2 1 JAY ROSENGARD HARVARD
PAYING THE BILLS: COMPARATIVE TAX
REFORM
Hotel Grand Hya-, Nusa Dua - Bali
10-11 December 2015
Presented by:
JAY K. ROSENGARD
KENNEDY SCHOOL OF GOVERNMENT
HARVARD UNIVERSITY
Sen. Russell Long on Tax Reform
• “A tax loophole is something that
benefits the other guy. If it
benefits you, it is tax reform.”
• “Tax reform means, 'Don’t tax
you, don’t tax me. Tax that fellow
behind the tree.'”
2
Roadmap of Presentation
• Part I:
Key principles and global lessons
• Part II:
Examples from Turkey and Argentina
3
Rationale For Tax Reform
• Fiscal: ↑ Tax Revenue
(revenue enhancing vs. revenue neutral)
• Social: ↓ Horizontal or Vertical Inequities
(redistributive vs. distributionally neutral)
• Economic: ↓ Resource Allocation Inefficiencies
(interventionist vs. economically neutral)
• Administrative: ↑ Efficiency and Service
(lower administrative and compliance costs vs. business as usual)
Primary objective in Indonesia? Cannot be all….
Maximize revenue in the most economically efficient,
socially equitable manner, relying on voluntary
compliance?
4
Obstacles To Tax Reform
• Context: Political
– Winnings Concentrated à Winners Organized & Active
– Losses Diffuse à Losers Disorganized & Passive
• Internal: Technical
– Limited Information On Present Situation & Simulation
of Possible Impact à Weak Planning Capacity
– Limited Financial & Human Resources à Weak
Implementation Capacity & Internal Sabotage
• External: Foreign Aid
– Conditionality & Inexpert Experts à Advice That Is
Inappropriate But Difficult To Reject
5
Principles Of Tax Reform
• Approximately Right vs. Precisely Wrong:
Simple > Optimal
• Emphasize Maximum Revenue & Efficiency:
Equity Best Addressed With High Thresholds,
Blanket Exemptions, and Expenditure Policy
• Economics Of Taxation:
Low Rate, Large Base à Minimize economic
distortion, share burden widely, promote voluntary
compliance/reduce incentive to evade
6
Independent Revenue Authorities
• Why?
– Need for rapid change in organizational culture
– Need to attract and retain competent staff
• Requirements?
– Strong political support at the top
– Adequate operational and investment funding
– Operational autonomy/freedom from interference
– Appropriate governance and oversight
• Symptoms or Causes?
– Calling a dog’s tail a leg does not make it a leg….
7
10 Lessons Of Tax Reform
•
•
•
•
•
Most successful when least needed
Continuity among decisionmakers/policies is critical
Hurried reforms are à failed reforms
Essential to focus on tax administration & implementation
Critical to have good mass communications
•
•
•
•
Revenue shortfalls doom reform
Simplification and rate reduction are complementary
Withholding systems are vital for income taxation
Indirect tax reform currently a major worldwide focus
• There are no quick fixes
8
Turkey Tax Reform (1)
Profile of Turkey in 2014 [Indonesia in brackets]
• Population: 77 million [253 million]
• Population < 15 years old: 24.3% [28.5%]
• