Mit,tlc East North Africa - World Bank...134.5 Mit,tlc East North Africa No. 11 -- April 1994 Tax Incidence On Agriculture In Morocco (1985-1989)by Jean-Paul Azam CERDI, University

134.5

Mit,tlc East

North Africa

No. 11 -- April 1994

Tax Incidence On AgricultureIn Morocco (1985-1989)

by

Jean-Paul Azam

CERDI, University of Auvergne, Clermont-Ferrand (France),et CSAE, Oxford (U.K.)

Discussion i Document

Paper de

Series ,- Travail

Discussion papers are not formal publications of the World Bank. They present preliminary and often unpolishedresults of country analysis and research. Circulation is intended to encourage discussion and commnor citationand the use of the paper should take account of its provisional character. The findings and conclusions of thepaper are entirety those of the author(s) and should not be attributed to the World Bank, its affiited

_oranzations, or to members of its Board of Executive Directors or the countries they represent.

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TAx RINCIDENCE ON AG:RICULTUREIN MOROCCO (1985-189

by

Jean-Paul Azam

CERDI, University of Auvergne, Clermont-Ferrand (France),et CSAE, Oxford (U.AJ.

April, 1994

I

Table of Contents

Summary ......... i

Introduction. ....... 1

I: Measuring the Tax Incidence on Agriculture: the Method . . . 41. 1: Theoretical Foundations of the Input-Output Analysis . . . 5

(a) From the Cost Functions to the Input-Output Table. 6(b) Forward Shifting .. 7

1.2: Incidence Analysis with Variable Returns to Scale and ImperfectCompetition. 9(a) Variable Returns to Scale. 9(b) Imperfect Competition .............................

1.3: Can Agriculture Shift the Tax Forward? ......... . . . .. . . . . .. . 12

LI: Implementation ssues .............................. ... 131I.1: The Decomposition Method ........... . . .............. . 14

(a) The Role of Locally Produced Inputs ................................:.14(b) Comparison with Effective Protection Analysis .... ........ 15

11.2: Practical Issues for Application to Morocco ..... .......... . . . . 16(a) The Inputs Analysed .......... .. . .. .. . .. .. . .. . . . 16(b) The Levies and Subsidies Taken into Account .... ......... 17

m: Measuring the Tax Incidence on Agriculture:'Application to Morocco (1985 aad 1989) .. .1.9..................... .'19HI. 1: The Tax Incidence by Products ......... . . . ............. . 19

(a) Incidence on the Sector as a Whole ....... . . . . . . . . . . . . 20(b) Disaggregation by Products ........ . . . . . .. . . . . . . . . . 22

III.2: The Taxes Shifted by Inputs ........... . . .............. . 25(a) Decomposition of Intermediate Inputs ....... . . . . . . . . . . . 25(b) Decomposition of Investment Expenditures ............... 28

Conclusion ............................................... 30

References .... ............................ .............. . 33

I

TAX INCIDENCE ON AGRICULTUREIN MOROCCO (1985-1989)

by

Jean-Paul Aam

CERDI, University of Auvergne, Clermont-Ferrand (France),et CSAE, Oxford (U.K..).

Acknowledgements:

This paper is based on work done by a Moroccan team composed of members of the DPAE(Direction of Planning and Economic Affairs) of the Ministry of Agriculture (MARA) and of theconsulting firm Expert-System, under the scientific direction of Said Chbaatou, Maftre de Conferencesat the University of Fes. The complete results of their work can be found in Expert-System (1991). T1epresent paper summarizes a longer synthesis report (Azam, 1991), which is not itself an exhaustivepresentation of all the wealth of information that they have produced.

I wish to thank the members of the DPAE team who have contributed to that study: AbderrahimBounnar, Abdessadek Rachqi, Mohamed Kissami, Abderrahim Zhari, and Bouabib Chtioui, under thedirection of Moktar Bouanani, Director of the DPAE and of Mohamed Mouddene, Chief of the PlanningDivision of the DPAE. I wish to thank as well Isabelle Tsakok (World Bank), and the then Directors ofExpert-System, Abdelaziz Mohattane, Driss Boudali, and Christine Leger, as well as their variousconsultants, including Said Chbaatou who performed the scientific direction of the Moroccan part of thestudy.

In addition to some of the persons quoted above, Kenan Bulutoglu, Isabel Guerrero et RaviKanbur, all three from the World Bank, have read some early versions of the synthesis report, andoffered some useful comments. The author, however, keeps the entire responsibility for the study andthe conclusions which he draws from it.

. r -

I~~~~~~~~~

SUMMARY

This study shows that, although it is exempt from the pecuniary burden of taxation, the

Moroccan agriculture is not exempt from all economic burden of the various taxes and levies.

In fact, it bears a non negligible tax burden. In order to show this, we perform a fairly standard

incidence analysis, according to a method explained in the first section. Assuming that

agriculture has decreasing returns to scale, as economists have done since the mid-eighteenth

century, and cannot shift its tax burden forward because its prices are exogenously determined,

we treat this sector like the final consumer is usually treated in tax incidence analyses. Three

basic assumptions are made regarding the supplier sectors of agriculture, namely:

(1) the upstream sectors are competitive;

(2) they have constant returns to scale;

(3) all the levies are shifted forward.

We argue that it is a reasonable set of assumptions regarding the non agricultural sectors,

and we show how changing either assumption (1) or (2) could change the measurement of the

tax incidence. But it is not possible to determine whether the incidence will exert itself at a r$te

above or below 100%. Under these assumptions, the measurement of the tax incidence can be

done using the famous Leontieff inverse matrix, which allows to take into account the indirect

incidence of the levies paid by the suppliers of the suppliers, etc.

We then present in detail the decomposition method applied. It turns out that four steps

in the iterative analysis of the taxes paid upstream are sufficient for reducing to a negligible

percentage the share of locally produced intermediate goods in the value of gross output. The

value of gross output of all the sectors can thus be decomposed, schematically, into imported

i

intermediate inputs, factor incomes, and taxes.

Applying this method to the Moroccan agriculture in 1985 and 1989, we find that the tax

burden passed on to the agricultural sector is not negligible. Globally, this sector has borne in

1989 a 1.9 billion DH tax burden, at the production level. This does not take into account the

taxes paid by agricultural households. In 1985, it has paid 140 million DH embodied in

investment, whereas it has received for it a positive, but negligible subsidy in 1989. It is shown

that some crops like truck-gardening and tree crops, and livestock production, to a lesser extent,

bear a rate of taxation comparable to that of the rest of the economy. Other crops are less taxed.

This tax burden is mainly carried by a small number of intermediate goods, including

traditional inputs like seeds, on the first hand, and goods which are complementary to

mechanization, like fuel and lubricants, on the other hand. Among fixed investment goods,

which are rather little taxed, irrigation equipment (in 1985) and poultry-farming equipment carry

the most levy. Moreover, we notice some subtle compensation mechanisms between taxation and

subsidization of complementary goods, like irrigation equipment and irrigation water, like

tractors and fuel, etc.

ii

RESUME

Cette etude montre que, si l'agriculture marocaine est exoneree de la charge pecuniaire de la

fiscalite, elle n'en supporte pas moins le fardeau economique de divers droits et taxes. En fait, ce

fardeau n'est pas negligeable. L'analyse d'incidence assez classique que nous avons effectuee A I'aide

d'une methode decrite dans la premiere section le prouve. En admettant, comnme le font les

economistes depuis le milieu du XVIIIe siecle, que I'agriculture a des rendements d'6chelle

decroissants et qu'elle ne peut repercuter la charge fiscale en aval parce que ses prix sont determines

de fagon exogene, nous traitons ce secteur conime on traite en general le consomimateur final dans

les analyses de l'incidence de l'imp6t. Pour les secteurs fournisseurs de l'agriculture, trois

hypotheses de base sont retenues

1) les secteurs d'amont sont competitifs;

2) ils ont des rendements d'echelle constants;

3) tous les imp6ts sont repercutes en aval.

Ce sont des hypotheses que nous estimons raisonnables pour les secteurs non agricoles, et nous

montrons qu'en modifiant l'hypothese 1) ou l'hypothese 2), on peut changer la mesure de l'incidence

de l'imp6t. Mais il n'est pas possible de determiner si l'incidence s'exercera A plus de 100 % ou

moins de 100 %. Avec ces hypotheses, on peut mesurer l'incidence de l'imp6t A I'aide de la fameuse

matrice inverse de Leontieff, qui permet de prendre en ligne de compte l'incidence indirecte des

imp6ts payes par les fournisseurs des fournisseurs, etc.

