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Jonathan Haughton Suffolk University, Boston For the World Bank. May 11, 2011.

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Presentation on theme: "Jonathan Haughton Suffolk University, Boston For the World Bank. May 11, 2011."— Presentation transcript:

1 Jonathan Haughton Suffolk University, Boston For the World Bank. May 11, 2011

2 1. Who bears the burden of taxes? 2. Who benefits from government spending? 3. What are the net effects? 4. Who would gain/lose under different possible tax reform packages, and by how much? May 11, 2011JH: Tax & Expenditure Incidence in PeruPage 2

3  Central government tax revenue  11.6% of GDP in 2004  Buoyant since 2002  71% of revenue from indirect tax ▪ Vat: 19% rate; but yields just 4.9% of GDP  Income tax: 3.4% of GDP May 11, 2011JH: Tax & Expenditure Incidence in PeruPage 3

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6  Revenue/GDP: 20% to 2000, now 25%  VAT: 7% of GDP (at 10% rate!)  Trade: from 4% to 2% of GDP, despite explosion of imports  All income tax: Peaked at 10% GDP in 2006, but dependent on SOE sector  NB: PIT raises 2% of revenue; surprisingly, not rising

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8  Step 1. Make assumptions about incidence  Statutory incidence ≠ Effective incidence  See Table May 11, 2011JH: Tax & Expenditure Incidence in PeruPage 8

9  VAT: on consumers  Excises: on consumers  PIT: on earners  Business profits: on earners  Other taxes: ▪ Property transfer; local fees and contributions: on payers. ▪ In this study, CIT, trade taxes, natural resource taxes, not included. Incidence covers half of revenue.

10 quantity supply S(1+t) price demand Pd2 Q1 Q2 P1 Ps2

11 quantity supply S(1+t) price demand Pd2 Q1 Q2 P1=Ps 2 What elasticity?

12 May 11, 2011JH: Tax & Expenditure Incidence in PeruPage 12

13  Step 2. Quantify the effects  Trace effect of a tax, spending change on every household in a survey  ENNIV ,997 households, 19,957 people, LSMS template  NB. Assumes equal sharing within household May 11, 2011JH: Tax & Expenditure Incidence in PeruPage 13

14  Operationalize the analysis  Excel spreadsheet  Stata dataset and programs. Change spreadsheet; it invokes Stata, returns the results. May 11, 2011JH: Tax & Expenditure Incidence in PeruPage 14

15  9,189 households, including 4,298 from 2004 round.  Two visits per household; 93% of interviews in June, Sept or Oct.  Some explicit tax information (e.g. business taxes); otherwise has to be inferred (e.g. VAT, PIT).

16  Socio-economic survey, 2009  47-page data dictionary  139,590 individuals  From 43,844 households ▪ Aside: US 1% IRS file plus non-filers: c. 150,000 filers.

17  19% rate. Fairly stable since  Exports zero rated  Exemptions include clothing, rice, milk, fish, vegetables, ed. fees, home consumption, housing  In 2000:  42% of central gov. tax revenue  Collected 7.3% of household expenditure. May 11, 2011JH: Tax & Expenditure Incidence in PeruPage 17

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19 May 11, 2011JH: Tax & Expenditure Incidence in PeruPage 19

20 Regressivity probably overstated, if poor are more likely to buy in informal sector  By expenditure/cap: slightly regressive  By income/cap: highly regressive May 11, 2011JH: Tax & Expenditure Incidence in PeruPage 20

21  Income:  Easy to measure  Widely used in developed countries  Overstates regressivity: “lifetime income”  Expenditure  Less underreporting than income  Closer to “permanent income”  May understate regressivity May 11, 2011JH: Tax & Expenditure Incidence in PeruPage 21

22  In 2000, summarized:  Alcohol, especially beer (t=27.8% of 84% of rec. prodr. price)  Soft drinks (t=17% ex factory)  Cigarettes (t=37.2%)  New vehicles (t=10%)  Motor fuel ▪ Gasoline (S/.2.90 per gallon) ▪ Diesel S/.2.29 per gallon) May 11, 2011JH: Tax & Expenditure Incidence in PeruPage 22

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25 Expend/cap: Kakwani (>0 = progressive) Income/cap: Revenue as % of all tax revenue Actual revenue as % of estimated Alcohol Soft drinks Tobacco May 11, 2011 JH: Tax & Expenditure Incidence in Peru Page 25 Note under-reporting of expenditures

26 May 11, 2011JH: Tax & Expenditure Incidence in PeruPage 26

27 Expend/cap: Kakwani (>0 = progressive) Income/cap: Revenue as % of all tax revenue Actual revenue as % of estimated Motor fuel Vehicles May 11, 2011 JH: Tax & Expenditure Incidence in Peru Page 27 Notes: Fuel numbers overstate progressivity, because of the “bus and truck problem” Vehicle numbers assume purchases in proportion to ownership, which is awkward Ideal is to run this through an input-output table

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30 May 11, 2011JH: Tax & Expenditure Incidence in PeruPage 30

31 May 11, 2011JH: Tax & Expenditure Incidence in PeruPage 31 Progressive or not?

32 May 11, 2011JH: Tax & Expenditure Incidence in PeruPage 32

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37  In Vietnam, incidence pattern by expenditure/cap decile similar to that by income/cap  Contrast with Peru  These taxes are progressive overall  Heavier, more progressive, than 1998  VAT is generally progressive – mainly due to home production (1/3 at bottom, 1% at top); not the case in all countries  Excise taxes are progressive – also a bit surprising.

