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FERDI – CIFD – CERDI – Université d’Auvergne 12 juin 2014 – Clermont-Ferrand

FERDI – CIFD – CERDI – Université d’Auvergne 12 juin 2014 – Clermont-Ferrand . Integrating the pro-poor agenda into fiscal performance measurement in LICs A case study of Burundi. Jérôme Sansonetti ODI Fellow, Office Burundais des Recettes. Introduction

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FERDI – CIFD – CERDI – Université d’Auvergne 12 juin 2014 – Clermont-Ferrand

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  1. FERDI – CIFD – CERDI – Universitéd’Auvergne 12 juin2014 – Clermont-Ferrand Integrating the pro-poor agenda into fiscal performance measurement in LICs A case study of Burundi JérômeSansonetti ODI Fellow, Office Burundais des Recettes

  2. Introduction Linking revenue and poverty reduction 2

  3. Introduction Linkages betweentax and poverty • In a country like Burundi, the pro-poor agenda is rarely included in fiscal monitoring schemes • Poverty reduction remains a central policy objective • Fiscal performance should be measured and designed in a way that monitors pro-poor impact • Surprising, as it is a challengeto mobilize revenues in LICs 3

  4. Introduction Linkages betweentax and poverty • The linkages between revenue reforms and poverty reduction are not appreciated at every echelon on the ground • There is no direct link between revenue increase and poverty reduction Pro-poorspending Povertyreduction Increased revenues Progressive taxes taxside spendingside Pro-poor impact Worst-case scenario? 4

  5. Introduction Increasedrisk of regressivity in LICs • LICs feature of higher risk of regressivity, all other things equal • Narrow income tax bases • Large returns to capital (classical growth theory) • Tax progressivity: • A tax is progressive if the tax payments of richer households accounts for a larger proportionof their incomes than those of poorer households • Consumptiontaxes with a flat rate can be regressive • Poorer households consume a larger fraction of their incomes 5

  6. Introduction Research questions 2. Are fiscal performance indicatorsfitted to monitor pro-poor impact? 1. Do revenue reforms in LICsincurregressivity? • Indicatorsused in LICsfall short • The nature of the linkages is not fullyappreciated • Raising revenues doesincur a risk of regressivity 6

  7. Outline • Introduction – the linkages between revenue mobilization and poverty reduction • Literature review • Case of Burundi: tax side • Case of Burundi: spending side • Suggested indicators 7

  8. Section 1 Literature review 8

  9. Overall fiscal structure in LICs IFI consensus Strengthen VAT revenues Reducetrade taxes Reducecorporate rate

  10. VAT • IFI consensus(IMF FAD, 2011) • Broad-based: few exemptions • Single rate • High registration threshold Regressivity Progressivity • In South Africa, poorest deciles feature higher VAT burden (Go et al., 2005) • Averagenumber of VAT rates (IMF FAD, 2011) • LICs: 1,28 • Rich countries: 2,52 • VAT less regressive than former sales taxes (Zolt & Bird, 2005) • More efficientto treatprogressivity on spendingsidethan by relaxing VAT • Case of Chile (Engel et al. 1999)

  11. Trade taxes • IFI consensus: reduce import duties and trade taxes (Marshall, 2009) • 1980s: 4% - 5% of GDP • Late 2000s: 3% of GDP Regressivity Progressivity • Export taxes are arguably progressive, so removal is regressive • Replacement with VAT createsaforementionedissues • Removing import taxes is progressive if poor households consume a larger fraction of imports • In South Africa, tradeliberalizationwasfound to beprogressive(Daniels & Edwards, 2006)

  12. Corporateincometax • IFI consensus(Marshall, 2009) • Decrease statutory rates to attract investors • Effect of Doing Business Indicators for “paying taxes” Regressivity Progressivity • Decrease in statutory rates in SSA (Keen & Mansour, 2009) • 1990: 44% • 2005: 33% • Increase in exemptionsin SSA (Keen & Mansour, 2009) • 1980: 40% • 2005: 80% • General equilibriumeffectaftertaxshiftingcanbe progressive (Harberger, 1962)

  13. Section 2 Burundi – tax side 13

  14. Burundi’staxreformssince 2009 Tax administration Taxpolicy • Creation of a Revenue Authority in 2010 (OBR) • Compliance • Taxpayer services • IT systems • VATcreated (2009) • VATreform (2013) • More exemptions • Intermediary rate at 10% • Corporateincometax (2013) • Statutory rate reducedfrom 35% to 30% • Personalincometax(2013) • Thresholdincreased • Statutory rates decreased

