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Politicaleconomyoftaxreforms:meetingtheSDGS
EhtishamAhmadG24AddisAbaba,February2017
FiscalobjectivesforSDGs….
• Whatrevenueenvelopeisneededforsustainablegrowth?• Minimizethecostsofdoingbusinessinincreasinglydifficulttradingenvironment,while
• Financingminimumpublicservicesandaddressinginequalities• Butvestedinterests,oftenwithostensiblygoodintentions,preventreforms:regional/provincialandclassesorgroupsofindividuals
• Successstories,amidlotsoffailures:onoffsettinggainersandlosers• Singapore• LessonsfromChina’s1993/4reformsindealingwithregionalinterests• Mexico,2007and2013inaddressing
• Agendaformultilevelfinance—importanceoftax-benefitlinkstoalignincentives
• Challengesforefficientenergy-use,cleancitiesandhealthcare
2
Raisingrevenues,addressingincentivesandmanaginggainersandlosers
3
Overalltaxrevenueenvelopeneeded…
• TheMDGsimplicitrequirementofaround18%tax/GDPratio• SDGs,inadditionincludeacomponentforsustainableinvestment
• Assignificantunmetneedsinallpartsoftheworld,includingG24countries,• Therealsohastobeaccesstoprivatefinancing,inafiscallysustainablemanner,especiallyatthesub-nationallevels
• Avoidgeneratingoraggravatingeconomiccrises,suchasinpost-2007Europe(seeAhmadBordignon andBrosio 2016)
• Multileveltaxhandlesarecritical• Publicinvestmentwithsignificantaccesstocreditatsub-nationallevels,includingborrowingandPPPs,hastobelinkedtoown-sourcerevenuegenerationovertime
• i.e.,overwhichasubnationaljurisdictionhascontrolatthemargin• Poorlydevelopedhandlesinmostemergingmarketeconomies
4
Is18%tax/GDPenough?
5Source:IMF(2013),India2013ArticleIVConsultation,basedonWorldEconomicOutlook
GeneralGovernmentRevenueandGDPperCapita,2012(excludingoilexportersandmicrostates)
Butpoliticallyhardforcountriesstuckat10-12%tax/GDPratiotogetto18-20%...
• Thisisoftenduetosplitrevenuebasesbetweenlevelsofgovernmentduetoacolonialheritage
• CaseoftheGovernmentofIndiaAct1935affectingbothIndiaandPakistan• Veryhardtochangegivengainersandlosersasaresult
• IndiahasimplementedasubnationalVAT,togetto18%tax/GDP,butthesplitbaseaddstothecostofdoingbusiness,andincreasedcomplexityfortaxpayers
• Mexico,startedwithefficientVATin1980s,butgraduallyintroducedexemptions,preferencesandmultiplerates
• Tomeetdistributionalconcernsandalsoto“encourageinvestment”• Infact,openedupincentivesforrentseeking,andtheabilitytotakeadvantageoftheopportunities
• Becamedifficulttoplugtheholes,despiterepeatedattemptsfrom1999-2010• MostinterestingsequencingisthatofChina
• Initialfocusonefficiency,plusemploymentgeneration• Incomedistributionalissuesand“rebalancing”atthesecondstage
6
Inefficienttaxesandrent-seeking:whysomecountriesseemtobestuckinquicksand?
