Tax Policy as Structural Reform - CSIS · Tax Policy as Structural Reform VITOR GASPAR DIRECTOR, FISCAL AFFAIRS DEPARTMENT ... pp ACE introduction ACE introduction Source: IMF, 2016,

Tax Policy as Structural Reform

VITOR GASPARDIRECTOR, FISCAL AFFAIRS DEPARTMENT

INTERNATIONAL MONETARY FUND

CENTRE FOR STRATEGIC AND INTERNATIONAL STUDIES

JAKARTA, INDONESIA

JULY 14, 2017

Motivation

1

Note: Top-10 and bottom-10 countries in terms of changes in social welfare over 2003-15.

Source: Hellebrandt and Mauro (2016) and IMF staff calculations.

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

0 10,000 20,000 30,000 40,000

Equ

ally

dis

trib

ute

d e

qu

iva

len

t in

co

me

($

PP

P)

Mean income

Correlation coefficient=0.997

Note: Reported is the relationship for 2015. Inequality aversion parameter=0.5.


-50 0 50 100 150

Taiwan Province of ChinaJapan

SingaporePhilippines

New ZealandLaos

Korea, Republic ofSri LankaAustraliaMauritiusPakistan

IndonesiaTimor-Leste

ThailandHong Kong

NepalIndia

MongoliaChina

Viet NamMalaysia

Mean income Income equality

Outline

Motivation: need for revenue-enhancing reforms

Structural reform is needed to raise productivity and growth

Fiscal structural reform

Fiscal support for structural reform

2

Motivation: need for revenue-enhancing reforms

3

Revenues traditionally low: focus on Asia, ASEAN

44

Source: IMF World Revenue Longitudinal Dataset (WoRLD)

Tax Revenue as percent of GDP: income groups

and ASEAN

unweighted average

8

10

12

14

16

18

20

22

24

1990 1995 2000 2005 2010 2015

High income Low income ASEAN

ASEAN(+3) ASEAN-5

Source: IMF World Revenue Longitudinal Dataset (WoRLD)

Tax Revenue as percent of GDP: regions

unweighted average

10

12

14

16

18

20

22

24

26

28

1990 1995 2000 2005 2010 2015

Asia and Pacific Africa

Europe Americas and Caribbean

Positive relationship: tax and GDP per capita

55

Tax and GDP per capita, 2015Low and l middle income countries

Myanmar

Indonesia

Cambodia

Philippines

Lao

Vietnam

0

5

10

15

20

25

30

35

0 1000 2000 3000 4000 5000 6000

Reve

nu

e a

s p

erc

en

t o

f G

DP

GDP per capita

World Distribution of Tax to GDP ratio

2016

Source: IMF World Economic Outlook (WEO) and IMF Staff Source: IMF World Revenue Longitudinal Dataset (WoRLD)

Tax capacity and economic development

66

Source: Vitor Gaspar and others (2016)

Taxes and Real GDP per Capita,

2012

0

5

10

15

20

25

30

35

40

45

50

2.0 2.5 3.0 3.5 4.0 4.5 5.0

Ta

x t

o G

DP

Log Real GDP per capita

Advanced

Developing

0

5

10

15

20

25

30

35

40

45

50

2.5 3.0 3.5 4.0 4.5

Tax to G

DP

Log of 50 year averages of real GDP per capita

1850-1899

1900-1949

1950-1980

Taxes and Real GDP per Capita, by time period


Tax capacity and economic development

77


Fiscal policies are structural policies

8

Fiscal structural reform

Policies to help push out the

technology frontier

Policies to help narrow the

productivity gap between firms

Fiscal support for structural reform

Understanding productivity calls for

research based on microeconomics

and micro-datasets

Fiscal policies are structural policies

Source: Dabla-Norris and others (2015).

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

75

77

79

81

83

1983-93 1990-00 1997-07

TFP Frontier Growth Rate

(percent)

Average TFP Level

(percent of frontier)

Advanced economies: Stochastic Frontier

Analysis, by Country-Sector

9

Fiscal structural reforms: Policies to push out the technology

frontier through encouraging innovation

10

R&D tax incentives play an important role

11

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45Indirect government support through R&D tax incentives Direct government funding of Business Enterprise R&D

11

Direct Government Funding of business R&D and R&D tax incentives,

2014 (Percent of GDP)

Source: OECD

Fiscal Incentives to R&D Help Push Out the Frontier

12

≈ 0.4 percent of

GDP budgetary

cost

40 percent

cost reduction

of extra R&D

for firms

R&D Tax

credits

R&D Subsidies

40 percent

increase in

private R&D

investment

5 percent

higher GDP

over the

long-run

Effective Design

Critical

Note: Estimates are averages across OECD countries.

