Fiscal & TAX Policy

1. Fiscal & TAX Policy

2. IMF Fiscal Monitor

5. Advanced Economies IMF Fiscal Monitor

6. Types of Taxes Taxes on Value Added and Imports + Taxes on Income and Wealth (Income Taxes, Corporate Profits Tax, Capital Gains Taxes, Property Taxes) + Social Security Contributions Total Taxes

7. Principles of Taxation • Implementability. Cheap to collect, easy to calculate, difficult to avoid. • Equitable. • Vertical • Horizontal • Efficient. Neutral effect on market decisions, consistent with growth and prosperity. Some Underlying Principles ofTax Policy byRichard K. Vedder and Lowell E. GallawayLink

8. VAT Taxes thought to be easy to collect and calculate

9. KPMG Corporate and Indirect Tax Report %

10. Equity • Considerations • Personal Equality – Poll Tax • Benefit Principle – Flat Tax • Ability to Pay – Graduated Tax

11. Taxes and Prosperity Incentive Effect • Taxes on labor income reduce after tax wages and reduce incentive to work; • Taxes on financial income reduce after-tax returns and reduce incentive to save; But Income Effect … • High tax bills may increase need to work or save to hit a target living standard.

12. No obvious relationship between GDP and tax rates among OECD Countries

13. PWC Corporate Income Tax Report

14. Tax Incidence • Lost income may not be borne entirely by direct target of tax. • Corporate Tax • Raise prices, borne by consumers • Reduce wages, borne by workers • Reduce dividends, borne by shareholders • Reduce investment, born by future consumers workers, or shareholders

15. Debt

16. Interest Rates: • Cost of borrowing $1 for 1 year $1+i. Net interest rate: i. • e.g. if you lend me $100 today, I will pay you $104 in one year, 1+i = 1.04. • Interest Rates are reported in % terms, e.g. 4%, or basis points, 400 points.

18. Primary Deficit • Simplified Government Budget Primary Revenue (less Interest Income) - Primary Expenditure (less Interest Paid) Primary Budget Deficit + Net Interest Payments on Existing Debt Overall Budget Deficit

19. Includes Interest Rates Greece

20. Can you run a deficit every year?

21. Sustainable Deficit • If then Debt-to-GDP ratio stays stable. • If > then deficit is “unsustainable” A growing economy allows the government to borrow some money every year and still keep debt in line with overall GDP

22. Sustainable Primary Deficit • If • then stays stable.

23. http://www.imf.org/external/pubs/ft/fm/2011/02/fmindex.htm

25. Primary Balance % of GDP

27. Crisis spreads to other countries IMF Fiscal Monitor Background Reading

28. Consequences of Deficits • Austerity • Financial Repression • Seigniorage • Default

29. Link

30. Austerity has a negative effect on business cycles. • IMF

31. Financial Repression • Indebted governments often draw financing from captive financial institutions to keep interest rates low. • Domestic banks, public pension funds • Increased reserve requirements • International capital controls. Link

32. Seigniorage - Central Bank prints money to buy government debt. Link

33. Default Link

35. IMF Fiscal Monitor Sources: Bloomberg L.P.; Consensus Economics; and IMF staff estimates and projections. Note: Euro area countries, subject to data availability. Bond yield spreads, measured vis-à-vis German Bunds, are an average of August 2011. Average consensus real GDP growth forecasts for 2011–12. Standard & Poors Ratings