• SimilaritiesbetweenPakistanandMexico(before2013)• Splitbases(goodsandservices)problematic
• Taxbreaksfordistributionalobjectives,orencouragingsectors,generatesrent-seekingbehaviourthatbecomesentrenchedovertime
• Harmscompetitiveness(e.g.,visaviscompetitorcountries)• Insufficientfinancingforbasicservices
• Incompleteinformationonvalueaddedchainleadstoincentivestocheatandinformality,compounding…
• Higheffectivecorporatetaxratesamajordisadvantage• ButfirstsomesuccessstoriesinAsia(SingaporeandChina)
7
AsianexperienceswithfinancingSDGs--education
• Asiahassomeofthebestperformingcountries/regionsintheworld• PISA(OECD,December2016),7Asiancountriesinthetop10globalrankings
• (1)Singapore;(2)Japan;(4)ChinaTaipei;(6)ChinaMacau;(7)VietNam;(8)China_HongKong;(9)China_Beijing-Shanghai-Jiangsu-Guangdong
• China_Shanghai wastopofthepreviousPISArankings• Only2Europeancountriesintop10:(3)Estoniaand(5)Finland;
• Butalsosomelaggards• Pakistan,continuestostrugglewithliteracy,basicservices
• spendingoneducationhasdeclinedoverthepastdecadedespiteavigorousattempttoeliminateoverlappingresponsibilities(18th AmendmenttotheConstitution,2011)
• AdditionalsharegiventoprovincesinDecember2010NationalFinanceCommissionAward
• Largelylinkedtofailureinthedomesticresourcemobilizationagenda
8
Asianexperiences….revenueenvelopes
• ChinaandIndiahavedonewelltoraiseoveralltax/GDPratioforgeneralgovernmenttoaround18%(Chinafrom10%in1992/3)
• Butnotenoughasspendingandinvestmentneedsaregreat,• SplitVATbasecausesdistortionsandaddstocostofdoingbusiness
• ChinacompletedintegrationofVATongoodsandservicesinMay2015• India:ConstitutionalAmendmentforintegrationoftheVATbase
• Pakistanlagging(around10%)provisionsandgaps/exemptionsandsplitbasesinvirtuallyallmajortaxes
• NationalFinanceCommissionAward(December30,2009)expectedtax/GDPratiotogoto15%byDecember2015from9.3%
• Majortaxreformsdidnothappen,insteadVATbasewassplitbetweengoodsandservices (latterassignedtoprovincesrevenues)
• Majorrevenueeffortatprovinciallevel,largelyfocussedontransactionandnuisancetaxesthatdidnotstemrevenuehaemorrhage
• Threenationaltaxamnestiesinthisperiod• Tax/GDPratiostoodat9.5%inDecember2016((NFCreporttoParliament)• Turnedthespendingassignmentsintounfundedmandates
9
Pakistan:IneffectiveTax-benefitlinkages?
• ForIMFSBAin2008,theauthoritiespromisedtorevamptheVATandeliminateloopholes,alongwithenergypricereformstoclosetherevenue-gaps
• ConditionalCashTransfer(CCT)theBenazirIncomeSupportProgram,modelledonMexicanOportunidades tobeintroduced(withWBandbilateralfinancing)
• Tocompensate“losers”andgainpoliticalacceptability• However:
• CCTcorrectlywenttopoorestruralhouseholds,whilemostofthe“losers”werefixedandlowincomepeopleinurbanareas
• CCTwasimplemented,butthetaxreformwasnot• Tax/GDPratioremainsbelow10%,despitenewWBloanof$300mfornewtaxadministrations
• Repeatedamnestieswithoutcrediblesanctionsorimprovedpluggingofholeineffectiveinraisingrevenues
• Createincentivestowaituntilthenextamnesty
10
Singapore—lessthan18%tax/GDPfortopPISArankingPISAleader,withlow,butefficientandeffectivetax/spendingsystem
11
Singapore:taxontaxreformstoencourageinvestmentandtrade
• VATintroducedin1994,asamechanismtoreducetaxesthataddedtothecostofdoingbusiness
• theCorporateIncomeTaxof40%,aswellas• taxesonassetsVATdesign
• UncomplicatedVATinkeepingwithTanzi principle:“keepitsimple”(Quaid-e-Azam Lecture2010)
• Noexemptions• Nocompensation,ideaistocreateinvestmentandfullemployment
• Overtime,CITreducedto17%,whileVATraisedto7%• Relativelylowtax/GDPratio(lessthan15%)
• Butmostefficienttaxadministration,andwell-prioritizedpublicspending(education22%ofthebudget)
12
Costsoftaxadministration
13
China:1993/4reforms:balancinggainersandlosers,whilegeneratingrapidgrowthwithfullemploymentFrom1993/4to2016
14
China:Politicaleconomyofsustainedgrowthwith1993/4reforms
• FiscalresponsibilitysystementailedreducingthetaxonSOEs• Tax/GDPratiodroppedsharplyfrom25%to10%by1992• Andcentralsharefrom50%to25%,aslocalgovernmentsprioritizedtheirownspendingbeforesharingrevenuesupward
