . . are typically shifted to employees in the form of lower

wages and capped at higher incomes, increasing income inequality.

• . . . are found to be particularly harmful in Asia.
• The estimated adverse effect on income inequality is eight

times larger than in the rest of the world.

Treasury Guest Lecture 35 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Taxes on goods and services

Estimated marginal impact on inequality (in percentage points) Asia Rest of the world General taxes on goods and services 0.666 0.768 Excises 0.609

• 0.059

Customs duties 0.174 0.651

• . . . have been found to be regressive in studies that

analyze current income.

• . . . are substantially less regressive and possibly neutral

when analyzed over a longer time frame.

• Here, taxes on goods and services are found to be

regressive in Asia.

• Excises reduce income disparity in the rest of the world.

Treasury Guest Lecture 36 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Social protection spending

Estimated marginal impact on inequality (in percentage points) Asia Rest of the world Social protection 0.490

• 0.276
• . . . has the expected negative sign in the rest of the world.
• . . . is found to increase income inequality in Asia.
• . . . consists of (i) services and transfers provided to

individuals and households, and (ii) expenditures on services provided on a collective basis.

• Asian countries provide relatively few services and

transfers (first component).

• The second component (formulation and administration of

government policy, formulation and enforcement of legislation and standards for providing social protection, and applied research and experimental development into social protection services) is likely to dominate.

Treasury Guest Lecture 37 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Social protection spending

Estimated marginal impact on inequality (in percentage points) Asia Rest of the world Social protection 0.490

• 0.276
• For the few services and transfers that Asian countries

provide there may be a narrow benefit coverage and a lack

• f targeting to the poor.
• E.g. unemployment benefits are typically restricted to

people in formal employment.

• Pension systems in Asian countries, outside the OECD,

can be generous (due to early retirement ages and relatively

high pension levels)

• ... but they are typically only available to a privileged

minority.

Treasury Guest Lecture 38 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Government expenditure on housing, health and education

Estimated marginal impact on inequality (in percentage points) Asia Rest of the world Housing 2.162

• 0.614

Health

• 0.241
• 0.330

Education

• 0.486
• 0.034
• Government expenditure on housing reduced income

inequality in the rest of the world but increases it in Asia.

• Health spending in Asia has a similar negative effect on

income inequality as in other countries.

• Education expenditure has a somewhat larger negative

impact.

Treasury Guest Lecture 39 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Improving the effectiveness of fiscal policies in Asia

• Taxation is a less effective tool for redistributing income

than public spending.

• But it is crucial for raising government expenditure to

achieve distributional objectives.

• Effectiveness of tax systems and tax administration in

collecting tax revenue in Asia

• Brief discussion of government spending policies on

education, health and social protection to throw more light

• n our econometric findings

Treasury Guest Lecture 40 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Corporate income taxation

• Corporate tax collection varies.
• It is low in some countries despite relatively high tax rates

partly because of various tax incentives and concessions.

• Tax incentives are likely to be regressive if they are

captured by high income interest groups.

Treasury Guest Lecture 41 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Personal income taxation

• Personal income tax collection is low in Asia compared to

the rest of the world, OECD countries and developing economies excluding Asia.

Treasury Guest Lecture 42 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Personal income taxation

• Personal income tax collection is low partly because of a

higher tax free (minimum exempt) thresholds ...

Treasury Guest Lecture 43 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Personal income taxation

• ... and a higher threshold of income above which the top

marginal personal income tax rate applies.

Treasury Guest Lecture 44 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

General taxes on goods and services

• General taxes on goods and services, similarly to personal

income tax, are low in Asia compared to the rest of the world, OECD countries and developing economies excluding Asia.

Treasury Guest Lecture 45 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

VAT efficiency

• An efficiency ratio can be calculated as VAT revenues to

GDP divided by the VAT rate (in percent).

• A low efficiency ratio suggests erosion by exemptions,

reduced rates within the tax law and/or low taxpayer compliance.

Treasury Guest Lecture 46 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

VAT registration threshold

• Relatively high registration thresholds are contributing to

low VAT efficiency in some countries.

Treasury Guest Lecture 47 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Tax administration costs

• Tax administration costs in Asia are relatively low, at least

in the countries for which data are available,

• ... partly because of less revenue collection

Treasury Guest Lecture 48 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Tax administration costs

• ... and efficient tax collection in some countries.

Treasury Guest Lecture 49 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Compliance costs

• The ease with which taxpayers are able to comply with the

tax system varies across countries.

• Compliance costs are high in some countries partly

because of complicated tax systems.

Treasury Guest Lecture 50 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Tax reform in Asia

• The tax systems in several Asian countries are

characterized by relatively high tax rates and narrow bases.

• There seems to be greater reliance on corporate income

taxation, which tends to be more distortionary (because of internationally mobile capital) than personal income taxation and value added taxes.

• Tax reform should focus on lowering income tax rates

while broadening the tax base.

