The tax system and redistribution Need to consider the system - - PowerPoint PPT Presentation

The tax system and redistribution

Need to consider the system holistically

• In achieving the overall objectives of the tax system, it

is important to consider all taxes (and transfer payments) together as a system; and at the same time being clear about the role of each tax within the system.

CEQ Methodology

• Comprehensive framework to analyze the effect of taxation

and public spending on inequality and poverty

• Method: Fiscal Incidence analysis and qualitative

diagnostic approach

• Application of a common methodology across countries

makes cross‐country comparisons more accurate

• Methodology is designed to be as comprehensive as

possible without sacrificing detail in any particular component of the analysis

Allocation Methods

Direct Identification in microdata If direct identification not possible then:

• (micro) Simulation: with tax shifting and transfer take-up

assumptions

• Imputation
• Inference
• Alternate Survey
• Secondary Sources

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Tax Shifting and Tax Evasion Assumptions

• Burden of direct personal income taxes is borne by the

recipient of income

• Burden of payroll and social security taxes falls entirely
• n workers
• Consumption taxes are assumed to be shifted forward to

consumers

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Source: Lustig and Higgins (2013).

Taxes considered in the SA CEQ study

• Personal income tax
• Payroll taxes
• VAT
• Excise duties on alcohol and tobacco
• Fuel levy

Direct taxes are absolutely progressive.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Cumulative Proportion of market income/tax Cumulative Proportion of the Population

South Africa Concentration Curves of Direct Taxes (share paid by market income deciles)

Direct taxes Market Inc 45 Degree Line

…but less so than in other countries...

Sources: Armenia (Younger et al, 2014), Bolivia (Paz et al, 2014), Brazil (Higgins and Pereira, 2014), Ethiopia (Hill et al, 2014), Indonesia (Jellema et al 2014), Mexico (Scott, 2014), Peru (Jaramillo, 2014), Uruguay (Bucheli et al, 2014), and own estimates for South Africa based on IES 2010/11.

0.13 0.23 0.25 0.27 0.28 0.30 0.43 0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50 South Africa (2010) Armenia (2011) Uruguay (2009) Brazil (2009) Ethiopia (2011) Mexico (2010) Peru (2009)

Progressivity of South Africa’s Direct Tax System: The Kakwani Coefficient

In contrast, indirect taxes are slightly regressive on account of excise taxes

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Cumulative proportion of disposable income/tax Cumulative proportion of the population

South Africa Concentration Curves of Indirect Taxes (share paid by disposable income deciles)

Disposable Income VAT Excise Tax Fuel Levy 45 Degree Line

Overall, the tax system is globally progressive

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 Cumulative Proportion of Tax Cumulative Proportion of the Population

South Africa. Concentration Curves of All Taxes, 2010 (share of market income)

Market Inc 45 Degree Line All taxes

Direct cash transfers are absolutely progressive…

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1 2 3 4 5 6 7 8 9 10

Cumulative Proportion of Income/Spending

Cumulative proportion of the population by market income deciles

Direct Cash Transfers by Category Concentration Curves for Transfers and Lorenz Curve for Market Income

Lorenz for Market Income Direct Transfers Old -age pension Child support grant Disability grant Population Shares

Sources: Own estimates for South Africa based on IES 2010/11.

What is the net impact of taxes and government transfers on inequality and poverty?

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Gini falls substantially with Government interventions…

0.771 0.75 0.694 0.695 0.596

0.25 0.35 0.45 0.55 0.65 0.75 0.85 Market Income Net Market Income Disposable Income Post-Fiscal Income Final Income

• direct

taxes + transfers & FBS

• VAT, Fuel,

excise + Educ, +Health

…more so than in other middle-income countries…

Source: Armenia (Younger et al, 2014); Bolivia (Paz et al, 2014); Brazil (Higgins and Pereira, 2014); Ethiopia (Woldehanna et al, 2014); Indonesia (Jellema et al 2014); Mexico (Scott, 2014); Peru (Jaramillo, 2014); Uruguay (Bucheli et al, 2014); Lustig(2014) based on Costa Rica (Sauma et al, 2014), El Salvador (Beneke de Sanfeliu et al, 2014), and Guatemala (Cabrera et al, 2014); and own estimates for South Africa based on IES 2010/11.

• 0.20
• 0.18
• 0.16
• 0.14
• 0.12
• 0.10
• 0.08
• 0.06
• 0.04
• 0.02

0.00

Change in Gini: Disposable vs Market Income (in Gini points)

…but inequality is still higher after fiscal policy than inequality prior to fiscal policy in other countries

0.579 0.771 0.694 0.596 0.25 0.35 0.45 0.55 0.65 0.75

Market Income Net Market Income Disposable Income Post-Fiscal Income Final Income

Gini Coefficient for Each Income Concept

Armenia (2011) Brazil (2009) Indonesia (2012) Jordan (2010) Mexico (2010) Peru (2009) South Africa (2010) Sri Lanka (2009) Uruguay (2009)

0.439 39

• direct

taxes

+ transfers & FBS

• VAT,
• Fuel
• Excise

+ Educ, +Health

Poverty also declines substantially…

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+ direct transfers

• Indirect

taxes + indirect subsidies

• direct

taxes

40.8% 41.0% 23.4% 29.0% 46.5% 46.7% 34.2% 39.6% 32.2% 52.3% 52.5% 45.1% 50.1% 0% 10% 20% 30% 40% 50% 60% Market Income Net Market Income Disposable Income Post-fiscal Income

National food poverty line1 National lower bound poverty line 2 Official consumption based (lower bound) National upper bound poverty line3

With the effect on poverty larger than other middle income countries.

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+ direct transfers

• Indirect

taxes + indirect subsidies

• direct

taxes

46.2 46.2 46.4 46.4 33.4 33.4 39 39 10 20 30 40 50 60 70 Market Income Net Market Income Disposable Income Post-Fiscal Income Percent nt

Povert rty y Headcoun

• unt at $2.50

0 per day (PPP)

Armenia Bolivia Brazil Indonesia Jordan Mexico Peru South Africa Sri Lanka Uruguay

Concluding remarks

• Progressivity in the overall tax system is an important

consideration and we recognise the need to enhance this.

• If increased revenue becomes important, trade-offs

associated with the choice of tax mix should be carefully considered in terms of their impact on inclusive growth.

• The tax system cannot be used to offset pathologies in
• ther parts of the system (e.g. in respect of property rights
• r labour market challenges).