• By1992/3centralgovernmentabilitytoconductmacroeconomicpolicy,redistributionorinvestmentseverelycurtailed
• 1993/4reforms:basedoncreatingacentraltaxfunction(SAT)fromscratchandanewtax VAT—tax-transferlinkageimportantingettingprovincialbuyin
• VATongoodstobesharedwithlocalgovernments• Lumpsumguaranteedtransfertoensurenoprovincelost(stop-lossprovision,usedinMexico’s2007reform)
• Revenue-sharefromVATandincometaxesbenefittedrichprovinces• Equalizationsystem,providedaninducementforthepoorprovinces• Revenuereturned:createdspaceforinvestmentforcoastal“hubs”,criticalforsustainedgrowthoverthenexttwodecades
• Effects:• Noindividualcompensation—butmaintenanceoffullemployment• Majorreductioninpoverty(over700m;as150mmigratedtocoastalhubs)
15
China:Thesuccessofthe1993/4reforms
16
0%
10%
20%
30%
40%
50%
60%
0%
5%
10%
15%
20%
25%
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
Centralgov'trevenu
eas(%
oftotalre
venu
e)
Taxrevunu
e(%
ofG
DP)
Localgov'trevenue(%ofGDP) Taxrevenue(%ofGDP) Centralgov'trevenue(%oftotalrevenue)
Source:Ahmad,Rydge andStern,2013,ChinaDevelopmentForum
China:Needforadditionaltaxesforsustainable“rebalancing”
• IntegrationoftheVATongoodsandservices—replacinglocalbusinesstax(onservices)completedinMay2016
• Reducecostofdoingbusiness• Butremoveslasttaxhandleinthehandsoflocalgovernments
• Sub-nationaltaxagendatoaddressproblemsofsuccess:• Increasinginequalities
• Needtoexpandpersonalincometaxbeyondwithholdingonwages;e.g.,piggybackoncentralbase,withlocalinformation(e.g.,fromthirdparties,includingonassets)
• Addressfailureofpropertytax—neededforaccountability• Ownership/valuationmodelnoteasytoimplement
• Climatechange/carbontax—local“piggy-back”withflexibilityforLGswithgreaterpollution/congestiontochargehigherrates,whileavoidingracetothebottom
• Own-sourcerevenuesatlocallevelasbasisforaccesstocredit• Rationalizationoflocalgovernmentborrowingand• Laybasisfornewinternalhubs:
• tosupplementnationalinvestmentsincross-borderconnectivity(OneBeltOneRoad),linkswithSEAsia(Indonesia),CentralandSouthAsia,Europe
17
TheMexicanreformsin2007and2010—partialsuccessandsomelessonsMixedsuccessandpoliticaleconomylessonsfromfailure
18
CreepingerosionoftaxbasesinMexico…
• AsinPakistan,anon-competitivetradingregimeinMexicowasthecauseforpreferencesandexemptionsbothfortheincometaxesandtheVAT
• AndpriortoNAFTA,therewasconsiderableemphasisonthecreationofSEZs(themaquiladorasintheborderzonewiththeUS)
• DesignedtoattractUSinvestmentandprovidecheaplabour• AndfortheUSfirmstomakehigherprofits,andkeepMexicanworkersinMexico• FirmsexemptfromincometaxandVAT
• LowerVATratesintheborderregionsadjacenttothemaquiladora• SubsequenttoNAFTA,Mexicoliftedtraderestrictions,andtheexchangeratewasmarket-determined
• Butthepreferencesremained—veryhardtoremoveoncebestowed• SuccessiveFinanceMinisters(sincethelate1990s)triedtoinitiatereformstofixtheincometax,orotherstofixtheVAT
• Becauseofstrongvestedinterests,noneofthereformattemptsworked• Thenon-oiltax/GDPratiostagnatedataround10%,VATefficiencyof25%,• CloseparallelswithPakistan
19
2007—IETUto“partially”closeloopholesintheCIT
• Carstens,asFinanceMinister,in2007,didnothavethepoliticalsupporttofixtheVAT
• ButtriedtoclosetheholesintheCITusingtheIETU(VAT-likeminimumtax)• AGrossAssetsTax(GAT,popularizedinLatinAmericabytheIMF)wasdistortiveandhadalsonotworked,wasreplacedby:
• AuniqueenterprisebasedminimumVAT-liketax,IETUcreditedtowardstheCIT,thatwaslessdistortivethantheGAT
• TheintroductionoftheIETUwasbasedonprinciplesusedinthe1993/4Chinesereforms
• Rationalizationofthetransfersystem,withgreaterclarityintheuntiedrevenue-sharingarrangements,andalsointhespecialpurposetransfers
• Astop-lossprovisionsothatnostatewouldloseasaresultofthereform
• Butrevenueimpactwassmall,halfpercentofGDP,andbegantoerodeaspoliticalpressurewasapplied
20
Lessonsfromfailedreformattemptin2010
• In2010therewasanattempttofixtheVATbyaddingadditionalamountspaidtorecipientsoftheCCT(Oportunidades),asinPakistan
• CCThadbeenintroduced,successfully,inMexicointhelate1990stophaseoutthegeneralizedtortillasubsidy,andhadcaughttheimaginationoftheIFIs
