Designing Tax Structures covers theory, practice and analytic methods relating to tax policy design. The grouping of entries roughly parallels the World Bank's 1991 publication Lessons of Tax Reform.
Sub Themes:
1. Reasons for and alternatives to taxationThe principal reason that governments levy taxes is to raise revenue to provide resources for the provision of various public services, in turn presumably motivated by the wish to promote outcomes such as reduced poverty, maintenance of law and order and higher living standards. Other reasons include redistribution of income and wealth, economic regulation, macroeconomic stabilization and promotion of special goals or, to use a term coined by Richard Musgrave, merit wants. Aspects and nuances of these basic motivations to tax are, therefore, the first topic dealt with here.
Taxes, however, are not the only instruments available to the government for raising revenue or engaging in redistribution, regulation, stabilization or the promotion of merit wants. Nor are taxes always the best instruments in different situations. In fact while in some cases non-tax instruments can substitute for taxes, there are several instances in orthodox public economic theory where they are also shown to be useful complements to taxation. So it is necessary to examine the nature and role of alternative and complementary instruments that are available to governments. The major alternatives include fees and charges, government debt, the inflation tax and subsidies and transfers and fiscal monopolies besides direct regulatory instruments. Direct regulatory instruments are not covered here, since they have no direct revenue implications.However, Environmental standards are an important alternative to environmental regulation via the tax system and Quotas and non-tariff barriers are important substitutes, in practice, to international trade taxes. Finally, political realities in some countries, such as Ecuador and Peru, and also economic advice for a few specialized public services such as road maintenance, lead to earmarking of taxes, a process through which revenues from particular levies are used only for specified public activities or transfers. Such deviations from the broader goals of taxation have both been advocated by some analysts and criticized by others.
Key Issues: - Basic motivations (Revenue, regulation and deliberate modification of market signals)
- Fees and charges,
- Debt,
- The inflation tax
- Subsidies and transfers
- International economic issues
- Earmarking of Taxes
2. Properties of good tax systems
There are economic costs of collecting and administering taxes and not all taxes have the same costs. While what are thought to be desirable Canons of taxation have remained basically unchanged since Adam Smith enunciated them, our knowledge of what constitutes practically feasible tax systems which embody these canons in countries at different levels of development is still far from complete. A major intellectual achievement in the area of normative tax design is the development of Optimal tax theory, a field of study pioneered by Ramsey in 1927. Among recent contributions, the Nobel prize winning work of James Mirrlees and his coworkers is perhaps the most important. The theory characterizes properties of second best taxes which minimize the economic excess burden of taxation when it is not possible to include some economic commodities or attributes in the tax base. Despite its elegance, optimal tax theory and practical tax policy continue to diverge in many important respects, due to real world complexities which optimal tax theory has, as yet, failed to take account of. Many of these complexities have to do with tax administration issues, a consideration which has led Milka Casanegra de Jantscher to write that, in developing countries, "tax administration is tax policy".
Apart from the relatively recent concern with minimizing the aggregate loss of economic welfare or excess burden of taxes, two independent principles of Tax Equity: Benefit and Ability to Pay Principles, have historically had a great influence on tax design and evaluation with the former being Adam Smith’s first Canon. Experts are divided on whether, among broad-based national taxes, a properly designed income tax or the progressive expenditure tax best accords with the ability to pay principle. The latter tax has not been tried in any country for an extended period, while practical income taxes are far from ideal in most countries and contribute relatively little to the exchequer in the typical developing country.
Key Issues:
- Canons of taxation
- Optimal tax theory;
- Optimal tax theory and practical tax policy
- Tax Equity: Benefit and Ability to Pay Principles
3. Problems of poorly functioning tax systems
The main focus of theoretical economic analysis is on the adverse effects of taxes on resource allocation via economic distortions to the price systems of market economies.
The second major area is the study of tax incidence on different groups of economic agents or activities. These topics are dealt with in while discussing Economic Analysis of Revenue Systems. Problems which crop up with far greater regularity in the policy arena are discussed in "What is Involved in Tax Reform?", Chapter 1 in Lessons of Tax Reform, published in 1991 by the World Bank. These include Revenue inadequacy, problems related to Equity and distribution, and two other problems to which inability to raise revenues through the tax system give rise to: Internal or external national Debt problems and related to the latter, Balance of payments problems.
