Public finance for development: Strengthening the connection between revenues and expenditures Pablo Sanguinetti Research Director CAF- Development Bank of Latin America Brookings Institution June, 24 th , 2013
Accountability Taxes (structure and Expenditure STATE administration) (public goods and CITIZEN redistribution) Reciprocity
Public Expenditure as a % of the GDP in Latin America 27,8% 22,9% 8,3% 20 years 4,8% 1990 - 1992 2007 - 2009 Taxes (structure and Expenditure administration)) (public goods and redistribution)
Social public expenditure explained most of the growth in public expenditures during 1990- 2009 4,8% Taxes (structure and Expenditure administration)) (public goods and redistribution)
Social public 27,8% expenditure 22,9% Education 18% Social Security and social 12% 8,3% assistance 20 years 4,9% 4,8% 3,2% 1990 - 1992 2007 - 2009 Taxes (structure and Expenditure administration)) (public goods and redistribution)
Public Expenditures Improves income distribution I. Access to public III. Subsidies goods (ej. Energy) II. Income Taxes transfers Taxes (structure and Expenditure administration)) (public goods and redistribution)
Total redistributive effect of public expenditure (and taxes) in selected countries Perú Bolivia México Brasil Argentina Cumulative variation (%) of the Gini Index 0% -2% -2% -2% -3% -5% -4% -4% -5% -5% -6% -7% -6% -8% -10% -15% -15% -20% -20% -23% -25% Source: own elaboration based on Lustig (2012). Taxes (structure and Expenditure administration)) (public goods and redistribution)
Total redistributive effect of the public expenditure (and taxes) in selected countries Perú Bolivia México Brasil Argentina Cumulative variation (%) of the Gini Index 0% 0% -1% -1% -2% -2% -2% -2% -2% -3% -5% -4% -4% -5% -5% -6% -7% -6% -8% -10% -15% -15% -20% -20% -23% -25% (1) Efecto de los impuestos directos y las contribuciones a la seguridad social (1) Effect of direct taxes and social security contributions (2) = (1) + Efecto de las transferencias monetarias directas (3) = (2) + Efecto de los impuestos y subsidios indirectos (4) = (3) + Efecto de las transferencias en especie (educación, salud, etc.) Source: own elaboration based on Lustig (2012). Taxes (structure and Expenditure administration)) (public goods and redistribution)
Total redistributive effect of the public expenditure (and taxes) in selected countries Perú Bolivia México Brasil Argentina Cumulative variation (%) of the Gini Index 0% 0% -1% -1% -2% -2% -2% -2% -2% -3% -5% -4% -4% -5% -5% -6% -7% -6% -8% -10% -15% -15% -20% -20% -23% -25% (1) Efecto de los impuestos directos y las contribuciones a la seguridad social (1) Effect of direct taxes and social security contributions (2) = (1) + Efecto de las transferencias monetarias directas (2) = (1) + Effect of direct monetary transfers (3) = (2) + Efecto de los impuestos y subsidios indirectos (4) = (3) + Efecto de las transferencias en especie (educación, salud, etc.) Source: own elaboration based on Lustig (2012). Taxes (structure and Expenditure administration)) (public goods and redistribution)
Total redistributive effect of the public expenditure (and taxes) in selected countries Perú Bolivia México Brasil Argentina Cumulative variation (%) of the Gini Index 0% 0% -1% -1% -2% -2% -2% -2% -2% -3% -5% -4% -4% -5% -5% -6% -6% -7% -8% -10% -15% -15% -20% -20% -23% -25% (1) Efecto de los impuestos directos y las contribuciones a la seguridad social (1) Effect of direct taxes and social security contributions (2) = (1) + Efecto de las transferencias monetarias directas (2) = (1) + Effect of direct monetary transfers (3) = (2) + Efecto de los impuestos y subsidios indirectos (3) = (2) + Effect of indirect taxes and subsidies (4) = (3) + Efecto de las transferencias en especie (educación, salud, etc.) Source: own elaboration based on Lustig (2012). Taxes (structure and Expenditure administration)) (public goods and redistribution)
Total redistributive effect of the public expenditure (and taxes) in selected countries Perú Bolivia México Brasil Argentina Cumulative variation (%) of the Gini Index 0% 0% -1% -1% -2% -2% -2% -2% -2% -3% -5% -4% -4% -5% -5% -6% -6% -7% -8% -10% -15% -15% -20% -20% -23% -25% (1) Efecto de los impuestos directos y las contribuciones a la seguridad social (1) Effect of direct taxes and social security contributions (2) = (1) + Efecto de las transferencias monetarias directas (2) = (1) + Effect of direct monetary transfers (3) = (2) + Effect of indirect taxes and subsidies (3) = (2) + Efecto de los impuestos y subsidios indirectos (4) = (3) + Efecto de las transferencias en especie (educación, salud, etc.) (4) = (3) + Effect of non cash income transfers (education, health, etc.) Source: own elaboration based on Lustig (2012). Taxes (structure and Expenditure administration)) (public goods and redistribution)