• This would reduce the economic, compliance and

administrative costs of taxation and likely lead to increases in tax revenue.

• A broad base, low rate tax system may be seen as fairer.

Treasury Guest Lecture 51 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Tax reform in Asia

• Further gains could be achieved in some countries by

shifting the tax burden from income taxation to value added taxes

• ... and by broadening the value added tax base.
• VAT exemptions and/or reduced tax rates are often used

to address the potential regressivity of value added taxes.

• They are costly and not well targeted to the poor.
• A more effective policy would be direct cash transfer

payments.

Treasury Guest Lecture 52 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Government expenditure: education and health

• Asia has made considerable progress in improving

education and health outcomes and toward achieving the millennium development goals (MDGs) and targets.

• Primary school enrollment and the number of students

who start grade one and reach the last grade of primary education have been rising.

• Literacy rates in Asia are high.
• These achievements are likely to be contributing to our

finding that education expenditure is reducing income inequality in Asia

• ... as government spending on primary education has been

found to be progressive.

Treasury Guest Lecture 53 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Government expenditure: health

• Maternal death rates have fallen sharply with better

attendance at birth of trained health professionals and improved antenatal care.

• Infant and child mortality rates are falling although only a

few countries so far have reached the MDG target.

• The progress that has been made is likely to have

benefitted poor families.

• Infant and child mortality is closely related to household

wealth.

• But HIV/AIDS remains a problem.

Treasury Guest Lecture 54 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Social protection: employment

• Coverage remains relatively low in Asia and generally is
• nly available to formal sector workers.
• Few countries have income support systems for the

unemployed

• ... with coverage rates in terms of the proportion of

unemployed who receive benefits being less than 10 percent on average.

• Effective coverage of work related accidents and diseases is

low with only a proportion of accidents being reported and compensated.

• In the informal sector, unemployment coverage is virtually

non-existent and working conditions and safety are typically poor and work related diseases are widespread.

Treasury Guest Lecture 55 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Social protection: pensions

• The proportion of working age population covered by

contributory pension programs in countries with pension systems is low at around 20 percent.

• Few countries have social pensions to provide safety net

retirement income for people who were not members of a formal scheme.

• Pension systems in Asian countries, outside the OECD, are
• ften quite generous.
• Replacement rates measure the value of a person’s pension

as the percentage of their earnings when working.

• They are well above OECD levels for men in Asia.

Treasury Guest Lecture 56 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Social protection: pensions

• Replacement rates are high partly because nearly all

defined-benefit schemes are based on final salaries rather than average earnings.

• Such schemes tend to be particularly regressive.
• The higher paid typically have salaries that rise more

rapidly with age, while the earnings of lower paid workers generally remain flat or rise less fast.

• The expected amount of time that people spend in

retirement can be calculated by combining information on national pension ages and life expectancy.

• It is relatively high in Asia because of low pension

eligibility ages.

Treasury Guest Lecture 57 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Government expenditure: explaining our results

• Education and health expenditures in Asia were found to

reduce income inequality

• ... while social security spending has mainly benefitted

higher income people.

• Basic education and health services seem to be fairly

universally available.

• Social protection spending has been restricted to a

minority already likely to be better off.

Treasury Guest Lecture 58 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Summary and conclusions: international evidence

• Most tax systems tend to show a mildly progressive

incidence impact.

• But overall taxes have not been an effective means of

redistributing income

• . . . partly because of large excess burdens or economic

losses associated with highly progressive tax systems.

• More effective redistributional policies can be achieved

with government expenditure.

• But the effective targeting can be difficult to design and

implement.

• Cash and in-kind transfers are particularly effective unless

there are serious targeting problems.

• Spending programs in the social sectors are more

progressive, the more is spent in relative and absolute terms on the goods and services used by the poor.

Treasury Guest Lecture 59 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Summary and conclusions: findings for Asia

• Our empirical investigation confirms international results

for Asia.

• Government expenditure has a larger impact on income

distribution than taxes.

• Education and health spending reduce income inequality in

Asia and in other countries.

• But social protection expenditure in Asia appears to

increase income inequality, whereas it reduces it in the rest

• f the world.
• Also adversely affecting the distribution of income in Asian

countries is government expenditure on housing.

Treasury Guest Lecture 60 / 61

Motivation Redistributive fiscal policies Tax incidence Expenditure incidence Empirical estimates Taxation Government expenditures Fiscal policies in Asia Summary and conclusions

Summary and conclusions: findings for Asia

• For taxation, policies in Asia have a less distinctive

differential distributive impact.

• Personal income taxes may be more progressive in Asia

than in the rest of the world, possibly because of a larger number of people not paying income tax.

• Corporate income taxes may be less progressive possibly

because of larger tax incentives, exemptions and concessions for Asian firms.

• Overall, we are unable to conclude in any reliable manner

that taxes are effective in redistributing income.

• At best, they may have a small impact both in Asia and

the rest of the world.

Treasury Guest Lecture 61 / 61