…but “Patent Boxes” should be avoided

Ineffective – no effect at all in

two countries

Only effective where tax relief is large

and link with R&D strong

Inefficient – as relief depends

on income, not R&D

Negative international

spillovers – focus is on

attracting mobile IP income

(aggressive tax competition)

Synthetic Control Estimation Results: Intellectual Property

Box and Private R&D (Log of real R&D spending)

13

-0.6

-0.3

0.0

0.3

199

0

199

2

199

4

199

6

199

8

200

0

200

2

200

4

200

6

200

8

201

0

201

2

Reform

-0.6

-0.3

0.0

0.3

199

0

199

2

199

4

199

6

199

8

200

0

200

2

200

4

200

6

200

8

201

0

201

2

Reform

-0.2

-0.1

0.0

0.1

0.2

0.3

199

0

199

2

199

4

199

6

199

8

200

0

200

2

200

4

200

6

200

8

201

0

201

2

Reform

1. France

-1.6

-1.2

-0.8

-0.4

0.0

0.4

199

0

199

2

199

4

199

6

199

8

200

0

200

2

200

4

200

6

200

8

201

0

201

2

Reform

Actual Synthetic Control

2. Spain

4. Netherlands3. Belgium

IP box

ineffectiveIP box

ineffective

IP box effective, but

costly

IP box effective, but

costly

Fiscal structural reforms: Policies to help narrow the productivity

gap between firms

14

Productivity gaps between firms can be large

0

4

8

12

16

20

24

28

32

0 3 6 9 12 15 18 21 24

Pe

rce

nt o

f firm

s

Firm revenue productivity

More efficient country

Less efficient country

Distribution of Firm-Level Revenue Productivities

Sources: ORBIS; and IMF staff estimates.

Note: The figure shows the distribution for firms in the manufacturing sector for each country. More (less) efficient country is defined as a country at the

75th (25th) percentile of the distribution of resource allocation efficiency, based on the ORBIS sample.

0

5

10

15

20

25

30

35

40

-2.6 -1.8 -1.0 -0.2 0.6 1.4 2.2 3.0

Perc

ent of firm

s

Log of firm revenue productivity scaled by corresponding country-industry average

15

Eliminating distortions could improve productivity and lift growth

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

AEs EMEs LIDCs

Re

al G

DP

gro

wth

(p

erc

en

t)

Estimated Annual Real GDP Growth Effects from Reducing Resource Misallocation

Sources: ORBIS; World Bank, Enterprise Surveys; and IMF staff estimates.

Note: The figure shows medians across country groups. Estimates assume a 20 year transition period, that other sectors could achieve TFP gains similar to those estimated for

the manufacturing sector, and that there are no adjustment costs. AEs = advanced economies; EMEs = emerging market economies; LIDCs = low-income developing countries.

Adds

1% to

real

GDP

growth

16

Upgrading the tax system reduces misallocation

Selection of tax distortions that discriminate across:

1. Sources of financing

2. Small and large firms

3. Capital asset types

4. Formal and informal firms

17

Example 1: Corporate debt bias affects investment decisions that depend more on equity, such as R&D

18

0

5

10

15

20

25

30

0 10 20 30

Exte

rna

l e

qu

ity d

ep

en

den

ce

R&D Intensity

Sources: Brown and Martinsson (2016); and IMF staff estimates.

Note: R&D intensity is the average of industrial research and development

expenditures normalized by vale added across OECD countries). External

equity dependence is the net external equity issues to total assets ratio for the

median U.S firm in each industry.

Advanced Economies: R&D Intensity and External

Equity Dependence, by Industry

Effective Marginal Tax Rates for Debt and Equity

Financed Investment, for a PIT taxed investor

Source: IMF, 2016, “Tax Policy, Leverage and Macroeconomic Stability,” IMF Policy Paper.

AUT

BEL

BGR

DNK

EST

FINGRC

HUN

IRL

LVA

LUXMLT

NLD

POL

ROU

SVK

ESP

GBR

HRV

MKD

NOR

CHE

JPN

0

10

20

30

40

50

60

70

80

90

100

-20 0 20 40 60 80 100

Ne

w E

qu

ity

Debt

Tax reforms can reduce debt bias

BanksNon-financial corporations

20 pp

13.7

pp

ACE introduction ACE introduction

Source: IMF, 2016, “Tax Policy, Leverage and Macroeconomic Stability,” IMF Policy Paper.

