1 / 37

Taxation, Poverty, and Equity

Taxation, Poverty, and Equity. Karl Kendrick T. Chua Undersecretary and Chief Economist As of October 27, 2016. Contents. Theory Evidence Philippine tax reform Our vision Proposed tax reform Impact on households Targeted transfers Long-term impact.

wmccabe
Download Presentation

Taxation, Poverty, and Equity

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Taxation, Poverty, and Equity Karl Kendrick T. Chua Undersecretary and Chief Economist As of October 27, 2016

  2. Contents • Theory • Evidence • Philippine tax reform • Our vision • Proposed tax reform • Impact on households • Targeted transfers • Long-term impact With much thanks to the World Bank for sharing some slides DEPARTMENT OF FINANCE

  3. Theory DEPARTMENT OF FINANCE

  4. The efficiency-equity trade-off • Maximizing the total of well-being (efficiency) requires paying attention to minimizing the costs (distortions) of taxing, other things equal. • Addressing the distribution of well-being (equity) requires that we pay attention to the progressivity of the tax burden. • What makes things challenging is that, with few exceptions, there is a trade-off between equity and efficiency. DEPARTMENT OF FINANCE

  5. Fiscal instruments and equity • Taxation • Progressive: income tax, property tax • Regressive: consumption tax, transactions tax, lump-sum tax • Expenditure • Progressive: health, education, social protection; infrastructure? • Regressive: blind subsidies, consumption spending DEPARTMENT OF FINANCE

  6. Importance of comprehensive analysis • Partial analysis, while expedient, does not give complete picture. • Excise tax on alcohol and tobacco • Excise tax on oil • VAT • Comprehensive analysis needed to capture the full effect of the net fiscal system. • Assessing the progressivity of a tax or a transfer in isolation can give the wrong answer to the question: Is the tax or the transfer equalizing? DEPARTMENT OF FINANCE

  7. Evidence DEPARTMENT OF FINANCE

  8. How progressive are indirect taxes? Sources: Armenia (Younger et al, 2014), Brazil (Higgins and Pereira, 2014), Bolivia (Paz Arauco et al, 2014), El Salvador (Beneke et al, 2015), Ethiopia (Woldehanna et al, 2014), Georgia (Cancho and Bondarenko, 2015), Guatemala (Cabrera et al, 2014), Indonesia (Afkar et al, 2015), Mexico (Scott, 2014), Peru (Jaramillo, 2014), Russia (Lopez Calva et al, 2015), Uruguay (Bucheli et al, 2014), South Africa (Inchauste et al, 2015), and Sri Lanka (Arunatilake et al, 2014). DEPARTMENT OF FINANCE

  9. How progressive are direct transfers? Sources: Armenia (Younger et al, 2014), Brazil (Higgins and Pereira, 2014), Bolivia (Paz Arauco et al, 2014), El Salvador (Beneke et al, 2015), Ethiopia (Woldehanna et al, 2014), Georgia (Cancho and Bondarenko, 2015), Guatemala (Cabrera et al, 2014), Indonesia (Afkar et al, 2015), Mexico (Scott, 2014), Peru (Jaramillo, 2014), Russia (Lopez Calva et al, 2015), Uruguay (Bucheli et al, 2014), South Africa (Inchauste et al, 2015), and Sri Lanka (Arunatilake et al, 2014). DEPARTMENT OF FINANCE

  10. In general, direct taxes and transfers are equalizing, while indirect taxes increase inequality, but the design of the tax matters a lot. Sources: Armenia (Younger et al, 2014), Bolivia (Paz Arauco et al, 2014), Brazil (Higgins and Pereira, 2014), El Salvador (Beneke et al, 2015), Ethiopia (Woldehanna et al, 2014), Georgia (Cancho and Bondarenko, 2015), Guatemala (Cabrera et al, 2014), Indonesia (Afkar et al, 2015), Mexico (Scott, 2014), Peru (Jaramillo, 2014), Russia (Lopez Calva et al, 2015), and South Africa (Inchauste et al, 2015). Note: contributory pensions treated as part of market income. DEPARTMENT OF FINANCE