• AsinPakistan,theVATreformfailed—theCCTdidnotaddressthemainlosersfromtheVATreform
• Atthesametime,thevehicletax,tenencía,wasfullydevolvedtotheStates• Theystoppedcollectingit—ostensiblybecauseofcompetitionacrossstates,butmainlybecause
• StateshadaccesstoMOFtransfersattheendoftheyear,incaseofdeficits• Sotheentiretransfersystemhadbecome“gap-filling”• Andstateshadnoincentivestoraiseown-sourcerevenuesorevenmanagetheirspendingefficiently
• Statesalsorefusedtoavailofapiggy-backonthePITthatwasavailabletothem
• Themainsourceoffinancingforstatesremainedthenomina,orpayrolltax,
• FederalGovernmentcarriedthepoliticalburden,asitalsocoveredsocialbenefitsatthenationallevel
21
Goodintentions,badoutcomes(Levy,2008)
• Universalbenefitsfinancedby“payrolltaxesonformalsector”SantiagoLevy(2008)argued:
• Addtothecostofdoingbusinessleadingtoinformality,but• Notallinformalityisbadorillegal(Kanbur andKeen),e.g.,inruralareas
• “Informality”asevadingthepaymentortaxesorsocialcontributions• Appliestofirmsofallsizes,astheyhideoutput(inputs),employment,andprofits;andworkershidewagesbyacceptingshort-termcontractsandavoidpayingcontributions
• leadstolessefficientuseofresources,andlowergrowthpotential
• Levy’sRecommendation:reducehighsocialcontributionsandshifttoVATthatdoesnotaddtothecostofdoingbusiness
• SameissuearisesinS.Europe,postcrisis,whereexchangerateadjustmentsarenotpossible—shiftfromhighsocialcontributiontoVATis“fiscaldevaluation”
• Butnotpossibletorelyon“Swisscheese”VATorCITinMexico
22
Incentivestocheat,plusabilitytogetawaywithit
• SplitbasesforVATandIncometaxes• REPECOS (smalltaxpayersregime(below~US$250kadministeredbystates)providedaconvenientshelterfromSATaudit
• Noincentiveforstatestochasetaxpayers,giventransferdesign(yearendgap-fillingexercise);
• Evidence:bunchingatlowerend—minimumrequiredtokeepSATatbay• 90%+evasion(SATassessment)
• convenientmechanismevenforlargerfirmsto“hide”production• MadeworsebyMaquiladoras(Specialeconomiczones);andlowerborderrates
• Progressivedeductionsandexemptionscontinuetonibbleawayatthe“Swisscheese”oftaxbase:1. Temptationeffect(generatesincentivestocheat)2. Informationgaps(limitspossibilitiesofoffsettingcheating?)
23
Mechanismstocheat…
24
SpecialEconomicZonesaddtocheating---Maquiladorasink-hole
• Firmsshiftedincometaxliabilitytomaquiladorasubsidiary• Carouselfraud• Importfraud
• VATfreegoodssmuggledintoMexicocreatingproblemsfordomesticmanufacturers
• Onlylostrevenuesandcreatedistortions
25
SEZ’s(Maquiladoras)playaroleinthis
26
The2013“package”ofreforms:meanttoaffectstructuralchange,notrevenues
• Taxpolicy,allthemaintaxesthatwereimpossibletotouchpreviously• EliminatedthespecialprovisionsintheVAT• RationalizedtheCIT• Minimumassettax(IETU)abolished• Carbontax,aboveapetroleumpricesetatworldprices• Exciseson“bads”
• Administration:Blockedtheabilitytocheatbyintegrationthesmalltaxpayerregime(RIF)
• Simplecash-basedaccountingpackagesissuedbySATtotaxpayers• Mustissueelectronicinvoices• Reversesthesegmentationofthetaxbase,allfirmssubjecttoSATaudit
• Compensationaspartof“packge”:• Relianceonlyonbasic(social)pension(65ymas)forthosewithoutoccupationalpension
• CCT:Oportunidad notused,replacedin2014byProspera,aprogramtoencouragesmallbusinessesandencourageemployment
27
Initialprojectionsoftheexpectedrevenues(2014)
28Source: SHCP
Excisesandcarbontax:initialbenefitsduring2014(0.3%ofGDP)
29
Butthereformsquicklybegantoraiserevenues…
• Additionalrevenuespushednon-oiltax/GDPratiotoaround14%in2015(+3.5%ofGDPabove2012level)
• AlthoughVATrevenueincreasewassmallinitially(+0.5%ofGDPtoatotalVATof4%ofGDPin2014)
• MainimpactwasontheIncomeTax:+1.7%ofGDPin2015relativeto2012
• Carbontax:+1.4%ofGDP,• althoughpoliticalpressuretofurtherincreasescouldbediffusedby
• adoptingthepiggy-backapproach,togetherwith• anequalizationframework
30
Actualrevenueperformancefarexceedsprojections…
31IMF, December 2016, Mexico Article IV staff report
TurningthewholeofMexicointoaFreeTradeZone….althoughFordcancelledtheCruzeplantinJanuary2017underUSpressure....