Nous decrivons ensuite en detail les differents elements de la m6thode utilisee. On constate

qu'il suffit de quatre etapes dans l'analyse iterative des imp6ts payes en amont pour reduire A un

pourcentage negligeable la part des biens intermediaires produits localement dans la valeur de la

iii

production brute. La valeur de la production brute de tous les secteurs peut donc etre decomposee,

schematiquement, en trois elements: les intrants intermediaires, les revenus des facteurs et les

imp6ts.

En appliquant cette methode a l'agriculture marocaine en 1985 et 1989, on constate que la

charge de l'imp6t qui est repercutee sur le secteur agricole n'est pas negligeable. Globalement, ce

secteur a supporte en 1989 une charge fiscale de 1,9 milliard de dirhams au niveau de la production.

Ce montant n'inclut pas les imp6ts payes par les menages d'agriculteurs. En 1985, le secteur a paye

140 millions de dirhams compris dans les investissements et beneficie par ailleurs d'une subvention

positive, mais negligeable en 1989. On montre que certaines cultures, comme les cultures

maraicheres et l'arboriculture, et dans une moindre mesure 1'elevage, supportent un taux d'imposition

comparable A celui du reste de l'economie. Les autres cultures sont moins taxees.

Cette charge fiscale pese, pour l'essentiel, sur un petit nombre de biens intermediaires,

notamment les intrants traditionnels tels que les semences, d'une part, et les biens complementaires

de la mecanisation, comme le carburant et les lubrifiants, de l'autre. Parmi les biens d'equipement

fixes, qui sont assez peu taxes, c'est le materiel d'irrigation (en 1985) et le materiel necessaire A

l'6levage de la volaille qui supportent la plus lourde charge fiscale. En plus, on note des mecanismes

de compensation subtiles entre taxation et subventions pour certains biens complementaires, tels que

le materiel d'irrigation et 1'eau d'irigation, ou les tracteurs et le carburant, etc.

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INTRODUCTION

By a Royal decision, expressed in a dahir dated 21 March 1984, the agnrcultural

incomes in Morocco are exempt from all taxes up to the year 2000, and this sector is exempt

of nearly all excise taxes as weL for this period. This decision was made after the very severe

droughts of 1981 and 1983, which affected severely agricultural incomes. The exemption

period has been extended recently. Before that date, there have been two main regimes of

agricultural taxation. From the end of the first World War up to the begining of the 1960s,

there was a general flat-rate tax on cultivated land, called the tertib. It has been replaced in

1961 by the more progressive agricultural tax, which resulted in about one third of the farmers

being exempt.

But the nearly full exemption applied in 1984 only concerns the institutional aspect of

taxation, and not its real incidence. In other words, this exemption only applies to the financial

burden of taxation, but cannot include its economic burden. The agricultural sector is not an

enclave within the Moroccan economy, in which it is in fact integrated. Therefore, in so far as

it purchases goods from the rest of the economy, and sells its own products to it, it can be

affected by the taxation levied on the other sectors. Thus, the various taxes which are paid by

the suppliers of agriculture are to some extent passed on downstream via the prices that th,

agricultural sector pays for its inputs. Similarly, the various taxes or subsidies concerning the

customers of agriculture, and which can bear on the transformed products, may be shifted

backwards through the producer prices of agricultural products. Therefore, the fact that

agriculture does not pay directly any tax does not entail that it does not bear any tax incidence.

On the contrary, many levies are shifted backward or forward onto agriculture through the

prices of intermediate inputs and investment goods, or through the selling prices of its

products. Moreover, agricultural households bear some tax burden through their final

consumption.

Thus, although there are no explicit taxes on this sector, there are many indirect and

implicit levies, via the transactions between this sector and the rest of the economy. It is useful

2

to have a quantitative evaluation of the tax incidence on the NMoroccan agriculture, in order to

dispel] the idea that such a production sector may be exempt from any tax.

The analysis of tax incidence is a fairly difficult topic, from a theoretical as well as a

practical point of view. This can be confirmed by looking at the monumental book published

recently by the World Bank on taxation in developing countries (Newbery and Stern, 1987).

In principle, any sector of the economy bears some tax burden shifted onto it by some of the

sectors with which it has some relationships, and passes in turn some levies which it has borne

either directly, or by incidence, onto various sectors. Thus, there is in any economy many

chains of repercussion by which the various types of levies are passed on from one sector to

the others. Eventually, of course, all this shifting falls on the incomes of the production factors

and/or on the purchasing power of the consumers. But the distribution of the burden over the

different sectors is an important issue, because production factors are neither homogenous

across sectors, nor perfectly mobile between them. Hence, for instance, it is not irrelevant to

know whether a given levy is affecting labor incomes in agriculture or in industry, as

agricultural labourers are probably much poorer than industrial workers.

In order to face up to the.extreme complexity of this issue, the ideal solution is to use a

Computable General Equilibrium (CGE) Model of the whole economy, for simulating all the

shifting of the various taxes, and for bringing out the final incidence of the different levies.

Such an approach seems currently out of reach both for theoretical reasons, in view of the

extreme complexity of economic relations within an economy like that of Morocco, and fof

practical reasons, because of the sheer mass of the required information. There exist some

CGE models of the Moroccan economy, like the one used by the OECD Development Center

(Morrisson, 1991, Bourguignon, Morrisson and Suwa, 1992). But they have not been devised

for addressing the tax incidence issue raised here. There is thus a need for a simpler, yet

operational, approach. In the following analysis, three main questions are raised:

(1°) how large is the tax burden passed on to agriculture?

(2°) how is this burden distributed arnong the various agricultural products?

(30) which inputs channel the most tax incidence?

Other questions are also discussed in this study, like the distribution of this burden, its

change after the fiscal reform, etc. But they are all derived from this basic set of questions.

To address these issues, we assume that there is a basic asymmetry between

agriculture and the rest of the economy, regarding returns to scale. While the production

technology of all the suppliers of intermediate inputs to agriculture is supposed to have

constant returns to scale, this is not the case for agriculture itself, for which decreasing returns

to scale have been assumed ever since the Physiocrats in the mid-eighteenth century

(Newbery, 1987.a, 1987.b). As shown below, provided agricultural prices can be regarded as

exogenous, because of international tradability or because of government policy, this

assumption implies that all the taxes paid by the suppliers of agriculture are shifted forward to

agriculture, which cannot in tum shift it onto the consumers. These assumptions are a bit

extreme, and they are thus discussed in detail in the following section, in order to evaluate the

changes in the results that would be entailed by changing them. Following Stem (1987), we

apply the tools of the input-output analysis, which is in fact a special case of general

equilibrium analysis. The change that we introduce in the present paper is that we treat

agriculture like the final consumers are treated in his article. This application rests on some

assumptions and some simplifications, which are presented and discussed in the first section.

Assuming that the suppliers of intermediate inputs to the agricultural sector have constant

returns to scale, and that all the fiscal burden bearing appearently on these sectors is in fact

shifted forward onto agriculture, we provide a detailed analysis of the tax incidence on the

different productions of this sector1 . The detailed presentation of the results is the topic of the p

third section. Additional tables are presented in Azam (1991).

Moreover, a fiscal reform took place starting in 1985 (El Ktiri and Akesbi, 1987,

Thirsk, 1989, Tazi, 1991). It is rooted in the thinking done in the Moroccan Parliament since

the mid-1970s, and is based on an I.M.F. study done in 1979, and known as the "Tanzi

Report". It aims at modernizing the fiscal system, which was initially of the schedular type,

with levies defined by income types, and not unified by taxpayer. This system had been subject

to some tinkering as time went by, but not within a clear framework. The most spectacular

measure has been the adoption of V.A.T. (laxe sur la valeur ajout&e: TVA) in April 1986,

replacing the tax on products and services (7arxe sur lesproduits et services: TPS). One of the

drawbacks of the latter was that it was cascading, at least to some extent, especially as far as

services were concerned. Regarding the tax on products, it already had some features of a

4

V.A.T., with a tax credit system, but a fairly imperfect one (Thirsk, 1989). Faced with fiscal

problems, the Moroccan government had raised some of the rates of this tax, with a base rate

rising from 15% to 17% in 1982, and to 19% in 1983 (Thirsk, 1989). Another important part

of this fiscal reform is the replacement of the tax on industrial profits (Imp6t sur les benefices

professionnels: [BP) by a company tax (Imp6t sur les societes: IS), decided in 1987. The IBP

had a progressive rate going up to 48%, but the rules governing the determiination of its basis

of taxation used to leave too much room for evasion (El Ktiri et Akesbi, 1987). The final

important point of this reform is the introduction of the general income tax (Impdt general sur

le revenu: IGR), effective from 1990. Moreover, the IPB has remained partly in place during a

transitional period, before the IGR was applied, because of the links between the two systems

planned for the IS and the IGR. Many other changes, of a more narrow nature, have taken

place during that period.