19

Introduction of an Allowance for Corporate Equity System in Belgium

20

1

2

3

4

5

<10

11

―2

0

21―

30

31―

40

40+

Ave

rag

e n

um

ber

of e

mp

loye

es

(re

sca

led

so

firm

s le

ss th

an

fiv

e

ye

ars

old

= 1

)

Firm age (years)

Countries with lower tax rate for small firms

Sources: KPMG; World Bank, Enterprise Surveys; and IMF staff estimates.

Note: Lines represent the median for each group.

Developing Countries: Employment by Firm Age

Example 2: Lower taxes for small firms creates a small business trap

Mozambique: Distribution of ISPC Taxpayers, 2015

Compared with 2010

Source: Swistak, Liu, and Varsano 2017.

Note: The horizontal axis shows the distribution of imposto simplificado para

pequenos contribuintes (ISPC) taxpayers by turnover bins of Mt$100,000.

0

20

40

60

80

100

120

10 15 20 25 30 35 40

Nu

mb

er

of IS

PC

ta

xp

aye

rs

Turnover (MT$100,000)

2010

2015

Small firms face high tax compliance costs

21

156

117

88

60

133 3 2

0

25

50

75

100

125

150

175Tax c

om

plia

nce c

osts

as s

hare

of sale

s

(ra

tio

of S

ME

s to

la

rge

firm

s)

Source: Dabla-Norris and others, 2017

Note: Average tax compliance costs as a share of sales of SMEs divided by tax compliance as a share of sales of large firms. Data from different years, and definition of SMEs

differs across countries.

Developing Countries: Tax compliance burden of small firms

(as a percent of total sales)

Lower tax compliance costs help small and young firms

22

20

40

60

80

100

Countries with lowTAQI score

Countries withhigh TAQI score

La

bo

r p

rod

uctivity o

f sm

all

firm

s

(ave

rag

e p

rod

uctivity o

f m

ed

ium

-siz

ed

a

nd

la

rge

firm

s =

10

0)

Developing Countries: Tax Administration Quality Index

and Labor Productivity of Small and Young Firms

Source: Dabla-Norris and others, 2017.

Note: Labor productivity refers to sales divided by the number of employees. Small firms have fewer than 20 employees; young firms are less than seven years old. A higher score

on the TAQI implies lower tax compliance costs. Countries with a low (high) TAQI score are those at the 25th (75th) percentile of the sample distribution. The TAQI uses country-

specific information on different dimensions of tax administration that are likely to matter for tax compliance costs faced by firms, from the IMF’s Tax Administration Diagnostic

Assessment Tool (TADAT). Medium-sized and large firms are those with 20 or more employees. Mature firms are those seven or more years old.

Small firms

20

40

60

80

100

Countries with lowTAQI score

Countries with highTAQI score

La

bo

r p

rod

uctivity o

f yo

un

g f

irm

s

(ave

rag

e p

rod

uctivity o

f m

atu

re firm

s =

10

0)

Young firms

Example 3. Differentiated tax treatment across assets

23

Developing Countries: Machinery as a Share of Total Assets,

by Industry (Percent of total assets)

Sources: Oxford University Center for Business Taxation; World Bank, Enterprise Surveys; and IMF staff

estimates.

Note: Tax disparity is the effective marginal tax rate (EMTR) on machinery minus the EMTR on buildings.

Countries with high (low) EMTR disparity are those with EMTR differences above (below) the median across

countries. Total assets are measured as the sum of machinery and buildings.

40 45 50 55 60 65 70 75 80

Paper

Electronics

Nonmetallic and plastic materials

Textiles

Metals and machinery

Other manufacturing

Garments

Auto and auto components

Chemicals and pharmaceutics

Other transport equipment

Leather

Food and beverage

Wood and furniture

Countries with low tax disparity Countries with high tax disparity

Tax disparities across

capital asset types steer

investors toward lower-

return, tax-favored,

investments

Example 4. International spillovers

24

Singapore

Singapore

Indonesia

IndonesiaThailand

ThailandMalaysia

Malaysia

Vietnam Philippines

Myanmar Myanmar0.0%

1.0%

2.0%

3.0%

GDP FDI stock

Share of world's FDI stock relative to share of GDP,

ASEAN

20

25

30

35

40

45

50

1990 1995 2000 2005 2010 2015

High income Middle income Low income

Asia ASEAN ASEAN(+3)

