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Tax, growth and
development
Richard Parry
Head, Global Relations Division,
Centre for Tax Policy and
Administration
OECD
Session 8
Mobilizing Tax Revenues: Key Questions
• How to raise sufficient tax revenues to finance
development?
• How to raise revenues in the most efficient (and
stable) way possible?
• How to raise revenues in an equitable way?
• How to raise revenues in a way that reduces
administrative costs, enforcement costs and
compliance costs?
• How to raise revenues in a transparent and
reliable way?
• How to raise revenues and overcome the political
economy obstacles?
Rates and the tax Base
• Increasing rates might raise revenues, but not Rates
necessarily
• Broad base – low rate for direct taxes
• Broad base – low rate VAT system + excise duties on
specific goods as luxury goods, environmentally bad
goods, alcohol, cigarettes
– Move away from specific indirect taxes to broad
VAT base
– Is this regressive?
– Low VAT rates will reduce tax evasion
– Redistribution should not be done by each tax but
by considering the entire tax and benefit system
Tax and Growth
• This section reports the main results of a
tax and growth study for OECD countries
• The results might not always reflect
conditions in African countries but some
lessons
• Results depend on the starting-point!
Main Empirical Questions in the OECD
Tax and Economic Growth Project
• Does the tax structure, as opposed to the
level of taxes, matter for GDP per capita
and its rate of growth?
• To what extent do different tax provisions
affect investment, productivity (TFP) and
growth?
• Does the industry/firm structure matter
for the impact of taxes?
5
Labour utilisation
- Employment
- Hours worked
GDP
per
capital Labour productivity
- physical capital
- human capital
- Efficiency in the use
of inputs (TFP)
Taxes
- consumption
- property
- personal income
- corporate income
Broad Tax Structure
• Macro findings suggest a “ranking” of taxes in
terms of their negative impact on GDP per
capita:
recurrent taxes on immovable property <
consumption taxes < personal income taxes
< corporate income taxes
• Broad tax bases and low rates
• Tax progressivity seems to reduce GDP per capita
7
Corporate Taxes I
• Cutting corporate taxes positively affects investment
and productivity growth, especially for larger and
older firms but not for firms that are both small and
young.
• Lowering the corporate tax rate will increase the
productivity of firms especially in profitable
industries.
• Especially dynamic and innovative firms gain from a
corporate tax rate reduction.
8
Corporate Taxes II
• Also the average effective corporate tax rate has
a negative impact on the firm’s productivity.
• It is possible that product market regulations
and large administrative burdens on firms can
make investment decisions less responsive to
taxes.
• Need to be careful about lowering the corporate
rate much below the top personal income tax
rate.
R&D Tax Credits
• Tax and growth study: R&D tax credits
increase productivity and therefore
stimulate growth but their impact is
relatively modest.
• Are R&D tax credits better for growth than a
standard CIT rate reduction?
• Is innovation better supported by targeted
spending programmes?
Personal Income Taxes
• A reduction in labour taxes can have both a
substitution effect and an income effect on
participation and hours worked
• High top personal income tax rates have a negative
impact not only on labour utilisation but also on
labour productivity reducing risk taking by individuals
• Countries with a large share of industries with high
rates of enterprise creation (or wishing to move in this
direction) may gain from reforming their top marginal
tax schedule. However, this could increase inequality.
PIT and Total
Factor Productivity
• The negative impact of top marginal tax rates on
TFP is stronger in countries with a high level of the
OECD indicator of product market regulation
• The PMR indicator includes, among other things,
measures of the administrative burden on firms
and regulatory barriers for start-ups.
• Progress made by African countries
Summary of key findings
• Recurrent taxes on immovable property are the least
distortionary form of property tax, but they are very
unpopular
• Broadening the base of consumption taxes is better for
growth than increasing the rate
• There is limited scope to improve growth by using
multiple consumption tax rates, and their equity
effects are best achieved by other means
Broadening the Tax Base
and the Informal Sector
• What role does the informal sector play?
• What inhibits the development of the formal sector?
– Excessive regulatory system, inefficiency and corruption
– Bureaucracy
– Presence of entry costs into the formal economy
– Macroeconomic instability
– Poor public services
• What can be done to encourage greater
participation in the formal sector?
Tax Administration
• Good tax policy depends on good tax administration
• Some key reform elements
– Integrated tax administrations
– Segment and function not tax
– Risk management
– Integrated communications and information
exchange
– Staff retention and skilling
• International aspects
– Integration of international aspects
– Tax compliance and good corporate governance
Tax and Inequality
• Process of growth inevitably tends to create greater
inequality in developing countries which are
industrialising
• Growth is uneven at sector, regional and household
level
• Implication is that growth and inequality not
undesirable per se given result is reduction in overall
(absolute) poverty but……..
• Need to ensure that some of the benefits of growth are
redistributed to those not directly benefitting
• Implication is that tax system should be progressive
overall
16
Achieving Successful Tax Reform
• Tax reform design and evaluation strategies
• Reform and timing
• Institutional tax reform implementation
strategies
• Political economy aspects
• Comprehensive versus incremental
approaches
• Communication and consultation strategies
Tax and development project
• DRM about resource for development,
also about state building
• Multi-stakeholder Task Force –
engagement of donors in strengthening
African tax systems
• Focus on capacity building and
transparency in international tax areas
• Support for G20 work on tax and
development
To Sum Up
• DRM not just a tax issue but tax can affect growth
• Key factor is broad based low rate regime, as well as a
well functioning tax administration and a balance of
taxes
• In terms of the mix of taxes – pro-growth elements are
focus on recurrent property, or consumption taxes
• Importance of extending the formal sector
• Inequality often exacerbated by growth. But growth
provides the means to deal with inequality.
• Need for more analysis in African context
Thanks for your attention
[email protected]
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