It thus seems interesting to take these policy moves into account for evaluating the

change in the tax incidence on agriculture resulting from this reform. Hence, the quantitative

analysis of the tax burden passed on through the input prices has been perforned for two

dates, before and after the reform. The years 1985 and 1989 have been chosen, for various

reasons. Beside the fact that they bracket the period when most of the reforms were effected,

these years are interesting because they are "normal years" from an agricultural point of view.

It was necessary to avoid doing the study for some exceptional years, either because the

production level was exceptionally weak, like it was during the drought years 1981 and 1983,

or because it was particularly good like in 1986 or 1988. Moreover, 1989 was the last year

with available data at the time when this study was performed. The main change that occurred

between these two dates from the point of view of the fiscal system is the replacement of the

TPS by the VAT, whereas the replacement of the IBP by the IS remained in its transitory

phase.

1. MEASURING THE TAX INCIDENCE ON AGRICULTURE:

THE METHOD.

The theoretical assumption used in this study for measuring the tax burden shifted onto

agriculture by its suppliers of inputs is composed of three points:

5

(a) All these upstream sectors are competitive,

(b) they all produce under constant retums to scale, and

(c) their whole tax burden is shifted downstream, and not backwards onto factor

incomes.

Before we present the results in the next section, we discuss these assumptions, from

both a theoretical and a practical point of view. It turns out that assumptions (a) and (b)

concern mainly the measurement of the tax incidence, and we discuss in the following sub-

section how this would be affected if either the assumption of perfect competition, or that of

constant returns to scale, were changed. It is shown that the assumption of a 1000/% shifing of

their tax burden by the suppliers is reasonable, being a compromise between the possible cases

where the rate of shifting is either larger, or smaller. Assumption (c) concerns rather the

interpretation of the results, as it determines the direction in which the tax burden is shifted. It

could be either shifted forward by increasing the prices of the products, or shifted backward,

by reducing the prices of the inputs. We discuss why forward shifting is more likely in

Morocco.

1.1: Theoretical Foundations of the Input-Output Analysis.

The competitive assumption implies that the producer prices of all the products

involved are equal to their respective marginal cost of production. Next, because of constant

returns to scale, this marginal cost is equal to the average cost of production, which is itstlf

independent of the scale of operation. We first draw the consequences of this result, before we

discuss their sensitivity to small changes in the basic assumptions.

In order to bring out the consequences of these assumptions, it is convenient to write

down a simple algebraic model for analysing the determination of the prices of the non

agricultural goods which may be bought as intermediate inputs by the agricultural sector and

by the upstream sectors. Assuming perfect competition, we can write the equality between the

net-of-tax prices of these goods and their unit cost of production in the following way (see

Stern, 1987):

(1) p - C(p+t,w+u),

6

where p is the vector (i.e. the list) of the prices paid to the producers, t is the vector of the

levies per unit of input in the non agricultural sectors, w is the vector of the net-of-tax factor

prices per unit of production factor used, and u is the vector of the levies borne by these

factors. The function c(-) is the vector of the (rminimum) unit cost functions of the various

upstream sectors. For the time being, we assume that the suppliers of agriculture are not

themselves users of agricultural goods. This is a simplification, which will be relaxed in the

application below. Notice that the non agricultural sectors, which are not exempt from

taxation, face the tax-included price vector p+t for their interrnediate inputs, while agriculture

pays only the price p without tax for them. In fact, there are exceptions to this rule for fuel and

spare parts in the Moroccan case, which we need not take into account in this theoretical

presentation. It would just take a bit of algebra to deal with them. What really matters here are

the properties of equation (1), which shed some light on the issues addressed here.

(a) From the Cost Functions to the Input-Output Table.

Equation (1) means first that the producer prices are equal to their unit costs, as

expressed above, and then it shows what the arguments of the cost functions are. Notice that

the scale of production does not belong to the list of arguments, because of constant returns to

scale. The costs depend on the tax-included prices. This notation clearly distinguishes between

the prices obtained by the sellers, p for intermediate goods and w for production factors, on

the one hand, and the tax-included prices paid by the buyers, on the other hand.

These functions are such that:

(2) dcldp = dc/dt =A, and dc/dw = dcldu =B,

where A is the matrix of the technical coefficients concerning intermediate inputs, and B is the

technical coefficient matrix concerning production factors (see Stern, 1987). This result uses

an envelope theorem known as Shephard's Lemma (see Varian, 1984). Hence, this notation

allows to pass simply from the usual nicroeconomic analysis to the input-output analysis. The

latter uses the data corresponding to the matrices A and B, presented as input-output tables.

Notice that we do not make the assumption that the technical coefficients are constant for the

7

analysis at hand. We are working in the neighborhood of the producer equilibrium point,

where the changes in the technical coefficients are irrelevant, because of the envelope theorem

alluded to above (see Varian, 1984).

The impacts on the producer prices of changes in the unit levies can be derived as:

(3) dp/dt = (I-A)-I A + (I-A)-I B dw/dt,

(4) dp/du = (I-A)-I B + (I-A)-I B dw/du.

(I-A)-1 is the farnous Leontieff inverse matrix. These equations bring out quite clearly

that changes in the taxes on intermnediate inputs or on production factor incomes can in

principle affect partly the producer prices, with dp/dt or dp/du > 0, and partly the factor

prices, if dw/dt or dw/du > 0. Obviously, the two extreme cases are possible, where the

shifting falls exclusively on factor incomes, or exclusively an the producer prices. For

example, in the hypothetical case of an economy which is completely open to the intemational

markets, all the goods are tradable at the prices p fixed by the world markets. If they are

subject to the same levies t as the goods produced locally before they reach the consumers,

then dpidt = dp/du = 0, and the burden falls entirely on the production factors. If one assumes

on the contrary that the factor prices are fixed (dav/dt = dw/du = 0), as it is the case when

there is a minimum wage legislation or perfect capital mobility, then the incidence of tho

change in the tax rates falls exclusively on the producer prices.

(b) Forward Shifting.

It has been shown in the theoretical literature that the latter case only occurs under the

fairly restrictive conditions of the Non-Substitution Theorem (see e.g. Varian, 1984). It

assumes that one is concerned with a closed economy, with no joint production, and that there

is only one homogenous production factor in the economy. In other words, this theorem

cannot apply rigourously in the real world. But it is generaLly admitted that it is a reasonable

approximation when one is studying the incidence of taxes or subsidies which are shifted

through the industrial sectors of the economy (Ahmad and Stern, 1987, Stern, 1987). Shah

8

and Whalley (1991) present a critique of this hypothesis, showing examples where the real

world is significantly different from this case.

One of the reasons why this approximation is reasonable when dealing with the sectors

of the economy which do not produce primary goods, be they agriculture or mining, is that the

goods produced locally by these sectors are not generally tradable at the margin. This can

result from the trade policy of the government, which may impose quantitative restrictions

upon imports of goods competing with local products. But it can result as well from more

structural characteristics, related to high transportation costs, or to product differentiation.

For example, it is quite common that locally produced goods are not perfect substitutes

neither for the imported goods, nor for the goods with which they may be competing on

external markets. Devarajan and de Melo (1987) have coined the expression "semi-tradable",

for taking this case into account.

In the present case of the suppliers of the Moroccan agriculture, this assumption seems

especially appropriate. Moreover, the price of the main production factor, namely labor, is

govemed by the minimum wage legislation. Hence, even if this legislation is not strictly

enforced, it is reasonable to think that the changes in the tax burden cannot be shifted

significantly onto labor. Azam (1992 and 1993) presents evidence that the minimum wage

plays a statistically significant part in the agricultural sector. Finally, many inputs are imported,

without having a close substitute produced locally. Consequently, the price structure in

Morocco possesses many anchors upstream, so that the assumption of forward shifting ontd

agriculture seems appropriate.

It is worth emphasizing the role played by the Leontieff inverse matrix in these

incidence equations. It means that we are not restricting the tax incidence analysis to the

shifting of the levies borne by the sectors situated immediately upstream of agriculture. Due

account is also taken of the shifting onto these upstream sectors of the burden of their own

suppLiers, and so on, following up the chain of all the purchases done by the suppliers of the

suppliers, etc.

Let us now analyse the changes that would result from changing the assumptions of

constant returns to scale or of perfect competition. They determine to some extent how much

forward shifting goes on when taxes change.

9

1.2: Incidence Analysis with Variable Returns to Scale or

Imperfect Competition.

One can bring out in the simplest cases the differences in the results implied by

changing the constant returns to scale or the perfect competition assumptions.

(a) Variable Returns to Scale.

The first panel of figure I depicts the case where the returns to scale are constant in the

supplier sector. Basically, the argument developed above applies, in this simplified case.

Assume that a vector of taxes t is introduced, and is shifted forward on the downstream

sector, which represents agriculture. It is assumed that the latter has decreasing returns to

scale, so that its derived demand for inputs d has a negative slope. In this case, the increase in

unit cost is shifted 100% onto the price paid for the input by the downstream sector. The

resulting price increase entails a fall in the quantity demanded, and hence in the quantity

produced in the market equilibrium. But, as the unit cost is independent of the production

level of the supplier sector, by assumption, the change in the quantity produced has no impact

on the equilibrium price.

price price pnce

c(p+t) .-

Tax ~~~~~~Tax Tax

c (p) -- - - -- - -

d\*

quantity quantity quantity

Returns: (a): constant (b): decreasing (c): increasing.

Fi_yure I: Tax Incidence under Variable Returns to Scale.

10

Panel (b) of this figure represents the case where returns to scale are decreasing in the

upstream sector, with a marginal cost curve rising with the output level. In order to facilitate

comparison with case (a), we analyse the case where the increase in the marginal cost is of the

same magnitude as in case (a), when measured at the initial production level. As we are now

interested in cases where returns are not constant, the impact of a change in the level of the

marginal cost depends on the output level at which it is measured. In the present case, where

the supplier sector has decreasing retums to scale, we observe that the increase in the tax on

inputs entails in the market equilibrium, where the two curves intersect, a rate of shifting

below 100%. The reason for it is fairly simple, and can be expressed in non technical terms.

The increase in production costs resulting from the tax increase leads the supplier firms to try

and increase their selling price. But, demand falls as their price increases, entailing a cut in

output. As we are in the case where returns to scale are decreasing, the fall in output implies a

simultaneous fall in the marginal cost of production. Then, when comparing the market

equilibrium before and after the tax increase, we observe that the impact is made partly of a

price increase, and partly of a reduction in the (net of tax) marginal cost, due to the fall in the

sale of production.

In the case depicted in panel (c) of figure I, where there are increasing returns to scale,

we get the reverse result. Here the rate of shifting is more than 100%. The price increase

implies a fall in demand, resulting in a lower output level in equilibrium. Then, the supplier

sector looses the benefit of the scale economies, and an increase in the marginal cost takes

place along with the cut in output. The price increase thus passes on not only the rise due to

the tax increase, but also the increase in cost entailed by the fall in the production level.

Therefore, the constant returns assumption that we use here is a sort of middle ground

assumption between the assumptions of decreasing returns to scale and of increasing returns.

Therefore, even if it is not rigourously true for all the sectors supplying agriculture, we can

hope that it holds true on average, so that the errors made compensate one another.

Similarly, giving up the assumption of perfect competition can result in a shifting rate

below or above 100%, without any way to tell which case is the most plausible.

1 1

(b) Imperfect Competition.

To show this point quite simply, assume that the supplier sector has some monopoly

power. One could generalize this approach by studying an oligopolistic market structure, but

this would complicate the analysis, without changing fundamentally the conclusion. Assume

thus that the demand curve by the downstream sector is D(p), with D' < 0 in order to capture

as above the fail in demand entailed by an increase in the price p, and that the upstream sector

produces with a constant unit cost c. Then, knowing that this upstream sector supplies the

whole demand facing it, it can be assumed that the monopolist seeks to maximize its profit:

(5) max profit = (p-c) D(p).

For this profit to be maximized, the condition to be filfilled by the price may be

written as a simple mark-up rule:

(6) p = (]+,u) c, where u = 1/(e-l) and e = -pDt /D > 1.

Obviously, for this monopoly equilibrium to exist with a positive and finite profit, we

assume e > 1. From equation (6) it is easy to compute the percentage increase in p as a

response to a 1% increase in c. We denote these percentage variations dlogp = dp/p and

dlogc = dc/c. We get easily:

(7) dlogp/dlogc = 1/(I-cp), where u' = dy/dp.

Hence the pass-on rate in the case of the monopoly is 100% if u' = 0, i.e. if the price

elasticity of demand is constant, as can be checked by looking at equation (6). In this case, the

monopoly assumption does not change anything compared to the perfect competition case. If

the price elasticity of demand e increases as the price increases, then the mark-up rate u

decreases, and the pass-on rate falls below 100%. If, on the contrary, demand becomes less

elastic when the price goes up, then the mark-up rate increases as the unit cost goes up, and

the pass on rate is above 100%.

12

Therefore, it is fairly difficult to decide whether the pass-on rate should be above or

below 100%, as it basically depends on the change in the price-elasticity of demand in

response to a price increase, a parameter which is not easy to estimate.

1.3: Can Agriculture Shift the Tax Forward?

So far, we have taken for granted that the agricultural prices can be regarded as

exogenous for the tax incidence analysis. In fact the agricultural marketing system has changed

during the period of analysis. In 1985, the system for the marketing of agricultural goods had

not yet been liberalized, and prices where determined by the government for most of the

products. In fact these administred prices implied some implicit taxation, which we do not

investigate here, as it is assigned to the commerce sector in the national accounts (see Tuluy

and Salinger, 1989). Taking it into account would just reinforce our conclusion that the

agricultural sector bears some taxation, despite its being exempt. In 1989, the liberalization

had been performed, and the prices were in fact determined by the world market. Hence, it is

clear that our assumption of price exogeneity seems quite safe.

Nevertheless, it is interesting to write down a small model in order to spell out the

required conditions for a sector to be able to shift its tax burden forward. Denote D(p *) and

S(p*) the demand and supply of the agricultural good, with an initial equilibrium price p*

Then, the equilibrium condition is:

(8) D(p*) =S(p*).

Now assume that a tax t is introduced, and denote p the resulting producer price. The

new equilibrium condition reads:

(9) D ((I+ +t)p) = S(p).

Using Taylor's expansions of D(-) and S(-) about the initial equilibrium point, we can

write:

(10) S(p) = s(p*) /1+ (p-P*)/P*/,

13

and:

(11) D((l +t)p) = D(p*) /q f(fI +t)p.p}/p*],

where qS and ,7D are the price elasticities of supply and demand, respectively, measured both

positively. Using (10) and ( 11), it follows that the rate of incidence on the producer price may

be written:

(12) (p*-p)/p = +I)].

The corresponding formula for the pass-on rate onto the consumer price ((l+t)p) can

easily be derived as:

(13) ((l +t)p-p*)/p = t [7/(D+iS)].

Hence, the introduction of a tax t affects the producer price the more so, the larger the

demand elasticity compared with the supply elasticity. In the limit, if the supply elasticity is

finite, while the demand elasticity tends to infinity, then the tax is entirely shifted onto the

producer. All the cases discussed in figure I could be fitted in this framework.

In the Moroccan case, during the period of study, we know that the demand for

agricultural products was perfectly elastic because either the prices where administred, with no

constraint on purchases (1985), or the prices were determined by the intemational market, as a)

result of the liberalization of agricultural marketing (except for soft wheat), in 1989.

Hence, it seems safe to assume that agriculture was unable to shift forward the tax

burden it received. But in the general case, we have shown that the sharing of the tax

incidence would depend on the relative elasticity of demand and supply. For example, if both

elasticities were equal (a fairly implausible assumption), then the burden would be split half for

the consumer, and half for the producer.