ASEAN-5

Statutory corporate income tax rates, historic trend

Sources: IMF Coordinated Direct Investment Survey (CDIS), IMF World Economic

Outlook (WEO) and IMF Staff

Sources: IMF historic corporate tax database

Fiscal policies to address inadequacy of current international tax framework

25

Current international tax

architecture

Inadequate compromise

on taxing rights

Vulnerable to tax

avoidance and evasion

Distortive; propagates

economic inefficiencies

Highly susceptible to tax

competition

G20/OECD BEPS project

Inclusive Framework: 100 countries committed to implement 4 minimum standards

Brunei Darussalam, Indonesia, Malaysia, Singapore, Thailand, Vietnam

Automatic Exchange of Information (AEOI)

Toolkits for LICs developed under the Platform for Collaboration on Tax

Regional cooperation and coordination

Initiatives to address

shortfalls

Fiscal support for structural reforms

26

Most labor and product market reforms strengthen medium-

term public finances indirectly by raising output

Impact of labor market reforms on fiscal outcomes depends on

cyclical conditions

Package combining reforms with well-designed fiscal support

can yield net medium-term fiscal gain

Fiscal and non-fiscal incentives can facilitate reforms by

alleviating transition and political costs

Fiscal support for labor and product market reforms

27

Background slides

28

29

-50 0 50 100 150

CroatiaCentral African Republic

MadagascarBurkina Faso

GreeceGuinea-Bissau

ZambiaItaly

JamaicaLiberia

UzbekistanIndia

GeorgiaIran

TanzaniaMongolia

ChinaViet NamMalaysiaBelarus

Change in equally distributed equivalent income over 2003-15 (%)




0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

0 10,000 20,000 30,000 40,000

Equ

ally

dis

trib

ute

d e

qu

iva

len

t in

co

me

($

PP

P)

Mean income


Note: Reported is the relationship for 2015. Inequality aversion parameter=0.5.


gamma=2.0


0

5000

10000

15000

20000

25000

30000

35000

40000

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000

Equ

ally

dis

trib

ute

d e

qu

iva

len

t in

co

me

($

PP

P)

Mean income

gamma=0.5


gamma=1.5


30

Note: Reported is the relationship for 2015. Inequality aversion parameters=0.5, 1.5, and 2.0.


-100 -50 0 50 100 150

Central African Republic

Croatia

Zambia

Guinea-Bissau

Madagascar

Burkina Faso

Greece

Italy

Macedonia, FYR

Jamaica

Iran

Uruguay

Tanzania

Georgia

Peru

Mongolia

China

Viet Nam

Malaysia

Belarus

Changes in social welfare over 2003-15 (%)


gamma=1.5

-100 -50 0 50 100 150


Zambia

Guinea-Bissau

Croatia

Madagascar

Italy

Greece

Burkina Faso

Macedonia, FYR

Benin

Uruguay

Tanzania

Russian Federation

Mongolia

Georgia

China

Peru

Viet Nam

Malaysia

Belarus



gamma=2.0

-100 -50 0 50 100 150

Croatia


Madagascar

Burkina Faso

Greece

Guinea-Bissau

Zambia

Italy

Jamaica

Liberia

Uzbekistan

India

Georgia

Iran

Tanzania

Mongolia

China

Viet Nam

Malaysia

Belarus



gamma=0.5

31



Interplay between reforms and fiscal policy

32

Labor and Product

Market ReformsFiscal Policy

Can bring forward benefits of certain

reforms and enhance likelihood of

their implementation

Can yield medium-term fiscal gains by increasing output (positive indirect effect, reform-specific

direct effect)

Fiscal gains from product market reforms

33

Note: Based on empirical analysis where t=0 is the year of the major reform shock. Solid red lines denote the average estimated response to the shock;

dashed yellow lines denote 90 percent confidence intervals.

-1

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

4

-1 0 1 2 3 4 5 6

Pe

rce

nt

Years

-10

-8

-6

-4

-2

0

2

4

-1 0 1 2 3 4 5 6

Pe

rce

nt o

f G

DP

Years

Panel 1. Output Panel 2. Public Debt-to-GDP

Fiscal gains from unemployment benefit reforms

34

-2

-1

0

1

2

3

4

5

6

7

8

-1 0 1 2 3 4 5 6

Pe

rce

nt

Years

-16

-14

-12

-10

-8

-6

-4

-2

0

2

-1 0 1 2 3 4 5 6

Pe

rce

nt o

f G

DP

Years

Panel 1. Output Panel 2. Public Debt-to-GDP

Note: Based on empirical analysis where t=0 is the year of the major reform shock . Solid red lines denote the average estimated response to the shock;

dashed yellow lines denote 90 percent confidence intervals.

