Owning Development: Taxation to fight poverty | Economic Inequality | Taxes

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[This paper was previously published under the title Progressive Taxation: Towards fair tax policies.] In order to be able to find enough resources to ensure public services, such as education and health for all, poor countries need to raise more tax, and raise tax in ways that are progressive and fair. Tax policy in developing countries has been heavily influenced by the IMF and national elites. This has had a negative impact in many cases, with a focus on indirect regressive taxation like VAT, and extensive tax incentives for companies. There is an urgent need for poor country governments to achieve an increase in progressive and redistributive taxes.
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  www.oxfam.org Owning Development Taxation to fight poverty Deborah Itriago Intermón Oxfam September 2011 In order to be able to find enough resources to ensure public services, such as education and health for all, poor countries need to raise more tax, and raise tax in ways that are progressive and fair. Tax policy in developing countries has been heavily influenced by the IMF and national elites. This has had a negative impact in many cases, with a  focus on indirect regressive taxation like VAT, and extensive tax incentives for companies. There is an urgent need for poor country  governments to achieve an increase in progressive and redistributive taxes.   OXFAM RESEARCH REPORT      Owning Development , Oxfam Research Report, September 2011 2 Contents Executive summary ......................................................................................................... 4   1. Introduction .................................................................................................................. 9   2. The design of a fair tax system ............................................................................... 12   3. An unfavourable international framework .......................................................... 17   4. Domestic limitations and constraints .................................................................... 22   5. The consequences of unfair tax systems ............................................................... 43   6. Sustainable public finance and integrated societies: experiences and opportunities .................................................................................................................. 47   7. Increasing domestic resources: how far can we go? ........................................... 53   8. Conclusion .................................................................................................................. 64   Annex 1 ............................................................................................................................ 66   Annex 2 ............................................................................................................................ 68   Annex 3 ............................................................................................................................ 71   Notes ................................................................................................................................ 74   References ....................................................................................................................... 82      Owning Development , Oxfam Research Report, September 2011 3 Figures Figure 1 Average simple tax revenues (% of GDP) Figure 2 Weighted averages of tax collection by region (% of GDP) Figure 3 Revenues from personal taxes (% of GDP) Figure 4 Number of countries where VAT was introduced Figure 5 VAT taxed goods and services as a percentage of total taxed goods (2008–09) Figure 6 Taxes on international trade as a percentage of total tax revenues (%) Figure 7 Taxes on imports by region (simple average of nominal rates) Figure 8 Tax revenue potential (% of GDP) through formalisation (various countries) Figure 9 Potential percentage increase in education expenditure as a result of increasing the tax to GDP ratio (various countries) Figure 10 Health spending as a percentage of total public expenditure (Second scenario, Option A) Tables Table 1 Taxes and their potential impact on efficiency and equity Table 2 Impact of the 2003 Nicaraguan tax reform Table 3 Estimates of tax expenditure (% of GDP) (various countries) Table 4 Tax revenue potential through formalisation (various countries) Table 5 Revenue potential through increases in tax to GDP ratio (various countries) Boxes 1 The nature of a tax policy 2 IMF views on tax policy 3 Low personal income collection in Paraguay and Peru 4 Stiglitz and Emran’s arguments on VAT as an inefficient tax for developing countries 5 Has Nicaragua’s tax system become more progressive since the reforms? 6 Defining informal workers 7 Tax avoidance using ‘creative accounting’ 8 The impact of arbitrariness on small businesses 9 Do so many local taxes make sense, given the low amounts collected? 10 Earlier tax reforms: IFI omissions or developing countries’ short cuts? 11 VAT and gender bias 12 Comprehensive fiscal policy in Malaysia 13 Ghana: opportunities for a win-win situation in the informal sector? 14 South Africa: taxation and good governance 15 A very long-term aid program in Mali    Owning Development , Oxfam Research Report, September 2011 4 Executive summary This report focuses on tax policy in developing countries: who pays tax, what taxes are paid, and how. Tax policy can have a huge impact on inequality and poverty reduction, either positively or negatively, depending on what tax policies a country decides to implement. Taxation is also often at the heart of the social contract between citizens and their government, and progressive taxation is central to creating strong, democratic, and effective states. As a percentage of GDP, rich countries collect in many cases more than twice as much public revenue (including taxes) as developing countries. In sub-Saharan Africa, the average is 18 per cent of GDP 1  compared to 38 per cent in western European countries. This report will show that a lot can be done to increase the amount of revenue poor countries get from tax, and that this can be done in a way that tackles inequality, making sure the richest bear the biggest burden. In the 52 developing countries analysed in this report, we found that significantly improving the collection of tax could potentially raise an additional $269bn dollars.  Developing countries’ tax and regulation policies have often been imposed, or at least strongly recommended, by the International Monetary Fund (IMF) and other international financial institutions (IFIs) as a condition of their financial support. This reduces the capacity of these nations to openly decide between different policy options, as well as their capacity to control and reduce capital flight and tax dodging. Historically, the IMF have consistently favoured economic efficiency and short-term collection goals over other objectives, often promoting taxes that are easiest to collect, with the lowest political costs, and that least affect the interests of companies and the rich. Such tax policies are not necessarily the most suitable for developing countries. However, recent papers from the IMF show promising signs that this approach may be changing and that they may now be ready to take a more progressive stance on taxation policy. One particularly noticeable feature of tax reforms in the developing world over the last three decades has been the emphasis on indirect taxes, in particular VAT (value added tax) on consumption. Taxes on consumption (mainly VAT) have generally become the main source of tax revenue for developing countries and economies in transition . In Africa and the Asia Pacific region, indirect taxes grew from 4.6 per cent of GDP in 1990 to 5.4 per cent in 2002, while in Latin America and the Caribbean they increased from 4.1 per cent to 8.8 per cent. For reasons linked to ‘economic efficiency’, VAT was the preferred choice of international reformers. The assumption was that VAT would create the opportunity to broaden the tax base, reaching all goods in the formal sector without distorting productive processes. This doctrine has found its way into the loan and aid conditions laid down by the IMF and World Bank in many developing countries. In Pakistan, for example, the World Bank and the IMF linked their budget support to the introduction of VAT, amongst other things. A Eurodad and Action Aid report (quoting a study by Damme et al (2008) of 54 developing country enquiries to the IMF under Article IV Consultations)found that VAT was recommended or approved by the IMF in 90 per cent of the total sample of IMF reports analysed. One clear part of this approach was abandoning the previous IMF doctrine that, by making the rich pay more than the poor, tax itself could be used to reduce inequalities. In fact the opposite is often the case. This is because the poor consume more of their income than the rich, who have savings. This makes VAT and other consumption taxes often regressive, hitting the poorest hardest.
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