II. IMPLEMENTATION ISSUES.

In order to apply the method outlined above, the main task of the incidence analysis is

that of measuring the taxes paid by the suppliers of agriculture, and passed on through the

14

input prices, and the taxes paid by the suppliers of the suppliers, and passed on, etc. One thus

gets a decomposition of the value of the agricultural gross output into its various components,

showing in particular the various taxes and levies paid by the upstream sectors, as well as the

amount of imported inter-mediate inputs.

11.1: The Decomposition Method.

We now explain the practical aspects of this decomposition of the agricultural gross

output, and then describe some practical details.

(a) The Role of Locally Produced Inputs.

Within the framework of the Leontieff inverse matrix, one should theoretically take

into account the infinite chain of suppliers, as each supplier sector has its own suppliers, etc.

Fortunately, one does not need to go very far along that chain. By decomposing at each step

the intermediate inputs that are produced locally into their locaRly produced and imported

intermediate inputs components, factor incomes, and various levies, one converges very

quickly towards a position where the locally produced intermediate goods have a very tiny

share, so that the extra information provided by an additional step in the decomposition would

be negligible.

This reasoning can be demonstrated easily. In a first step, the value of the agricultural

gross output can be decomposed schematically into some localy produced intermediate inputs.

amounting to, say, Cal, some imported intermediate goods, noted Cai, and some factor

incomes, noted Ra. Each of these components is obviously smaller than the whole value of the

gross output. As the amount Cal of intermediate goods has been produced by the local

supplier sectors, it can be decomposed likewise into its locally produced intermediate goods,

imported intermediate goods, and factor incomes components. From this point on, all these

amounts must be understood tax included, as the non agricultural suppliers pay taxes on their

intermediate inputs. Denote cf7, Cfi, and rf (with cfl4+cfi+rrF1 ) the fractions of each unit of

locally produced local intermediate goods which are made respectively of locally produced

intermediate goods, imported intermediate goods, and factor incomes. Then we can refine the

initial decomposition of the value of output by going one step further. Now, the amount spent

15

by agriculture and its imnnediate suppliers on imported intermediate goods is Cai+cfiCal, and

the value of factor incomes thus becomes Ra+ra--al. These two values have increased since

the first step. On the contrary, the value of locally produced intermediate inputs has decreased,

as it is now worth c7lCal.

But this amount of locally produced intermediate goods can itself be decomposed

similarly into the three components presented above. Assuming here for the sake of simplicity

that the same coefficients as before apply, the decomposition becomes: Cai+('Cfi+CfiCf)C, for

the imported intermediate inputs, Ra+(rjp-rjl)Cab, for factor incomes, and cg2Cal for the

locally produced intermediate goods. As cfl is a fraction, cfl2 < cfl, so that the remaining share

of locally produced intermediate goods decreases at each step in the decomposition, as it is

first raised to the power two, then three, etc.

For the sake of simplicity, we have assumed above that the coefficients for the

decomposition are the same at every step. Obviously, in general, it is not the case, and they

change at each step. But this does not change the conclusion as they are all less than 1. Hence,

at every step, some numbers below one are multiplied by other numbers below one, so that

their product is smaller than each of the numbers involved. Therefore, the share of locally

produced internediate goods falls quickly during the iteration. Practically, it turned out that

four steps suffice in general for producing the desired information.

One can notice that this method resembles to some extent that of effective protectio1X

analysis, which is applied by international trade specialists in order to assess in a synthetic way

the incidence of customs duties and other taxes or subsidies affecting imports and exports

(Bliss, 1987). It is thus worth describing briefly the differences between the two methods.

(b) Comparison with the Effective Protection Analysis.

In the case of effective protection, the analysis bears on one or several sectors

producing tradable goods, the price of which is therefore determined by the world market and

the levies and subsidies determined by the government. Tuluy and Salinger (1989) have

performed such an analysis for the Moroccan agriculture. One can then use the input-output

analysis in a related way to that presented above, for decomposing the value of output so that

the share of locally produced non-tradable intermediate goods becomes negligible. Then, one

16

computes the various components of this decomposition by either including or excluding the

trade-related levies and subsidies bearing on the goods concerned, and one compares the

results obtained with or without these interventions. This allows to bring out the net degree of

protection that benefits the sector concerned, taking into account both the positive impact on

its own value added of the customs duties protecting its product, and the increase in costs

entailed by the input price increases resulting from these interventions. Then, it is said that the

sectors whose value added is higher than that computed without the taxes benefit from a

positive effective protection, whereas those whose value added is lower bear a negative

effective protection.

The tax incidence analysis performed here is very close to an effective protection

analysis, but it differs from it on two accounts. First, we are interested here in all the taxes and

subsidies, and not just in the customs duties and other trade-related interventions. Second,

instead of building the decomposition on the distinction between tradable and non-tradable

goods, which is relevant for the effective protection analysis, we build it on the distinction

between imported goods and locally produced goods. The justification for this approach is

that we are interested in the taxes and other levies really paid by the various sectors, and not

to the price increases that protection grants to the different sectors compared to the free trade

situation.

11.2: Practical Issues for Application to Morocco.

As a matter of fact, obviously, we have used a finer decomposition than that in the

example above, which only aims at explaining as simply as possible the principle of the

decomposition applied. In fact, very disaggregated coefficients have been used in order to take

into account as far as possible the differences between sectors regarding technical coefficients,

the share of imported intermediate inputs in each sector, the share of the various levies, etc.

(a) The Inputs Analysed.

Hence, the intermediate inputs of the different crops, and of livestock production, have

been decomposed according to a list of eighteen goods, thanks to a matrix especially built for

this purpose. The list of the goods is the following:

17

- seeds;- fertilizers;- fuel and lubricants;- spare parts;- pesticides;- irrigation water;- electrical power;- small equipment;- transport;- banking services;- insurance services;- manure;- bran;- dried pulp;- molasses;- composed feed;- livestock drugs;- feed of agricultural origin.

For the next steps in the iteration, the data from the national accounts have been used.

In fact, at the time of writing, the latest available input-output matrix for Morocco was that of

1980. The corresponding matrix for 1985 was in the process of being prepared. But it was

possible to perform some correction of the 1980 coefficients using data available at the

National Accounts. These corrected coefficients have been used here.

A similar decomposition has been performed for investment and final consumption.

The latter is not reproduced here (see Azam, 1991). Like we did for intermediate

consumption, discussed above, investment was first decomposed into six goods, and then the

National Accounts data have been used for the next steps. The first round data come partly'

from Essai d'evaluation du capitalfixe productif agricole marocain (flux et stocks) [Attempt

at Evaluating the Moroccan Agricultural Productive Fixed Capital (Flows and Stocks)]

(Chbaatou, 1990). The investment goods taken into account are:

- tractors;- combined harvesters;- supporting equipment;- imrgation equipment;- poultry-farming equipment;- buildings.

(b) The Levies and Subsidies Taken into Account.

Regarding the taxes and other levies taken into account, we have made some

simplification by restricting the analysis to the main levies. There is first, as far as indirect

18

taxation is concerned, the tax on products and services (laxe sur esproduits el services: TPS)

in 1985, replaced by the VAT (TVA) after 1986, registration and stamp duties (doits

d'enregistrement et de ulmbres), and duties and taxes on imports. Entrance duties to the souks

(weekly markets) have been computed by applying to the quantities traded the rates applicable

in the region of Rabat and Casablanca. Concerning direct taxation, we have taken into account

the tax on profits (imp6t sur les benefices professionels, IBP), partly replaced later by the

company tax (imp6t sur les societes, IS) in 1987; the levy on salaries and wages (prelvements

sur les traitements et les salaires, PTS), which is a tax levied at the income source, and the

participation to National Solidarity (participation a la solidarit nationale, PSN), have also

been taken into account. The PSN is an additional tax on profits, aiming at contributing to the

financing of the Sahara war (Thirsk, 1989). These three taxes are the bulk of the direct taxes.

There exist other direct taxes, amounting to a negligible value. Lastly, the personal

contributions to the National Social Security Fund (cotisations a la caisse nationale de

securite sociale, CNSS), which are compulsory, have also been taken into account.

TABLE ]11.: THE SUBSIDIES TAKEN INTO ACCOUNT(Millions of DHs)

1985 : 1989

Tractors : 29.8: 55.6

Combined Harvesters : 4.4 : 16.0

Hydraulic Developments : 6.0 : 58.0

Livestock Breeding Intensification : 1.5 : 4.6

Autumn Cereals Seeds : 16.3 : 15.6

Fodder Seeds : 5.8 2.2

Pesticides : 4.6: 3.9

Fertilizers : 409.0 87.0

Bran : 193.0

Dried Pulp : 68.0

Fuel : 8.5

19

As far as subsidies are concerned, only the amounts effectively paid, as measured in the

national accounts, have been taken into account, and not the legal rates. The difference

between the two comes from the fact that some farmers do not collect the subsidies or the tax

refunds to which they are entitled. For example, pumping equipment is in principle subsidized

by the Agricultural Development Fund (F.D.A.: Fonds de developpement agricole) since

1986. But, as a matter of fact, relatively few farmers submit application files to the

administration in charge, probably because of the costs entailed by any dealings with the

administration, be they subjective or pecuniary (traveling, paper work, etc.). Table 11.1

presents the subsidies used.

III: MEASURING THE TAX INCIDENCE ON AGRICULTURE:

APPLICATION TO MOROCCO (1985 and 1989).

The global results for the agricultural sector are presented first, and are next split

between crops and livestock raising, before they are disaggregated further by crops. It is then

quite evident that there are two distinct groups of crops: those which are little taxed, and

those which are taxed more or less like the rest of the economy. Moreover, in order to bring

out the main channels of the tax incidence, the different levies passed on by the various inputs

are analysed in a second step. Intermediate inputs are first decomposed according to the

eighteen-entry list presented above, and a similar decomposition is then done for fixed

investment. Hence, the decomposition method described above can be presented in two

different ways. We can first present the results by products or crops. Then, we present the

decomposition by inputs, in order to analyse how much tax incidence is channelled onto

agriculture by each intermediate good or investment good.

III.1: The Tax Incidence by Products.

The tax incidence by products may be presented with different levels of

disaggregation. We begin by presenting the results for the agricultural sector as a whole.

Then, we split it into crops and livestock. Finally, we divide the crops sub-sector into seven

different crops.

20

(a) Incidence on the Sector as a Whole.

Table III. I presents the results of the decomposition for the agricultural sector as a

whole, for the years 1985 and 1989. The first row shows the share of the total production

which remains as the residual of locally produced intermediate consumption that has not been

decomposed between imported intermediate consumption and factor incomes after four steps

in the iteration. It is slightly different at the two dates, decreasing by 0.56% between 1985 and

1989. But, knowing that the different taxes and levies are probably worth at most 5 to 10% of

this residual, which is itself worth about 2% of the value of output, we can hope that there is

no source of error here, and that the figures are comparable.

One can observe some changes between the two dates. The share of indirect taxes in

the value of gross output increases from 4.11% to 4.74%. This change results from two

moves in opposite directions: the adoption of VAT (TVA) implies a fall compared to the share

which the TPS had, from 2.14% to 1.48%. This is in agreement with the aim of a VAT

system, which is supposed not to bear on production sectors.

But this downward movement is more than compensated by an increase in the other

indirect taxes. As noted above, this comprises mainly registration and stamp duties, entrance

duties at the souks, and the levies on imported goods. Among the reasons for this increase in

indirect taxes other than the VAT, there is probably the adoption of an improved fiscalJ

discipline as part of the fiscal reform, in particular a better control of the exemptions of import

duties. Moreover, the import content of agricultural output has fallen, with a coefficient going

from 11.73% to 6.96%. As the imports directly concerning agriculture are exempt, the fall in

the import content, with the ensuing increase in the share of local inputs, implies an increase in

the basis for the shifting of the taxes from the upstream sectors. One thus observes a near

doubling of the share of other indirect taxes, from 1.97% to 3.26%.

The share of direct taxes passed on to agriculture is on the contrary negligible, and

decreasing. Similarly, there is a spectacular fall in the share of the subsidies between the two

dates, from 3.4% to 1.26%. All these changes combine to result in an increase in the tax

incidence on agriculture. This is true both in gross terms, i.e. without netting out the subsidies,

21

TABLE 1I1.1: TAX INCIDENCE ON THE MOROCCAN AGRICULTURE(million DH, and %)

Years : 1985 : 1989

Share of the Residual 2.26% : 1.70%

Indirect Taxes 1301.0 2103.4(4.11) (4.74)

including: TPS (TVA): 678.8 : 657.1(2.14) (1.48)

Others : 622.2 : 1446.3(1.97) (3.26)

Direct Taxes : 200.4 : 200.9(0.63) (0.45)

including: PTS : 99.9 : 112.5(0.32) (0.25)

IBP : 88.9 : 78.3(0.28) (0.18)

PSN : 11.6 10.1(0.04) (0.02)

CNSS Contributions : 107.3 : 122.1(0.34) (0.28)

Subsidies : -1076.5 : -557.1(3.40) (1.26)

Total Levy(Gross of Subsidies) : 1608.7 : 2426.5

(5.08) (5.47)Total Levy(Net of Subsidies) : 532.2 : 1859.4

(1.68) (4.21)

Imports : 3715.2 : 3091.4(11.73) (6.96)

Note: The numbers in parentheses below the amounts levied are the percentagesof the value of gross agricultural output.

22

where the rate of taxation goes from 5.08% to 5.47%, and in net terms, which is more

relevant, where the increase goes from 1.68% to 4.21%.

(b) Disaggregation by Products.

Table 111.2 provides a first disaggregation of these results, by distinguishing the crops

on the one hand, from livestock production, on the other hand. In general, livestock

production is more taxed than crops, with a rate which is higher by about 1.5%. Notice that

this result is even reinforced by the fact that the residual share of undecomposed locally

produced intermediate goods is higher for livestock production than for crops. But, in view of

the order of magnitude of these figures, one should not expect that these residuals embody

much additional levy. Livestock production has also a larger import content. Finally, it seems

that the switch to VAT is less beneficial to livestock production than to the crops, as the fall in

the tax rate compared to that of the TPS is smaller.

Table 111.3 pushes the disaggregation one step further, by distinguishing various crops.

It shows that the truck-gardening products and the tree crops are the most heavily taxed, with

rates equal to 4.2% and 4.91% in 1989, respectively. The other crops have a net rate about

3%, with a minimum of 1.41% in 1989 for oil seeds. This table shows also the very important

part played by subsidies in 1985, which have mainly benefitted pulses, industrial crops, and

fodders, whose net rate of taxation has been negative (-3.91%, -5.05%, -1.67%, respectively).

The industnral crops are defuied as comprising sugarbeets, sugarcanes, cotton, etc. The oil

seeds are sunflower, soya, groundnuts, etc., whereas olive trees are classified as tree crop.

The importance of subsidies has fallen considerably between 1985 and 1989, so that all

the crops have a positive rate of taxation in 1989. Only pulses have kept a rate of subsidization

above 2%. One can notice that the switch to VAT has mainly been felt by industrial crops,

truck gardening and tree crops, with a fall in the rate of taxation about 0.8% or 1% compared

with that of the TPS. But these are the crops for which the compensation due to the increase

in other indirect taxes has been the largest, except for the industrial crops, for which that rate

has not changed.

Obviously, because of the fiscal exemption enjoyed by the agricultural sector, all this

fiscal burden is the result of the shifting of the taxes and other levies paid by the upstream

23

TABLE 111.2: TAX INCIDENCE ON CROPS AND LIVESTOCK PRODUCTION(million DH and %)

Crops Livestock

Years 1985 1989 1985 1989

Share of Residual 1.54% 0.91% 3.53% 3.25%

Indirect Taxes 771.1 1210.9 529.9 892.5: (3.83) (4.11) (4.61) (5.98)

incl. TPS (TVA) 442.8 386.3 236.0 270.8: (2.20) (1.31) (2.05) (1.81)

Others 328.3 824.6 293.9 621.8: (1.63) (2.79) (2.56) (4.16)

Direct Taxes 108.1 103.0 92.3 97.9: (0.54) (0.35) (0.80) (0.66)

incl. PTS : 53.2 58.6 46.7 53.9(0.26) (0.19) (0'.41) (0.36)

IBP 49.4 39.6 3.9.5 38.7(0.25) (0.13) (0.34) (0.26)

PSN 5.4 4.9 6.1 5.2(0.03) (0.01) (0.05) (0.04)

CNSS Contrib. 54.5 61.3 52.8 60.8(0.27) (0.20) (0.46) (0.41)

Subsidies -764.5 -374.6 -311.9 -211.1(3.79) (1.27) (2.71) (1.41)

Total Levy 933.6 1375.2 675.0 1051.3(Gross of Subsidies) (4.63) (4.69) (5.87) (7.04)

Total Levy 169.1 1000.6 363.1 840.1(Net of Subsidies (0.84) (3.40) (3.16) (5.63)

Imports 2466.4 1981.4 1248.7 1130.1(12.24) (6.66) (10.86) (7.57)

Note: The percentages in parentheses are computed per sub-sector.