Fiscal effects of employment protection reforms depend on cyclical conditions

35

Panel 1. In periods of slack Panel 2. In periods of expansion

Note: Based on empirical analysis where t=0 is the year of the major reform shock. Solid yellow lines denote the estimated response to the reform shock; dashed yellow lines

denote 90 percent confidence intervals. The solid red line shows the unconditional result, i.e., the average estimated impact across different growth regimes. The growth regime

(expansion vs. slack) is defined using a smooth transition function as in Auerbach and Gorodnichenko (2012), which takes values between 0 and 1 depending on the extent to

which the economy is in recession. The charts show estimated impulse responses for large and low values of the smooth transition function, that is, assuming F(z)=0.75 and

F(z)=0.25

-6

-4

-2

0

2

4

6

8

10

12

14

-1 0 1 2 3 4 5 6

Pe

rce

nt o

f G

DP

Years

-16

-14

-12

-10

-8

-6

-4

-2

0

2

-1 0 1 2 3 4 5 6

Pe

rce

nt o

f G

DP

Years

Impact on Public Debt-to-GDP Ratio

Fiscal gain from combining employment protection legislation reform with fiscal support

36

Effect of employment protection legislation reform on public debt-to-GDP

ratio under weak business cycle conditions

(deviation from no reform scenario, in percentage points)

Note: t=0 is the year of the shock. The solid blue (red) lines represent the average results under fiscal contractions (expansions). The fiscal policy regime (expansion vs.

contraction) is defined using a smooth transition function as in Auerbach and Gorodnichenko (2012), which takes values between 0 and 1 depending on the extent to which the

economy is experimenting fiscal contraction. See supplementary slides for details. The charts show estimated impulse responses for large and low values of the smooth transition

function, that is, assuming F(z)=0.75 and F(z)=0.25. F(z)=0.75 (0.25) typically corresponds in the sample to an unanticipated government consumption shocks of about -

0.85(+0.85) percent of GDP. See SDN Appendix for details.

-6

-4

-2

0

2

-1 0 1 2 3 4 5 6

under fiscal expansion

under fiscal contraction

Political economy case: net fiscal gain of product market reform remain even with upfront fiscal support

37

Note: Based on numerical simulations including estimated output effects of reforms and current country-specific parameters for marginal tax rates, the real interest rate and the

trend growth rate of the economy, the bars represent the net fiscal gains associated with product market reform, as measured by the improvement in the overall fiscal balance

relative to the no-reform scenario over the medium term. The red bar represents the average net medium-term fiscal gain without an upfront fiscal support. The yellow bar

captures the average gains associated with reforms supported by 1% of GDP fiscal support. The error bars show minimum and maximum values in OECD countries. The medium-

term multiplier for the fiscal support is conservatively assumed to be zero in this exercise. See SDN Appendix for details.

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

No Fiscal Support Fiscal Support

Pu

blic

De

bt to

GD

P

Net Fiscal Benefit of Product Market Reforms under Weak Business

Cycle Conditions (Positive Values Denote Improvement)

Raising productivity is a top challenge

-3

-2

-1

0

1

2

3

1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015

Growth in Total Factor Productivity, 1990―2016

(Five-year average growth rate, percent)

1. Advanced Economies 2. Emerging Market Economies 3. Low-Income Developing Countries

Source: Adler and others 2017.

Note: Group averages are weighted using GDP at purchasing power parity.

38

39

b=1-(y1/y2)^gamma

y2/y1 2 3 4 5 10 25

gamma

0.2 0.13 0.20 0.24 0.28 0.37 0.47

0.5 0.29 0.42 0.50 0.55 0.68 0.80

1.5 0.65 0.81 0.88 0.91 0.97 0.99

2.0 0.75 0.89 0.94 0.96 0.99 0.998

Documents

Tax Policy as Structural Reform - CSIS · Tax Policy as Structural Reform VITOR GASPAR DIRECTOR, FISCAL AFFAIRS DEPARTMENT ... pp ACE introduction ACE introduction Source: IMF, 2016,