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25th Regional Seminar on Fiscal Policy
ECLAC, United Nations
The Renewal of the Fiscal Covenant: Public Revenues for
Development
Daniel Alvarez Estrada
Public Sector Unit – PREM LAC,
The World Bank
Santiago, Chile, 5-6 March, 2013
Taxation and Development
Evolution of World Bank’s role
In the 70s:
• Comprehensive income tax / Optimal taxation dominated the
approach on tax policy advise.
• Later on, VAT largely replaced excises and taxes on trade as trade
became more liberalized.
• Bank’s advise concentrated on tax measures in specific sectors of
the economy.
• Overall focus on increase of taxation levels and tax measures
prescribed on ad hoc basis
• Few prescriptions for strengthening tax administration to support
reformed structure.
2
Taxation and Development
Evolution of World Bank’s role
In the 80s:
• Bank began to discuss general taxes with governments, often
relying on recommendations from donor partners (IMF, IADB) and
academic institutions (HIID, USAID)
• The strategy for generating revenues was to increase rates on
existing taxes, with little attention to the structure of the tax system
• At request of member countries, the Bank produced own reports
on policy advise , including findings as components of adjustment
lending.
• Advise on tax reform determined in the context of a broader macro
framework in consultation with the IMF (for example, indexation of
the income tax structure).
3
Taxation and Development
Evolution of World Bank’s role
In the 90s:
• Dialogue with and advise to countries gradually expanded in scope.
• Revenue enhancement was a major objective, but more balanced
advise with the objectives of efficiency, and equity better
integrated. (Coordination of trade tariff reform with domestic tax
reform).
• Advise reflects prevailing best practices (WC), using BBLR approach
(VAT reform component on lending operations), and a flatter and
more uniform income tax structure ………but with some
ambivalence toward some areas of advise (use of tax incentives).
• Growing understanding of the role of tax administration reform
(recommended in many structural and sectorial adjustment loans),
but projects were leaded mainly by automatization efforts.
4
Taxation and Development
Evolution of World Bank’s role
In the 2000s:
• Policy dialogue on revenue enhancement was the main entry point,
but the adaption of tax systems to a free market economy (ECA
Region), and the transparency and efficiency agenda was
increasingly considered.
• More emphasis on tax administration reform through investment
lending operations (5- 7 year projects). SARAs and LTUs.
• Major improvement on results due to a better design of investment
/ technical assistance loans, with greater emphasis on voluntary
compliance, simplification, and service delivery.
• Selected tax policy reform components included in development
policy loans.
5
Taxation and Development
Evolution of World Bank’s role
•Capital flows not enough, turn to macro policies.
Optimal Taxation. Introduction of VAT
•Macro not enough, turn to a more comprehensive
package including fiscal discipline. Emergence of the
Washington Consensus.
Broadening of the tax base. Indexation.
1970s
1980s
1990s
2000s
2005+
2010+
•Policies not enough, turn to "institutions" within "New
Growth Theory"
Revenue Administration Reform (IT-lead).
Standard BBLT policy advise
•Begin to add "political incentives to pursue development"
into the mix. Demise of the original Washington
Consensus.
Comprehensive revenue administration
reform. (LTUs, SARAs)
•Recognition that there are multiple paths. Overall,
argument for moving away from formulaic policy making
to focus on the binding constraint(s).
Best fit vs. best practice. Piece meal
approach to reform. Service delivery
(Doing Business)
•Social mobilization is associated with changed political
incentives that constrain growth.
Transparency and Accountability of fiscal
institutions.
6
The way forward…….
Revenue enhancement / service delivery
PSM approach to tax reform
The Public Sector
Upstream
Institutional
Arrangements
Formalizing
behavior
Upstream
Functioning of
the Center of
Government
Downstream
Institutional
Arrangements
Formalizing
behavior
Downstream
Functioning of
Sector
Agencies
Fiscal and Institutional
Sustainability
Sector
Outputs
Objective
and Subjective
Development
Outcomes
Parallel to stabilization policy
objectives (upstream), tax
systems appear instrumental to
strengthen the relationship
between the state and citizens /
taxpayers through the provision
of better services
(downstream).
Fiscal contract supported on
positive taxation/ service –
delivery feed-back loops has
the potential to further improve
governance and shape
accountability in many ways.
Source: Public Sector Management (PSM) approach, World Bank (2011)
7
The way forward…….
Comprehensive approach to tax reform
Level of Analysis
Core Measurement
Strategic Focus
Whole economy
(Potential to raise
revenue)
Revenue Effort vs. Capacity
Potentiality to mobilize
revenue (given
economic and
institutional
arrangements)
Whole economy
(Tax Policy &
Administration)
Tax Ratio (TTR as % of GDP)
Effectiveness of tax
system (Design of
bases, rate structure,
and administrative
effort)
Tax Administration
(Outcome)
Compliance Measurement
(Tax Gap)
Taxpayer compliance
behavior
Tax Administration
(Outputs)
Activities indicators
(Outputs/Inputs)
Efficiency measures of
core activities
8
The way forward…….
Focus on Compliance and Risk on Tax Adm reform
Tax Gap approach to TA performance
Registration
Filing and
Reporting
Payment
Overal Tax Gap
(by type of tax, during
a given period)
Tax Gap 1
Tax Gap 2
Tax Gap 3
Non-compliance
Tax Gap by type of non- compliance behavior:
Lack of
registration,
Wrong activity
classification, etc.
Late filing, under
reporting of
income, over
reporting of
deductions, etc.
No payment, late
payment,
unlawful tax
credits, etc.
Tax potential
Tax potential
Tax Gap
(1+2+3)
The way forward…….
Renewed interest on taxation and equity (2/2)
Marginal tax rate by multiples of average household income. OECD unweighted
average, excluding Chile and Mexico. Source: OECD (2010).
11
Taxation and Development
For a better design of World Bank interventions…..
Stick to fundamental
policy objectives, but
within a flexible and
country specific
context.
Best fit vs best practice
Orientation to results
(PforR)
Accountability,
transparency, and
service delivery
Deeper look into
political economy and
behavioral change
Wider consultation with
civil society
Sensible and realistic
road map to
fundamental tax reform
Comprehensive view to
the entire tax system
(policy/administration;
national/subnational)
Institutional capacity of
tax policy analysis
13