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Tax Performance in Developing Countries Presentation for Taxation & Developing Countries 16 Sept 2013 at ODI Oliver Morrissey CREDIT, School of Economics, University of Nottingham Network member of ICTD Tax Performance ISSUES Tax

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Tax Performance in Developing Countries

Presentation for Taxation & Developing Countries 16 Sept 2013 at ODI

Oliver Morrissey

CREDIT, School of Economics, University of Nottingham Network member of ICTD

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Tax Performance

ISSUES

  • Tax performance (tax/GDP) is determined by inherently structural

factors (variables capturing the tax base, to which tax rates are applied)

  • Tax policy (reform) primarily concerned with tax rates and measures

to improve administration and collection efficiency

  • Changes in the tax base are largely determined by economic

performance and some bases are easier to tax (trade, spending) than

  • thers (corporations, MNEs, resource sector)
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Tax Performance Trends

  • Overall tax/GDP ratios have not changed noticeably on average

since the early 1980s, especially for LICs/SSA

  • VAT and CIT shares of revenue have increased
  • PIT shares have remained rather flat
  • Trade tax shares have declined
  • Measured relative to GDP, the decline in trade tax revenue has

not been offset by increases in revenues from other taxes in LICs

  • In general, as income levels rise the increase in other revenues is

more likely to compensate for declines in trade taxes

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Tax/GDP Trends, IMF, 2011 (Figure 2, p. 13)

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Tax Performance

20 40 60 80 100

1971-1975 1976-1980 1981-1985 1986-1990 1991-1995 1996-2000 2001-2005 2006-2010

Period Mean Rev/GDP

Note: Data organised into 5 year period averages

Revenue/GDP (%), 1970-2010

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SSA Revenue/GDP Trends

10 20 30 40 50 1970-1980 1980-1990 1990-2000 2000-2010 The box plot: whiskers indicate the maximum and minimum values, the line in the box is the median and the size of the box indicates the distribution between the 25th and 75th percentile.

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IMF, 2011 (Figure 7, p. 16)

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 Low income Lower middle income Upper middle income High income Percent GDP

...and CIT receipts have been robust.

1980-1989 1990-1999 2000-2009 2 4 6 8 10 12 Low income Lower middle income Upper middle income High income Percent GDP

The PIT is modest and flat...

1980-1989 1990-1999 2000-2009 1 2 3 4 5 6 7 8 Low income Lower middle income Upper middle income High income Percent GDP

VAT revenues have increased...

1980-1989 1990-1999 2000-2009 1 2 3 4 5 6 Low income Lower middle income Upper middle income High income Percent GDP

... and trade tax receipts are in decline.

1980-1989 1990-1999 2000-2009

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Tax Performance

Tax performance typically modelled as determined by:

  • Income– revenue expected to increase with GDP pc as collection

efficiency improves with development

  • Share of agriculture– (% GDP) consistently associated with lower

revenue

  • Share of industry– (% GDP) expected to increase revenue but

evidence is very mixed

  • Trade– imports and exports have traditionally been the principal

source of tax revenue in LICs

  • Aid– ambiguous effect and mixed evidence
  • Resources– difficult to tax (transparently)
  • Better governance associated with higher revenue
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Tax Performance

  • Resource tax revenues (often less transparent and more

volatile) are important for many SSA countries

  • Absence of growth in tax base even with increasing GDP
  • Increasing difficulties in taxing the bases that are growing

(resource extraction, MNEs and very wealthy individuals)

  • Formal sector employment and earnings (the income tax

base) and private sector spending (the indirect tax base) are not growing at the same rate as GDP it will be difficult to increase the ratio of tax to GDP

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Tax Performance

Trade Taxes

Why have trade taxes (especially tariffs) been so important in LICs?

  • Revenue needs – the border is often the easiest point to levy

taxes (imports and exports recorded), and taxing exports may be easier than taxing the income of producers

  • Infant industry arguments promoted protection until trade reforms

from the 1980s

  • Political (economy) – influential groups lobby for help from the

government and tariffs are a politically cheap way of doing this

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Tax Performance

Tariff Reform (Africa)

  • Significant tariff reductions since mid 1980s when average tariffs

were over 35% (on average) so that by the early 2000s the average was below 15%

  • Reductions strongly influenced by donors, especially World Bank,

promoting trade liberalisation (but not consistently linked to other tax reforms)

  • Pattern of tariff reductions was essentially technocratic in nature

(preserves relative protection)

  • Larger sectors (measured by the number of employees or

establishments) appear to have higher protection

  • While political economy factors may have influenced the initial

pattern of protection, reforms since the early 1990s have diluted the extent of average and relative protection

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Tariff Pattern Changes

Figure 1 Tariff Structure in Ethiopia 1995 and 2001

Ad Valorem Tariffs Ethiopia

500 1000 1500 2000 2500 01-10 11-20 21-30 31-40 41-50 51-60 >61 Tariff Band Frequency Ethiopia 1995 Ethiopia 2001

Notes: The tariff (t) bands are: 0%, 0 < t ≤ 10%; 10 < t ≤ 20%; 20 < t ≤ 30%; 30 < t ≤ 40%; 40 < t ≤ 50%; 50 < t ≤ 60%; t > 60%.

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Tax Performance

Aid and Taxation

  • Aid, and more generally donors, can influence tax

performance in a number of ways

  • Advocating reforms that reduce tax rates (e.g. tariffs)
  • Supporting reforms to improve the tax system (e.g. VAT,

SARAs, administration)

  • Reliance on aid may reduce incentives to mobilise domestic

revenue (but cedes influence to donors)

  • Effective aid and economic reforms increases the tax base
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Slight Rise in Aid on Average

20 40 60

1971-1975 1976-1980 1981-1985 1986-1990 1991-1995 1996-2000 2001-2005 2006-2010

Period Mean Net Aid

Note: Data organised into 5 year period averages

Net Aid/GDP (%), 1970-2010

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Weak Correlation With Revenue

20 40 60 20 40 60 80 100 Revenue/GDP % Net Aid/GDP Fitted values

  • Note. Outliers (from L-R): Tonga (1990), Liberia (2010), Palau (1995), Palau (2000), Kiribati (2000), Kiribati (2010)

Revenue and Net Aid (% of GDP), 1970-2010

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Tax Performance

Aid and Taxation

  • ‘IMF view’ that loans increase tax effort whereas grants

reduce tax effort

  • Others show that results are not robust and can even be

reversed [most likely since 1990s]

  • Major issue is that country characteristics may ‘co-

determine’ high grant share and low tax/GDP ratio

  • Appropriate donor support can improve tax systems and

increase revenues

  • Tax base growth can also be influenced by donor support
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Some References

  • Keen, M. and M. Mansour (2010), Revenue Mobilisation in Sub-

Saharan Africa: Challenges from Globalisation 1 – Trade Reform, Development Policy Review, 28 (5), 553-572

  • IMF (2011), Revenue Mobilization in Developing Countries,

Washington DC: IMF Policy Paper

  • Clist, P. and O. Morrissey (2011), Aid and Tax Revenue: Signs of a

Positive Effect since the 1980s. Journal of International Development 23(2): 165-180

  • Benedek, D., E. Crivelli, S. Gupta and P. Muthoora (2012), Foreign

Aid and Revenue: Still a Crowding Out Effect? Washington DC: IMF Working Paper WP/12/86