32
Creationofnewclean“hubs”forsustainabledevelopment
• PublicinvestmentbyFederalGovernment:newCapitalairportatQuerétaro
• Smalluniversitytown,attractiveenvironment• AttractedAerospace($1.5bn)andBMW($1.3bn)• Goodlocalinfrastructure
• ThenationaltaxreformsleaveMexicomuchbetterpreparedtotakeonthechallengesininternationaltradethatitisfacing
• Butadditionalurbanhubsrequirestateandlocalinvestmentinservicesandsmallerinvestmentstolinktonationalgrids
• Stateandlocalincentivesremainaproblem
33
Sub-nationaltaxagendaMorethanrevenues—accountability,incentivesanddistributionaleffects
34
Sub-nationalissues
• Own-sourcerevenuesatsubnationallevelmaybesmallrelativetonation-widetaxinstruments
• But:affectincentivesandaccountability• Attheprovincial/statelevel:butoftenfocuson“maximizingshareofnationalpie”
• Municipallevel—evenmorerelevantforservicedelivery,investmentandSDGs
• Sharedrevenues(oftenonasymmetricbasis,e.g.,Acheh inIndonesia)
• Importantforpoliticaleconomyperspective,but• donotrepresent“own-source”revenues
• Taxadministrationdoesnothavetobesub-national—setting“ratesatmargin”does
35
36
Note: enforcement would include both (1) the maintenance of a common data base on transactions and assets, using tax and third party information, and (2) audit.
Revenue-sharingisnotsubnationalown-sourcerevenue
• Veryhardtoagreeon“sharingproportions”• Politicaleconomyconsiderationsoftenleadtoasymmetricsolutions,includinginIndonesia
• TheasymmetricsolutionsinSpainhaveintensifiedinequalityandseparatisttendencies(e.g..,forCatalunya),ratherthanreducingthem
• Exclusiverelianceonrevenue-sharing, thus• Enhancesfightoverresources• Asymmetricsolutionsmaybeneeded(e.g.,Indonesia),butopensuppressureselsewhereasthepoorerregionsfallbehind
• Enhanceslocalresistancetochange:shiftingoutofpetroleum/coal(thelatterisimportantinChina)
37
Own-sourcerevenuesandtransferdesign
• Oftenlocalrevenuebasesareunevenlydistributed,andown-sourcerevenuescanenhanceinequalities
• Needtobecomplementedbyequalizationtransferstocreatelevelplayingfieldand
• Permitlocalgovernmentstoprovidesimilarlevelsofserviceatsimilarlevelsoftaxeffort
• But,badlydesignedequalizationistantamountto“gapfilling”fordeficits:
• completelynegatesincentivestouseown-sourcerevenues
38
• Standardizedfactorsforequalization(asinAustraliaandoriginallyinIndonesia)areconsistentwithhard-budgetconstraintsandefficientuseofresources
• Unfortunately,veryfewcountriesusestandardizedfactors—noneinLatinAmerica
• Dilemmathatnaturalresourcesharingishardtoequalize:
• if“favored”regionleftoutofequalization,intensifiestheresultinginequalities, andpossiblyincreasespressurestosecede(AhmadandBrosio,2016,LisbonLawSchool)
• Ifincludedinthe“equalization”withtheuseofactualrevenuesanddeficits(tooffsettherevenue-sharinginequality)convertstheequalizationtransferintodistortive‘gapfilling"
• Negativeconsequencesforincentivesforallsub-nationalentities
39
Howto“equalize”canbetricky
Piggy-backonPersonalIncomeTaxes
• Muchoftheprogressivitycomesfromtheexemptionlimit,(AhmadandStern,1991)and
• thewelfaresystemsneedstobeintegratedtoavoida“povertytrap”
• But,withsplitbases,PITlargelyappliedtoformalsectorwages—becomesanadditionalburdenwiththepayrolltax
• inequalityenhancingmeasure,ifnon-wageincomeslargelyexcluded• Couldgeneratefurtherinformalityandbaseerosion
• But,informationonassets(e.g.,propertyregisters,cars)fromsub-nationaladministrationscouldbeusedtoverifynonwageincomeflows
40
Carbontax—withaprovincial/municipalpiggyback
• Nationalcarbontaxwithalocalpiggy-back (AhmadandStern,2012)• topermitahighermarginalrateinmorepolluted/congestedarea,but• withanationalminimumtopreventaracetothebottom
• Issueofgainersandlosersbecomesimportant• Howtocompensateisanempiricalissue—mostofthepeopleaffectedarelikelytobeurbanmiddleandupperincomegroups
• Fixedandlowerincomeurbanworkers• Canthecreationofjobsbesufficient?