24

TABLE 111.3: TAX INCIDENCE BY CROPS(Million DH and %)

Levy TPS or TVA: Other Indirect Direct Taxes: Subsidies Net Total

Cereals 1985 192.9 145.6 : 40.1 : -344.2 : 59.9(1.80) : (1.36) : (0.37) : (3.21) : (0.56)

1989 : 178.9 : 385.2 : 48.8 : -195.0 : 449.1(1.12) : (2.47) : (0.31) : (1.23) : (2.82)

Pulses 1985 : 14.3 : 11.6 : 4.9 : -67.6 : -34.1(1.64) : (1.33) (0.56) : (7.76) : (-3.91)

1989 : 10.4 : 21.5 : 4.4 : -17.1 : 21.6(1.41) : (2.92) : (0.60) : (2.32) : (2.95)

Ind. Cropsl985: 13.7 : 15.0 : 5.6 -69.4 : -31.8(2.17) : (2.38) (0.88) : (11.02) : (-5.05)

1989: 11.1 : 20.5 6.0 : -19.5 : 22.1(1.06) : (1.95) : (0.57) : (1.86) : (2.10)

Oil Seeds 1985: 2.7 2.4 0.6 : 4.0 : 2.1(1.38) (1.26) : (0.32) : (2.06) : (1.10)

1989: 4.2 : 6.4 : 1.5 : -5.5 : 7.5(0.78) : (1.20) : (0.28) : (1.04) : (1.41)

Truck Gard.1985: 87.1 64.5 : 27.3 -87.8 : 101.7(2.65) : (1.96) : (0.83) : (2.67) : (3.09)

1989: 75.5 148.9 : 19.5 : -52.6 201.8(1.57) : (3.10) : (0.41) : (1.10) : (4.20)

Tree Cropsl985: 123.1 82.3 27.4 A -162.3 81.0(3.18) : (2.13) : (0.71) : (4.20) : (2.10)

1989 99.7 : 227.4 : 20.6 -74.9 : 283.3(1.73) : (3.95) : (0.36) : (1.30) : (491)

Fodder 1985: 9.1 : 6.8 : 2.3 : -29.3 : -9.7(1.56) : (1.17) : (0.39) : (5.02) : (-1.67)

1989: 6.6 : 14.7 : 2.3 : -9.8 : 15.2(1.00) : (2.23) : (0.35) : (1.49) : (2.30)

Notes: The percentages in parentheses are computed by crop.

25

sectors. Consequently, it is interesting to identify which inputs channel the incidence of these

levies. We shall see that some inputs carry in fact a net subsidy, while most of the tax

incidence is channelled by a small number of intermediate goods.

111.2: The Taxes Shifted by Inputs.

The incidence of the levies paid by the upstream sectors can in principle be channelled

by intermediate goods, or in the longer run, by fixed investment (and the resulting "capital

consumption"). The results presented below show that intermediate goods are the most

important in this process.

(a) Decomposition of Intermediate Inputs.

Table III.4 presents the results by applying the decomposition method separately to

each intermediate good, according to the eighteen-entry list presented above. The percentages

in parentheses below the arnounts are the rate of taxation channelled by each good, as a

percentage of the total expenditure by the agricultural sector on that good.

One observes that irrigation water is the main channel of subsidies to agriculture, with

a rate of 51.33% in 1985 and a rate of 31.54% in 1989. Insofar as irrigation mainly benefits

large estates, one can see in this subsidization an especially regressive redistributive

intervention. But, we will see below some elements of the structure of embodied taxes which

mitigate this impression. Then, fertilizers and dried pulp, which carried a subsidy rate about

30% in 1985, channel in 1989 a positive taxation, small for the former, at the rate of 3.91%,

and fairly large for dried pulp, at the rate of about 13%. Hence, another bias in favor of

intensive agriculture which seemed to exist in 1985 has been removed.

The goods carrying the heaviest tax are fuel and lubricants, with a rate which has

grown from 24.22%o to 50.21% between the two dates, and banking and insurance services,

whose rate has increased from 31.78% to 44.43% and from 51.57% to 66.28%, respectively.

One must take into account, in the case of petroleum products, that there exists a variable-rate

tax aiming at stabilizing the domestic prices of these products, so that the tax burden carried

by these goods is very variable, as a function of the price changes in the world market. There

are other goods whose embodied tax rate is very high, larger than 15% in 1989, namely spare

26

parts, pesticides, electrical power, small equipments, bran, molasses, and drugs. The rates on

pesticides and on bran have increased a lot during this period. Notice that beside bran, most of

these products are used mainly in the intensive agriculture sub-sector, more than in the

traditional one. Hence, one can see here a factor of partial compensation for the regressive

distributional impact noted above about irrigation water. It seems that the incidence of the

taxes carried by inputs affects the different products in a very differentiated way. Therefore,

beyond the redistribution effects that they entail, there must exist some rather strong

substitution effects bearing on the choice of cultivation techniques. But, in order to go further

in this evaluation, and to assess firmly the distorsions of the incentive system entailed by this

incidence, one would need shadow prices for the different inputs. Tuluy and Salinger (1989)

have computed some shadow prices for some agricultural products, but not for the inputs

studied here.

Beyond the rates of net taxation just analysed, it is interesting to look at the amounts

involved. It appears that the bulk of the levies are carried by four main goods. Two of them

are of agricultural origin, seeds and feed of agricultural origin. They represent in 1989 a levy

of 102.3 million DH and 292.2 million DH, respectively. These goods carry in fact a fairly low

rate of embodied taxation (5.01% and 4.39%), but their use is so widespread that the sheer

size of the quantities consumed explains the bulk of the levies. At the other extreme are found

two goods which are complements to mechanization: fuel and lubricants, which represent an

embodied tax worth 935.4 million DH, and spare parts, which represent an embodied tax

amounting to 175.8 mnillion DH. Contrary to the two goods of agricultural origin identified

above, these two goods have very high embodied tax rates, 50.21% for the petroleum

products, and 27.52% for spare parts. Agficulture is not exempt from taxes for these two

goods, because they could easily be diverted for being used outside of agriculture.

One can thus draw a clear picture of the types of agricultural activities which bear

some taxes. There is first the basic cultivation, the most widespread, which cannot avoid for

example the use of seeds; with small rates, it bears a fairly large burden, because of its size.

There is next mechanization. We will see below that investment in agricultural equipment is in

general little taxed. But the intermediate goods which are complementary to mechanization are

at the same time taxed at a high rate and widely enough used to make an important basis for

27

TABLEAU 11I.4: NET TAX INCIDENCE PER INPUT(INTERNIEDIATE GOODS).

(millions DH and %).

Years: 1985 1989

Seeds . 34.2 : 102.7: (2.06) : (5.01)

Fertilizers : -311.2 39.1: (-29.72) (3.91)

Fuel and Lub. 394.4 : 935.5: (24.22) (50.21)

Spare Parts : 102.8 : 175.8: (21.00) (27.52)

Pesticides : 0.8 : 48.6: (0.38) : (17.00)

Irrigation Water: -183.7 -198.8: (-51.33) (-31.54)

Elect. Power 74.4 84.9(21.39) (20.82)

Small Equip. 7.4 : 12.4 :: (13.42) (20.79)

Transport : 13.3 : 6.4: (13.10) : (3.70)

Bank. Services: 11.4 : 64.2: (31.78) : (44.43)

Insur. Services: 37.4 : 48.1: (51.57) : (66.28)

Manure : 8.0 : 13.6: (3.24) : (5.00) :

Bran : 16.0 : 109.8: (1.54) : (19.53)

Dried Pulp : -50.0 : 29.2: (-29.82) : (12.86)

Molasses : 0.4 1.6(9.78) : (15.27)

Comp. Feed : 90.1 : 82.9: (7.91) (8.02)

Drugs : 14.5 : 24.4(14.5) : (17.94)

Feed of Agric.: 242.8 : 292.2Origin : (7.99) : (4.39)

Note: The Percentages in parentheses are computed by inputs.

