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 5

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 on workers • Consumption taxes are assumed to be shifted forward to consumers 6 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. South Africa Concentration Curves of Direct Taxes (share paid by market income deciles) 100% 90% Direct taxes Cumulative Proportion of market income/tax 80% Market Inc 70% 60% 45 Degree Line 50% 40% 30% 20% 10% 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Cumulative Proportion of the Population

…but less so than in other countries... Progressivity of South Africa’s Direct Tax System: The Kakwani Coefficient Peru (2009) 0.43 Mexico (2010) 0.30 Ethiopia (2011) 0.28 Brazil (2009) 0.27 Uruguay (2009) 0.25 Armenia (2011) 0.23 South Africa (2010) 0.13 0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50 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.

In contrast, indirect taxes are slightly regressive on account of excise taxes South Africa Concentration Curves of Indirect Taxes (share paid by disposable income deciles) 100% Cumulative proportion of disposable income/tax 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 0 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Cumulative proportion of the population Disposable Income VAT Excise Tax Fuel Levy 45 Degree Line

Overall, the tax system is globally progressive South Africa. Concentration Curves of All Taxes, 2010 (share of market income) 1.0 0.9 Market Inc 45 Degree Line 0.8 Cumulative Proportion of Tax 0.7 All taxes 0.6 0.5 0.4 0.3 0.2 0.1 0.0 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 the Population

Direct cash transfers are absolutely progressive… Direct Cash Transfers by Category Concentration Curves for Transfers and Lorenz Curve for Market Income 100% Cumulative Proportion of Income/Spending 90% Lorenz for Market Income Direct Transfers 80% Old -age pension Child support grant 70% Disability grant 60% Population Shares 50% 40% 30% 20% 10% 0% 0 1 2 3 4 5 6 7 8 9 10 Cumulative proportion of the population by market income deciles 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? 13

Gini falls substantially with Government interventions… 0.85 0.771 0.75 0.75 0.694 0.695 0.65 0.596 0.55 0.45 0.35 0.25 Market Income Net Market Income Disposable Income Post-Fiscal Income Final Income - direct + transfers & - VAT, Fuel, + Educ, taxes FBS excise +Health

…more so than in other middle -income countries… Change in Gini: Disposable vs Market Income (in Gini points) 0.00 -0.02 -0.04 -0.06 -0.08 -0.10 -0.12 -0.14 -0.16 -0.18 -0.20 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.

…but inequality is still higher after fiscal policy than inequality prior to fiscal policy in other countries Gini Coefficient for Each Income Concept Armenia (2011) 0.771 0.75 Brazil (2009) 0.694 Indonesia (2012) 0.65 0.596 0.579 Jordan (2010) 0.55 Mexico (2010) Peru (2009) 0.45 0.439 39 South Africa (2010) 0.35 Sri Lanka (2009) Uruguay (2009) 0.25 Market Income Net Market Income Disposable Income Post-Fiscal Income Final Income - direct - VAT, + Educ, taxes - Fuel + transfers +Health & FBS - Excise

Poverty also declines substantially… 60% 52.5% 52.3% 50.1% 50% 46.7% 46.5% 45.1% 41.0% 40.8% 39.6% 40% 34.2% 32.2% 29.0% 30% 23.4% National food poverty line1 20% National lower bound poverty line 2 10% Official consumption based (lower bound) National upper bound poverty line3 0% Market Income Net Market Income Disposable Income Post-fiscal Income - Indirect + direct taxes - direct transfers + indirect taxes subsidies 17

With the effect on poverty larger than other middle income countries. Povert rty y Headcoun ount at $2.50 0 per day (PPP) 70 60 Armenia 50 46.2 46.2 Bolivia 46.4 46.4 Brazil 40 Indonesia 39 39 Percent nt Jordan Mexico 33.4 33.4 30 Peru South Africa 20 Sri Lanka Uruguay 10 0 Market Income Net Market Income Disposable Income Post-Fiscal Income - Indirect + direct taxes - direct transfers + indirect taxes 18 subsidies

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 other parts of the system (e.g. in respect of property rights or labour market challenges).