Access to public goods and Equality in income Expenditure services, distribution transfers and subsidies An efficient But efficiency also matters management is a Efficiency of public moral obligation for Permits the saving expenditure is public of resources and important to strength administrators improves the reciprocity impact of redistributive programs Taxes (structure and Expenditure administration)) (public goods and redistribution)
Inputs Efficiency Enviroment Results Taxes (structure and Expenditure administration)) (public goods and redistribution)
Distributions of the SIMCE grades and efficiency levels by type of institution (average 2004-2010) SIMCE Grades Efficiency scores Density function Density function SIMCE Grades Efficiency scores Municipal schools Private schools Perú (2010) Efficiency scores Density function Taxes (structure and Expenditure Efficiency scores administration)) (public goods and redistribution) Public schools Private schools
Improving the quantity and quality of public goods requires the strengthening of the tax collection Is Latin America making all the necessary effort at tax collection? Tax collection and GDP per capita Tax revenues (percentage of the GDP) GDP per capita (USD 2005, PPA) Main determinants: Taxes (structure 1. Tax Structure and Expenditure administration) (public goods and redistribution)) 2. Tax Administration
The low tax effort is originated, in part, by a low participation of direct taxes in total tax revenues: Evolution of main taxes inside the average tax structure of Latin America (% of total tax revenues) General taxes on goods and services Income and capital gains taxes Social Security contributions Main taxes Specifics taxes on goods and services International trade duties Property taxes Other taxes 0 5 10 15 20 25 30 35 40 Relative participation (percentage of total tax revenues) 1990 - 1992 1999- 2001 2008 - 2009 Taxes (structure and Expenditure administration) (public goods and redistribution))
38% in Nicaragua The tax evasion rate of the VAT in Latin America is 27% The low tax effort is also related with 11% in Chile The evasion rate in weaknesses in tax control 64% in Ecuador USA is 16% The evasion rate of the income tax in 41,6% in Latin America is Mexico 51,4% Impuestos (Estructura y Gasto administración) (Bienes públicos y redistribución)
¿Virtuous More taxes, more empowerment and circle? Accountability accountability Taxes (structure and Expenditure STATE administration) (public goods and CITIZEN redistribution) Reciprocity Better expenditures, more willingness to pay taxes
According to the CAF survey, the families in Latin America “are more willing to pay taxes” if the government performs better (www.caf.com/investigacion) Remove corruption: 11,5% will pay more Better health and education: 11,5% More citizen Taxes security: 11,4% Expenditure More protection to the poor: Reciprocity 9,2%
Complementary evidence: Experiment in 17 cities of the region: random assignment of information about the performance of local governments Rio de Janeiro: positive Increase willingness to pay information about the taxes on vehicles and to local government reduce VAT evasion Lower tax collection Timmons, 2011 : Corruption after the information reports in Brazilian Municipalities was made public Taxes Expenditure Reciprocity
But when citizens pay taxes, they Accountability feel they have more rights to ask for a good public administration Taxes Expenditure 72,6% of households in Latin America have this Citizens doesn ´ t like opinion to pay taxes Historical evidence: independence episodes
Evidence supports the existence of this virtuous circle : Accountability The size of the public sector increases as a share of GDP along the development path Taxes Expenditure Reciprocity
Direct Taxes Transparency in the use of natural resources revenues A professional and independent Tax Administration
Taxes strengthen democracy Taxes
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