Key Issues:
- Revenue inadequacy
- Equity and distribution
- Debt problems
- Balance of payments problems
4. International comparison of tax structures and trade-offs in tax design
Three major trade-offs exist in the tax design that accord with the canons of taxation. In order to assess their practical importance it is necessary to ask the question: "What do we know of tax structure and development?". The study of this question was pioneered by Hinrichs (1966) and broadly speaking, shows that tax structures in developing countries tend to rely relatively more on inequitable and inefficient taxes, such as those on international trade or the domestic sale of intermediate goods, rather than on income taxes or the Value Added Tax. Thus, while the equity versus efficiency trade-off is the focus of much economic analysis and is the major preoccupation of developed country tax designers - where administrative capacity and penetration of modern markets is relatively high - trade-off between administrative simplicity and equity or efficiency is of greater importance in developing countries.
Key Issues:
5. Possible reform strategies
Orthodox advice generally puts base roadening, especially through the limitation or elimination of exemptions, first, coupled with tax rate setting advice encompassing low and uniform rates. This includes a critical review of Tax incentives aiming at abolishing incentives which are costly and ineffective. Regarding The tax mix, a broad based consumption type VAT, coupled with selective excise taxes and income taxes for corporations and organized sector non-corporate income along with presumptive taxes for the informal sector, the self employed and small businesses are advocated at the national level with property taxes being the main local levy. Coordinating tax designs across taxes is important especially for foreign and domestic taxes on goods and for different types of taxes on domestic and foreign income. Reform strategies advocated by the World Bank and the IMF are reviewed in the section on Bank and Fund advice.
Key Issues:
- Base broadening;
- Tax incentives
- Rate setting;
- Limited exemptions;
- The tax mix;
- Coordinating tax designs across taxes
- Pitfalls and spillovers
Readings:
6. Economic analysis of revenue systems
Regarding economic analysis, the types of analysis with the greatest relevance to practical policy include different types of Incidence analysis in which the burden of taxes on different economic groups is studied or, related to this, effective tax rates are computed. Revenue forecasting tools and methods are important both for analysis and for fiscal management. In determining the effects of alternative tax policy choices, Policy counterfactuals are important, and a variety of different approaches, of varying degrees of sophistication, exist, from simple back of the envelope methods to general equilibrium models. Other economic analysis includes a vast range, from normative analysis of taxes to measure their excess burden, to analysis of tax compliance, to the analysis of effective rates of protection given the nature of international Trade taxes and Quotas and non-tariff barriers in a country
Key Issues:
7. An inventory of taxes and alternatives
This section is divided into a total of entries on different taxes. Furthermore, it provides an overview on various approaches to tax specific sectors of the economy, namely Agriculture, Natural Resources, Small Businesses, and Financial Institutions. The various taxes and their economic impact have been extensively analyzed in numerous books and articles. The entries on this page therefore generally are limited to comparative data and key readings. The list of entries are found on the left navigational panel of this page.
Key Issues:
- Asset taxes
- Asset transfer taxes
- Broad-based "direct" taxes
- Broad-based "indirect" taxes
- Capital taxes
- Capital gains taxes
- Cesses
- Corporation taxes
- Creditable and final withholding taxes
- Entry and exit taxes
- Environmental taxes and regulations
- Estate duties and inheritance taxes
- Expenditure or consumption taxes
- Gift taxes
- Interstate sales taxes
- Investment taxes
- Land taxes
- Motor vehicles taxes
- Natural Resource Taxation
- Personal income taxes
- Poll taxes
- Presumptive direct taxes
- Michael Engelschalk. Small Business Taxation in Transition Countries
- Production taxes
- Property taxes
- Regulatory taxes
- Value Added Tax
- Retail sales taxes
- Sales taxes on wholesalers, manufactures and primary producers
- Social security taxes
- Special purpose taxesStamp duties
- Sub-national taxes
- Trade taxes and Non-tax Trade Restriction
- Glenday, Graham, "Trade Liberalization and Customs Revenues: Does trade liberalization lead to lower customs revenues? The case of Kenya" Development Discussion Paper No. 764, June 2000.