  11. Mexico’s 2010 Tax Reform • Proposed reform • Substantial expansion in indirect (VAT) base: new 2% uniform expenditure tax named Contribution to Fight Against Poverty (CCP), on top of existing VAT, on all goods and services to be used to finance expansion in social protection and poverty alleviation. • Increases in various income tax and duties rates. • Approved reform • Was a much reduced version of this, in particular replacing the proposed 2% uniform VAT with increase in standard rate of VAT from 15% to 16% instead and food exemptions were kept. • Part of reason proposals rejected was because it was seen as “regressive.” Is it? DEPARTMENT OF FINANCE

  12. Mexico 2010: Impact of an increase in VAT Source: Abramovsky, Atanasio, Emmerson, and Phillips. 2011. The distributional impact of reforms to direct and indirect tax in Mexico DEPARTMENT OF FINANCE

  13. Taxation and Income Inequality – Tax Variables: theory generally holds Standard errors in parentheses, *** p<0.01, ** p<0.05, * p<0.1 Source: Vazquez, Dodson, Vulovic. 2013. The Impact of Tax & Expenditure Policies on Income Distribution: Evidence from a Large Panel of Countries DEPARTMENT OF FINANCE

  14. Public Expenditures and Income Inequality – Expenditure Variables: theory generally holds Standard errors in parentheses, *** p<0.01, ** p<0.05, * p<0.1 Source: Vazquez, Dodson, Vulovic. 2013. The Impact of Tax & Expenditure Policies on Income Distribution: Evidence from a Large Panel of Countries DEPARTMENT OF FINANCE

  15. Economic Effects of Taxation and Public Expenditures: less of a progressive instrument means more inequality Note: All policy instruments are expressed as % of GDP Source: Vazquez, Dodson, Vulovic. 2013. The Impact of Tax & Expenditure Policies on Income Distribution: Evidence from a Large Panel of Countries DEPARTMENT OF FINANCE

  16. Philippines: Better tax administration can improve equity of taxes Income Gini coefficient before and after income tax and transfers Source of basic data: FIES 2006 A = before tax and before non-taxable income B = before tax and after non-taxable income (remittance) C = after reported tax D = after computed tax using reported income E = after computed tax using adjusted income (better tax admin) Source: World Bank. 2011. Philippine public expenditure review 16 DEPARTMENT OF FINANCE

  17. Philippines: Better tax administration can improve equity of taxes Income Gini coefficient before and after all taxes and transfers Source of basic data: FIES 2006 A = before tax and before non-taxable income B = before tax and after non-taxable income (remittance) C = after reported tax D = after computed tax using reported income E = after computed tax using adjusted income (better tax admin) Source: World Bank. 2011. Philippine public expenditure review DEPARTMENT OF FINANCE 17

  18. Philippine tax reform DEPARTMENT OF FINANCE

  19. DRAFT FOR DISCUSSION. SUBJECT TO CHANGE. Vision for the Philippines • By 2022 (6 years from now) • Poverty rate reduced from 26 to 17% (or some 10 million Filipinos uplifted from poverty). • Law abiding country. • Peace within the country and with our neighbors. • Achieve high middle income status, where per capita gross national income (GNI) increases from USD 3,000 to USD 4,100 by 2022 in today’s money (where Thailand and China are today). • By 2040 (24 years or one generation from now) • Extreme poverty eradicated. • Inclusive economic and political institutions where everyone has equal opportunities. • Achieve high income status, where per capita GNI increases from USD 3,000 to USD 12,000 by 2040 in today’s money (where Malaysia and South Korea are today). DEPARTMENT OF FINANCE