  15. Burundi’staxreformssince 2009

  16. Overalldistributional impact

  17. Data available to assessregressivity • QUIBB 2006: expenditure survey, household level • Construct a “total expenditure” variable • 77 food and non-food expenses • Only health and education missing • Quartiles of wealth based on syncretic wealth score

  18. VAT – exemptions

  19. VAT – intermediary rate • A 10% intermediary rate was implemented on 12 staple foods • Cassava, maize, wheat, etc… • Direct effect is progressive • Indirect effect is unclear, as retailers may not have shiftedthe VAT decrease • Inflation for 10%-taxed staples (Jul.-Dec. 2013): 1.75% • Inflation for other food items (Jul.-Dec. 2013): -1.69%

  20. Excise • A 10% intermediary rate was implemented on 12 staple foods

  21. Personalincometax – general • The reform triggered a dip in the contribution of PIT to total revenues • 2010 to 2013 : 11.7% to 7.7% of total revenues • Higher taxable threshold • Lower statutory rates

  22. Personalincometax – scenarios • Distributional impact mostly regressive • From 40 001 to 150 000, impact is unclear • From 150 001 upwards, impact is clearly regressive

  23. Corporateincometax • Two tax breaks for corporations, assumed to be regressive • Statutory rate decreased from 35% to 30% • Minimal 1% tax on sales in case of negative profits • Exemptionson corporate income tax are regressive loopholes

  24. Burundi’staxreformssince 2009 Regressive (assumed) Progressive (assumed) • Corporateincometax • Personalincometax • VATexemptions • VAT intermediary rate • Most excisefees

  25. Section 3 Burundi – spending side 25

  26. Pro-poorspending • Pro-poor spending growing much slower than tax revenues • Pro-poor spending in Burundi: • All expenditures by social ministries (i.e. education, health, etc.) • “social projects” in other ministries

  27. Section 4 Fiscal performance indicators 27

  28. Indicatorscurrentlyused in Burundi • Very few fiscal indicators are fitted to capture the pro-poor impact • Government: pro-poor aspect entirely absent • IFIs: mostly capture the spending side

  29. Suggestedindicators • Suggested indicators with two views: • Follow up on pro-poor impact of tax reforms (tax side and spending side) • Be available subject to data scarcity in a country like Burundi

  30. Conclusion 30

  31. Conclusion • In an LIC like Burundi, there is a partial disconnect between revenue reforms and poverty reduction • Tax side: the risk of regressivityis relatively higher • Narrow income tax bases • Spending side: impracticalto compensate for tax regressivity with increased pro-poor spending • Revenue reforms are not precisely coupled with allocation reforms • The case of Burundi illustrates this difficulty • Measurement indicatorsare not fitted to take into account the pro-poor impact of revenue reforms • Neither tax side, nor spending side

  32. Thank you!  32

  33. Bibliography • Bastagli, F., Coady, D., & Gupta, S. (2012). Income Inequality and Fiscal Policy. IMF. • Daniels, R., & Edwards, L. (2006). The Benefit-Incidence of Tariff Liberalisation in South Africa. • Engel, E., Galetovic, A., & Raddatz, C. (1999). Taxes and income distribution in Chile: some unpleasant redistributive arithmetic. Journal of Development Economics, 155-192. • Go, D., Kearney, M., Robinson, S., & Thierfelder, K. (2005). An Analysis of South Africa’s Value Added Tax. World Bank. • Harberger, A. (1962). The Incidence of Corporation Income Tax. The Journal of Political Economy, 215-240. • IMF. (2012). Article IV Consultation and First Review Under the Extended Credit Facility. • IMF. (2014). Fourth Review Under The Extended Credit Facility Arrangement. • IMF Fiscal Affairs Department. (2011). Revenue Mobilization in Developing Countries. • Keen, M., & Mansour, M. (2009). Revenue Mobilization in Sub-Saharan Africa: Challenges from Globalization. IMF Working Paper. • Marshall, J. (2009). One size fits all? IMF tax policy in Sub Saharan Africa. Christian Aid. • World Bank. (2011). CPIA 2011 Criteria. • Zolt, E., & Bird, R. (2005). Redistribution via Taxation: The Limited Role of the Personal Income Tax in Developing Countries. UCLA Law Review, 1627–95.

  34. Appendix 1 – Total expenditure

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