• Also“gap-filling”transfers,oruseof“actual”factorsinequalizingsystems,islikelytooverridetheincentivestouselocaltaxhandles,evenifoneexisted
41
Containinghealthexpendituresthroughlocaltaxation
• Manyofthekeybasicfunctionsareatthelocallevel,includinginteralia
• Sanitation• Publichealthandeducation,includingnutritionaladvice-–thismayhavetobesupplementedbyspecificexcises,whichcouldbeatcentralorlocallevels
• Motherandinfant/childclinicsforpreventivecare,nutritionandvaccinations
• Giventheimportanceofthepreventivefunctions,itisofteninnationalinterest,and“Specialpurposetransfers”maybeinuse
• Butwithimperfectinformationonspendingandbudgets,• nocertaintythatthefundswillbeusedeffectivelyandnotdiverted(aswithOportunidades insomeMexicanstates)
• Keyroleofown-sourcelocaltaxestoalignincentives
42
Propertytaxestoanchorlocalaccesstocredit,newcleancitiesand“hubs”
• Typicalfailureswithpropertytaxesinemergingmarketcountries,LatinAmericaincludingMexico,manyAsiancountries
• US-typemodelbasedonownershipandvaluationhardtoimplement—abandonedintheUK
• Selfassessmentoption:Bogotá,maybesubjecttoabuse• Presumptiveapproach,didnotworkinDelhiorPune,andisprovingproblematicinBangalore
• Linkagewithservicedelivery(Marshallianprinciples)Ahmad,Brosio,Pöschl (2015)and(2017onMexico)toovercomeresistance
• Focusesalsoonservicedelivery,enhancesaccountability• Maximumandminimum“bands”legislatedinunitarycountries,• Localratesettingforaccountabilitybutavoidracetothebottom
• Scopeforelectronicpropertyregistersandsatelliteimagery(arms’lengthadministrationtoreducescopeforcorruption)
43
Generallessonsforemergingmarketeconomies
44
Politicaleconomyandinstitutionscritical
• Non-standardrecommendationsmaybeneededinthepresenceofinformality
• Lowereffectivethresholdmaybeneeded,byintegratingsmalltaxpayers,whilekeepingfocusonthelargest
• Fullvalue-addedchainessentialtogenerateinformation,stopcheatingandbaseshifting
• Chineseapproachtoadministration:matchallinvoices(GoldenTaxProject)toblockcheatingandalsofacilitateefficientandaccurateVATrefundsforexporters
• Reducedcostofbusiness,enhancedcompetitiveposition• Politicaleconomyofoffsettingoppositiontoeachmaintaxbyputtingthemtogether,minimumcompensationneeded
• Butsignificantworkonsub-nationaltaxesandtransfersremainsinmanyEmergingMarketEconomies
45
Keylessons
1. Raiserevenuesefficientlyforsustainablegrowthandjobcreation
• Taxesthatdonotaddtothecostofdoingbusiness• Basisforaddressinginequalitiesandfinancingcleancitiesorsustainable“hubs”
2. Appropriatelydesignmultileveltaxandsocialpoliciesthatgeneratesustainablegrowth
• Avoiddistortingbenefitsthatcreatea“povertytrap”• Addresstheissuesofgainersandlosersinasustainablemanner
3. Attentiontoinstitutionsandincentivestocheatateachlevelofadministration
46