More than revenue: Taxation as a Development Tool Vicente Fretes - - PowerPoint PPT Presentation

More than revenue: Taxation as a Development Tool

Vicente Fretes Cibils June 24, 2013 Brookings Institution Washington, DC Base version

Taxation as a Development Tool

Content

– Myths

• Low tax burden
• Regressive taxes
• Rampant evasion

– Essentials—Some policy reforms

1

Taxation in LAC: Myth vs. Reality

Myths?

• 1. Low tax burden

Reality

Yes…in personal income tax …but most significant rise in overall tax burden in the world

2

Low tax burden

7 16 17 17 24 25 3 5 10 15 20 25 30 Middle East Africa Asia Latin America and the Caribbean Eastern Europe OECD Tax Burden as Percentage of GDP (simple average, 2008-2010) Potential given development level— Income tax = 2.4 %GDP

3

…but largest increase in burden…

• 0.5

0.0 0.5 1.0 1.5 2.0 2.5 3.0

OECD Asia Africa Middle East Eastern Europe Latin America and the Caribbean Changes in the Tax Burden between 1990 and 2010 (simple average, percentage of GDP)

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…and in (almost) all taxes (and revenues)

1.6 2.0 1.9 3.4 4.3 6.3 2.7 1.7 0.4 0.5 1.9 1.6 3.0 4.2 1.1 1.9 2.8 4.3

5 10 15 20 25 1990-95 2006-10

Personal income Corporate income VAT Trade Property Excises Social Security Natural resources Other

Structure of Fiscal Revenue in Latin America and the Caribbean (percentage of GDP)

5

Taxation in LAC: Myth vs. Reality

Myths?

• 1. Low tax burden
• 2. Regressive taxes

Reality

Yes…in personal income tax …but most significant rise in overall tax burden in the world Maybe…but big losses to avoid VAT regressivity …and to promote progressivity of personal income taxes

6

Regressive VAT? Measurement matters

5 10 15 1 2 3 4 5 6 7 8 9 10 Income and consumption deciles Average effective rate (percentage of consumption) Average effective rate (percentage of income) Incidence of VAT by income and consumption deciles

7

Personal income tax: Design on paper

5 10 15 20 25 30 35 1 2 3 4 5 6 7 8 9 10 Rate Income level (number of times per capita income) Maximum Marginal Rate for Each Income Level, 2010 Other middle-income countries Latin America and the Caribbean

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…and ends up an empty shell

1 2 3 4 1 2 3 4 5 6 7 8 9 10 Income decile Incidence of Personal Income Tax Average effective rate

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• Poor design

80% of population pays 0%

• Generous deductions
• Evasion

The very rich pay only 4%

Progressive on paper…with NO real redistributive power Change in income distribution before and after taxes = 0.008

Taxation in LAC: Myth vs. Reality

Myth?

• 1. Low tax burden
• 2. Regressive taxes
• 3. Rampant evasion

Reality

Yes…in personal income tax …but most significant rise in overall tax burden in the world Maybe…but big losses to avoid VAT regressivity …and promote progressivity of personal income taxes Yes in income taxes (lower in VAT) It’s easy and risk free to evade

10

Rampant evasion: The killer blow to equality

10 20 30 40 50 60 VAT Personal Income Tax Corporate Income Tax Tax Evasion Rates (percentage)

11

…with minimum chances of being audited

3% Mass audits

12

0.2% In-depth audits

Taxation in LAC: Myth vs. Reality

Myth?

• 1. Low tax burden
• 2. Regressive taxes
• 3. Rampant evasion

Reality

Yes…in personal income tax …but most significant rise in overall tax burden in the world Maybe…but big losses to avoid VAT regressivity …and promote progressivity of personal income taxes Yes in income taxes (lower in VAT) It’s easy and risk free to evade

13

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

   ?   ?  

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