More than revenue: Taxation as a Development Tool Vicente Fretes - PowerPoint PPT Presentation

Base version More than revenue: Taxation as a Development Tool Vicente Fretes Cibils June 24, 2013 Brookings Institution Washington, DC

Taxation as a Development Tool Content – Myths • Low tax burden • Regressive taxes • Rampant evasion – Essentials — Some policy reforms 1

Taxation in LAC: Myth vs. Reality Myths? Reality Yes…in personal income tax 1. Low tax burden …but most significant rise in overall tax burden in the world 2

Low tax burden Tax Burden as Percentage of GDP (simple average, 2008-2010) OECD 25 Eastern Europe 24 Latin America and the Caribbean 17 3 Asia 17 Potential given Africa 16 development level — Income tax = 2.4 %GDP Middle East 7 0 5 10 15 20 25 30 3

…but largest increase in burden… Changes in the Tax Burden between 1990 and 2010 (simple average, percentage of GDP) Latin America and the Caribbean Eastern Europe Middle East Africa Asia OECD -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 4

…and in (almost) all taxes (and revenues) Structure of Fiscal Revenue in Latin America and the Caribbean (percentage of GDP) 25 4.3 1.9 20 2.8 4.2 1.1 15 1.6 3.0 0.5 1.7 1.9 0.4 10 2.7 6.3 4.3 5 3.4 1.9 2.0 1.6 0 1990-95 2006-10 Personal income Corporate income VAT Trade Property Excises Social Security Natural resources Other 5

Taxation in LAC: Myth vs. Reality Myths? Reality Yes…in personal income tax 1. Low tax burden …but most significant rise in overall tax burden in the world Maybe…but big losses to avoid VAT 2. Regressive taxes regressivity …and to promote progressivity of personal income taxes 6

Regressive VAT? Measurement matters Incidence of VAT by income and consumption deciles 15 Average effective rate (percentage of consumption) 10 5 Average effective rate (percentage of income) 0 1 2 3 4 5 6 7 8 9 10 Income and consumption deciles 7

Personal income tax: Design on paper Maximum Marginal Rate for Each Income Level, 2010 35 30 Other middle-income countries 25 Rate 20 15 Latin America and the Caribbean 10 5 0 0 1 2 3 4 5 6 7 8 9 10 Income level (number of times per capita income) 8

…and ends up an empty shell Incidence of Personal Income Tax 4 Average effective rate • 3 Poor design 80% of population pays 0% • Generous deductions • Evasion The very rich pay only 4% 2 1 0 1 2 3 4 5 6 7 8 9 10 Income decile Change in income distribution before and after taxes = 0.008 Progressive on paper…with NO real redistributive power 9

Taxation in LAC: Myth vs. Reality Myth? Reality Yes…in personal income tax 1. Low tax burden …but most significant rise in overall tax burden in the world Maybe…but big losses to avoid VAT 2. Regressive taxes regressivity …and promote progressivity of personal income taxes 3. Rampant evasion Yes in income taxes (lower in VAT) It’s easy and risk free to evade 10

Rampant evasion: The killer blow to equality Tax Evasion Rates (percentage) Corporate Income Tax Personal Income Tax VAT 0 10 20 30 40 50 60 11

…with minimum chances of being audited 0.2% In-depth audits 3% Mass audits 12

Taxation in LAC: Myth vs. Reality Myth? Reality Yes…in personal income tax 1. Low tax burden …but most significant rise in overall tax burden in the world Maybe…but big losses to avoid VAT 2. Regressive taxes regressivity …and promote progressivity of personal income taxes 3. Rampant evasion Yes in income taxes (lower in VAT) It’s easy and risk free to evade 13

To collect is essential but not enough — some policy reforms Revenue Equity Efficiency • Personal Income Tax Reduce minimum exempt level    Cap deductions progressively Adopt a dual income tax • Corporate Income Tax   Phase out special regimes ? Reduce tax incentives Decrease rates? • VAT Eliminate exemptions; unify rates   ? Compensate poor households Reduce payroll taxes? 14