28

the incidence of the fiscal burden. These data allow to refine a bit the view that one can form

of the influence of the tax burden embodied in inputs on the incentive system and the choice of

cultivation techniques. The subsidy on irrigation water, on the one hand, which is an important

incentive to intensification, and the strong taxation of mechanical capital, through the

complementary intermediate goods, on the other hand, probably combine their impacts to

induce a strong labor intensity in the intensive sector. We can thus think that these elements

are incentives that support a strong demand for labor from the intensive sector, at least during

the high season.

(b) Decomposition of Investment Expenditures.

In view of table 111.5, the tax incidence shifted onto agriculture by investment goods is

negligible, with a fairly uniform and low structure of rates. It is nevertheless interesting to

decompose these investment expenditures in order to bring out the diversity of the tax rates

carried by the various investment goods. This is shown in table 111.6.

Out of the six goods represented, and which comprise the bulk of the agricultural

sector investment, the diversity is such that it could be interpreted as a deliberate policy, at

least in part, while it results in fact from the incidence mechanisms analysed above.

Nevertheless, the government can change the impact of this mechanism by the use of

subsidies, for example, and so it keeps some responsibility for the outcome. Tractors are

subsidized, maybe for compensating the tax burden which bears on the complementary)

intermediate goods, like fuel and spare parts. Similarly, supporting equipment and combined

harvesters are little taxed, or even subsidized, like the supporting equipments in 1989.

Buildings carry a light but not negligible tax, while poultry-farming equipments are heavily

taxed.

Regarding pumping equipment, we observe a drastic change, with a heavy taxation in

1985, replaced by a net subsidy in 1989. One might see here a policy change concerning the

control of water use, about which two opposing doctrines may be defended. In the case of the

strong taxation, it is to be related to the important subsidy carried by irrigation water. The

water provided by parastatal services is delivered generously, but the means to develop a

private irrigation system are taxed heavily. Water is a scarce and precious resource, and

29

because the liquid circulates in the water table, there are externalities which could induce

private agents to extract the water too fast, according to the mechanism known as the

TABLE 111.5: DECOMPOSITION OF INVESTMENTOF THE AGRICULTURAL SECTOR

(million DH and %)

Year 1985 1989

Share of Residual 0.00 0.01

Indirect Taxes 164.1 101.6: (8.49) (3.88)

incl. TPS (TVA) 93.8 60.9: (4.85) (1.93)

Others 70.3 61.2: (3.64) (1.96)

Direct Taxes : 29.9 22.9(1.55) (0.88)

incl. PTS : 16.6 13.2(0.86) (0.51)

IBP 11.9 8.6(0.62) (0.33)

PSN 1.4 1.1: (0.07) (0.04)

CNSS Contributions 16.3 14.8: (0.84) (6.26)

Subsidies -70.8 -137.4: (3.66) (6.26)

Total Levy 210.3 139.3(Gross of Subsidies) (10.87) (5.33)Total Levy 139.5 1.9(Net of Subsidies) (7.22) (0.07)Imports : 960.7 : 1324.2

(49.68) (50.85)

Note: The percentages in parentheses are computed by reference to thevalue of fixed investment.

"tragedy of the commons" (see Dasgupta and Heal, 1979). Each agent wants to extract

water as fast as possible, without taking care of the conservation of the water table, knowing

that the water that he does not extract himself would probably be extracted by his neighbor.

The result is a too fast extraction compared to the technical and economnic optimum (see

30

Dasgupta and Heal, 1979). This reasoning leans in favor of a public irnigation system, and

against the uncontrolled development of private irrigation. However, various authors criticize

in general the public provision of irrigation water, arguing that it leads to wastage and

favoritism, or even to corruption (Bardhan, 1984). According to this view, the administrative

costs entailed by water delivery, and the resulting inefficiency of its exploitation, more than

compensate for the inefficiency implied by the "tragedy of the commons" described above.

Then, support to private irrigation may be considered.

TABLE 11.6: TAX INCIDENCE BY INPUTS(Investment Goods)(million DH and %)

Years 1985 : 1989

Tractors : -24.0 -49.6(-7.79) (-12.84)

Combined Harvesters 4.0 4.3(2.21) (1.78)

Supporting Equipments 6.8 -4. 1(1.34) (-0.59)

Irrigation Equipments 109.1 -19.8(30.64) (-3.77)

Poultry-Framing Equip,. 6.1 11.5(27.32) (38.59)

Buildings : 37.5 59,8(6.70) (7.99)

Note: The percentages in parentheses are computed with respect tothe expenditure in each investment good.

Regarding the taxation of the poultry-farming equipment, the rationale seems less

clear. In fact, these goods bear quite a heavy indirect taxation, and are little subsidized. Maybe

this results from the fear that these equipements could easily be diverted from agricultural

uses.

CONCLUSION

This study has shown that, although it is exempt from the pecuniary burden of

taxation, the Moroccan agriculture is not exempt from all the economic burden of the various

taxes and levies. In fact, it bears a non negligible tax burden. In order to show this, we have

31

performed a fairly standard incidence analysis, according to a method explained in the first

section. Assuming that agriculture has decreasing returns to scale, as economists have done

since the mid-eighteenth century, and cannot shift its tax burden forward because its prices are

exogenously determined, we have treated this sector like the final consumer is usually treated

in tax incidence analyses. Three basic assumptions are made regarding the supplier sectors of

agriculture, namely:

(I) the upstream sectors are competitive;

(2) they have constant returns to scale;

(3) all the levies are shifted forward.

We have argued that this is a reasonable set of assumptions regarding the non

agricultural sectors in Morocco, and we have seen how changing either assumption (I) or (2)

could change the measurement of the tax incidence. But it is not possible to determine

whether the incidence will exert itself at a rate above or below 100%. Under these

assumptions, the measurement of the tax incidence can be done using the famous Leontieff

inverse matrix, which allows to take into account the indirect incidence of the levies paid by

the suppliers of the suppliers, etc.

We have then presented in detail the decomposition method applied. It turned out that

four steps in the iterative analysis of the taxes paid upstream have been sufficient for reducing

to a negligible percentage the share of locally produced intermediate goods in the value of

gross output. The value of gross output of all the sectors can thus be decomposed,

schematically, into imported intermediate inputs, factor incomes, and taxes.

Applying this method to the Moroccan agriculture in 1985 and 1989, we have seen

that the tax burden passed on to the agricultural sector is not negligible. Globally, this sector

has borne a tax burden worth 1.9 billion DH in 1989, at the production level. This does not

take into account the taxes paid by agricultural households. In 1985, it has paid 140 million

DH embodied in investment, whereas it has received for it a positive, but negligible subsidy in

1989 These figures may be compared to the government general budget, which is 49.8 billion

DH in 1989, including the supplementary budgets (Direction de la Statistique, 1991). For

further comparison, the Moroccan GDP is 129.5 billion DH in 1985, and 191.6 billion DH in

1989. It was clearly shown that some crops like truck-gardenning and tree crops, and

32

livestock production, to a lesser extent, bear a rate of taxation comparable to that of the rest

of the economy. Other crops are less taxed.

This tax burden is mainly carried by a small number of interrnediate goods, including

traditional inputs like seeds, on the one hand, and goods which are complementary to

mechanization, like fuel and lubricants, on the other hand. Among fixed investment goods,

which are rather little taxed, it is irrigation equipment (in 1985) and poultry-farming

equipment that carry the largest levy. Moreover, we have noticed some subtle compensation

mechanisms between taxation and subsidization of complementary goods, like irrigation

equipment and irrigation water, tractors and fuel, etc.

Note:

1. All the results concerning the tax incidence have been produced using the input-output method by a Moroccan team under the scientific direction of Said Chbaatou(University of Fes). The complete results can be found in Expert-System (1991).

33

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Documents

Mit,tlc East North Africa - World Bank...134.5 Mit,tlc East North Africa No. 11 -- April 1994 Tax Incidence On Agriculture In Morocco (1985-1989)by Jean-Paul Azam CERDI, University