  20. DRAFT FOR DISCUSSION. SUBJECT TO CHANGE. How to achieve the vision • All these investments require additional funds of around 1 trillion pesos per year in 2016 prices on top of the current 1.3 trillion. • This can be achieved through tax reform, which is integral to the larger goals of the administration and crucial for achieving the vision of a prosperous country. • In addition, complementary economic reforms are crucial: secure property rights, enhance competition, improve food security, and simplify regulations. DEPARTMENT OF FINANCE

  21. DRAFT FOR DISCUSSION. SUBJECT TO CHANGE. Proposed tax policy package 1 DEPARTMENT OF FINANCE

  22. PRELIMINARY AND SUBJECT TO CHANGE. High end revenue impact by 2019 (PHP billion and % of GDP) DEPARTMENT OF FINANCE

  23. DRAFT FOR DISCUSSION. SUBJECT TO CHANGE. Where to use the tax revenues • A quarter to a third of the incremental revenues from the petroleum excise tax will be allocated to fund highly targeted transfer programs in the first year of implementation. • The remaining amount will be allocated to education, health, infrastructure and other investments. DEPARTMENT OF FINANCE

  24. Combined tax impact by household DEPARTMENT OF FINANCE

  25. DRAFT FOR DISCUSSION. SUBJECT TO CHANGE. “The money we generate from the rich, who do not need exemptions and subsidies, will be transferred back to the poor and used to fund more and better services.” DEPARTMENT OF FINANCE

  26. DRAFT FOR DISCUSSION. SUBJECT TO CHANGE. Protecting the poor, investing in the people • Conditional cash transfer like the 4Ps to make the poor healthier and more educated to take on better jobs or livelihoods. • Transfer programs have good multiplier effects: 1.34 to 2.52. • A highly targeted transfer program is more transparent, accountable, and direct way to protect the poor and vulnerable. • On the other hand, tax exemptions and blind subsidies are inefficient and cause large leakages. DEPARTMENT OF FINANCE

  27. DRAFT FOR DISCUSSION. SUBJECT TO CHANGE. Proposed new programs DEPARTMENT OF FINANCE

  28. Proposed layered social protection program to mitigate effect of tax reform on poor and vulnerable Percentile of households Amounts are indicative and depend on actual collection DEPARTMENT OF FINANCE

  29. DRAFT FOR DISCUSSION. SUBJECT TO CHANGE. Transfer effect Targeted transfers will be crucial in protecting the poor from shocks and assuring progressivity of the tax reform. This analysis is with regard to fuel excise revenues converted into various transfers (doesn’t yet include emergency relief program or PWDs and senior citizens top up) DEPARTMENT OF FINANCE

  30. Income inequality of tax reform package 1 DEPARTMENT OF FINANCE

  31. Change in income after tax-transfer reform DEPARTMENT OF FINANCE

  32. Consumption: The high case initially sees lower consumption due to higher consumption taxes but later on catches up well as investments make people more productive. High case: proposed tax reform Base case: no reform Low case: only PIT is passed As percent deviation from steady state DEPARTMENT OF FINANCE

  33. Consumption path of rich and poor: Transferring back some 25 percent of incremental revenues to the low income households improves their welfare today and in the future. As percent deviation from steady state DEPARTMENT OF FINANCE

  34. Investment: Over the medium-term, public investment stimulates private investment in high case. Crowding out effect and higher interest rates reduce investments in the low case. As percent deviation from steady state DEPARTMENT OF FINANCE

  35. GDP: The high case shows initially lower GDP growth but it soon catches up and well exceeds the low and base case as tax revenues are invested. As percent deviation from steady state DEPARTMENT OF FINANCE

  36. Real wages: Tax-financed public investments encourages more job-generating private investment that raises productivity and wages. As percent deviation from steady state DEPARTMENT OF FINANCE

  37. DRAFT FOR DISCUSSION. SUBJECT TO CHANGE. Let’s be partners for change!Thank you very much. DEPARTMENT OF FINANCE

More Related