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39  Regional effects  Personal Income Tax  Property Tax  Expenditure incidence  Marginal full incidence  Policy reforms

40  Higher tax rates in south  Highest rate in South-Central Coast (sampling error?)  Urban/rural gap in burden is surprisingly small

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43  Method: strip out business income tax and PIT, and apply rules of new tax  Revenue: from VND127k to VND21k per person.  New tax highly progressive.  But: excludes foreigners; very small sample size for PIT and for large household enterprises.

44  Done by General Dept. of Taxation in 2005, using tax rolls  Survey, asking about income, spending  15,500: 3,200 foreign, 7,200 PIT, 5,100 business income tax  11,535 responses (74%); low in HCMC, among foreigners. Results re-weighted.  Anything equivalent in Thailand?

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46  Based on 2009  NB. PIT very elastic  Total revenue: -5% ▪ Foreigners: down by a quarter ▪ Vietnamese: tax payments up  Reconcile with VHLSS data  High-income individuals would pay more  Not-so-high income individuals would pay less, and not be in the tax net as much  Difficult to merge the two; in progress.  Keep: taxes foreigners, adds equity. Enforcement could be better. Perhaps limit top rate to top CIT. Adjust brackets for inflation (as in US).

47  VHLSS has limited data on property:  Residence; non-agric. real estate  Assume tax would not apply to agricultural property, or to movable property.  1% of capital value; arbitrary

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49  Highly progressive  1% is steep; 7.8% of expenditure, so politically infeasible at this level.  Cash flow concerns  Based on bubble prices?  Introduction of tax would reduce base  Excludes corporate ownership

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51  Applied to education, health, targeted social programs  Step 1: Measure unit subsidies  Step 2: Identify coverage  Step 3: Present results May 11, 2011JH: Tax & Expenditure Incidence in PeruPage 51

52  In 2000 ▪ 98.8% of children 7-10 were at school ▪ 94% of 14-year-olds were at school ▪ 13% of pupils/students were at private schools  Costs ▪ Pre-K: S/. 583 per child per year ▪ K & primary: S/. 386 ▪ Secondary:S/. 624 ▪ Tertiary:S/.2,506  Assigned based on attendance May 11, 2011JH: Tax & Expenditure Incidence in PeruPage 52

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54 May 11, 2011JH: Tax & Expenditure Incidence in PeruPage 54 “progressive but not well-targeted”

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56  Cost of procedures  Used ENNIV-2000 reported data on cost at private facilities  Adjusted downwards substantially to be consistent with government spending ▪ Cost/consultationS/. 0.75/minute ▪ Cost of hospitalizationS/. 75/night ▪ Cost of an analysisS/. 6.2/item May 11, 2011JH: Tax & Expenditure Incidence in PeruPage 56

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59  Allocated based on reported usage May 11, 2011JH: Tax & Expenditure Incidence in PeruPage 59

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62  System seems progressive overall  But ▪ Some taxes not included (e.g. CIT) ▪ Not all spending can be included ▪ Rely on our incidence assumptions May 11, 2011JH: Tax & Expenditure Incidence in PeruPage 62

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64 May 11, 2011JH: Tax & Expenditure Incidence in PeruPage 64

65  Addresses question:  If a tax were raised, and spending increased as a result, what would effect be on incidence?  Step 1: Estimate effect of more tax revenue on spending  Step 2: Simulate effect of higher VAT in Peru May 11, 2011JH: Tax & Expenditure Incidence in PeruPage 65

66  Estimated using regression of form  i.e. spending/GDP (y) is a function of tax revenue/GDP (x)  Panel Data: 16 Latin American countries, “Fixed effects” estimates. May 11, 2011JH: Tax & Expenditure Incidence in PeruPage 66

67 May 11, 2011JH: Tax & Expenditure Incidence in PeruPage 67 Note: Low marginal effects for education, health No marginal effect for interest payments High marginal effects for social spending

68  2000: assume VAT from 18% to 19%  Of extra revenue: ▪ Education takes 7.6% ▪ Health takes 7.3% ▪ Social subsidies take 28.4% ▪ Remaining spending not allocable May 11, 2011JH: Tax & Expenditure Incidence in PeruPage 68

69 May 11, 2011JH: Tax & Expenditure Incidence in PeruPage 69

70  A higher VAT need not hurt the poor  Result is robust to whether we use expenditure/cap or income/cap to sort households May 11, 2011JH: Tax & Expenditure Incidence in PeruPage 70

71  Greater disaggregation of spending  Sensitivity to assumptions about incidence  Source of purchases/evasion  Better treatment of transport  Use income tax data  Add social security pensions May 11, 2011JH: Tax & Expenditure Incidence in PeruPage 71

72  Confidence intervals (bootstrapping?)  Create integrated “calculators”; and do it in-house  Need better access to primary data  Adjust for quality/value of benefits  Theory: why income/cap results differ so much from expend/cap results ▪ Measurement error (Deaton)/permanent income May 11, 2011JH: Tax & Expenditure Incidence in PeruPage 72

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