[Abstract] - Jenkins, Glen P. and Chun-Yan Kuo, Information, Corruption, and Measures for the Promotion of Manufactured Exports, Paper presented at the Tenth Annual Villa Colombella Group Conference, September 4 – 7, 2002
- Neubig, Thomas S.; Adrion, Harold L., "Value Added Taxes And Other Consumption Taxes: Issues For Insurance Companies."
- Jenkins, Glenn P., and Chun-Yan Kuo, "A VAT revenue simulation model for tax reform in developing countries."
- Turnover taxes
- User Charges
- Wealth taxes
8. International issues in tax design
With the development of global markets international tax issues have become more and more important. While some time ago international considerations were merely a secondary aspect of tax policy decisions, this is no longer the case today. Tax policy needs to guarantee an appropriate level of Taxation of multinational enterprises, International tax evasion. New challenges, such as Electronic commerce or International tax competition require policy responses on the individual country-level and also increased international coordination. Tax treaties are the main multilateral instrument to avoid double taxation. They also facilitate the international cooperation of tax administrations, especially the Exchange of taxpayer information. Finally Tax harmonization is – to a different extent – an issue in regional economic blocks, such as the European Union, NAFTA or MERCOSUR.
Key Issues:
9. Sub-national taxes and tax competition
In countries with more than one tier of government the question of regional and/or local taxation becomes an important policy design issue. The question, which taxes are Suitable subnational taxes, has been analyzed broadly. Although, according to this analysis, value-added taxes generally are considered to be more appropriate for the national than for the sub-national level, a number of federal countries, such as Canada, India and Brazil, have implemented Subnational Value Added Taxes. In countries where sub-national governments have been granted considerable autonomy in tax policy, the issue of Subnational tax competition can become a concern to policy makers. This is avoided if sub-national tax financing occurs in the form of Tax sharing arrangements.
At the local level financing of local governments through Intergovernmental transfers and the levy of User charges and fees often is more important than taxation. For the member countries of the Council of Europe the Council has developed best practices in local self-government in the European Charter of Local Self-Government. Art 9 par. 3. of the Charter stipulates that part at least of the financial resources of local authorities should derive from local taxes and charges of which, within the limits of statute, they have the power to determine the rate. Property taxes, Local income taxes and Local business taxes are the most frequent major local taxes. In many countries local governments also administer a large number of small taxes, such as dog taxes, amusement taxes or advertisement taxes. Such taxes, often referred to as Nuisance taxes should be reviewed carefully to make sure that their compliance and administrative costs are not higher than the revenue collected.
Key Issues:
10. Administrative and compliance costs and tax design
Taxes that are most easily administered are those with an easy to identify base that is not capable of being misrepresented either by the taxpayer or the administrator and on which the rate of tax is easily determined. At one administrative extreme is a poll tax under which taxes are levied at a fixed rate per person per period. At the other extreme are taxes such as the VAT and, even more complex, the income tax, whose bases, often burdened with special concessions and exemptions are impossible to compute accurately without the use of formal accounts, and whose rate structures can be differentiated and graduated. The formal empirical study of Administrative and compliance burdens due to tax structure is, however, as yet limited in developed countries and almost unknown for developing countries. Yet the handful of developed country studies show that taxpayer compliance costs can be substantial and many times larger than costs of administering taxes. A somewhat similar situation exists with respect to the formal study of Design elements for administratively simple taxes though several insightful discussions by experienced administrators and tax experts exist much of it having guided Bank and Fund advice in the area of tax structure design. Studies examining The trade-off between administrative convenience and efficiency or equity are more plentiful, especially in relation to problems of taxing on accrual versus realization.
Key Issues:
 Readings:
11. Bank and Fund advice
The broad contours of orthodox tax reform as conceived by the World Bank are outlined in "Tax Reform Strategies and Experience", Chapter 2 in Lessons of Tax Reform published in 1991 by the World Bank. The discussion is complemented by that in Chapter 1 in Wayne Thirsk, Editor, Tax Reform in Developing Countries, 1997 Chapter 1 in Wayne Thirsk, Editor, Tax Reform in Developing Countries, 1997 from the World Bank. The broad contours of this advice is in the topic brief on Possible reform strategies. For specific types of taxes, Bank and Fund advice is discussed in the appropriate section of An inventory of taxes and alternatives.
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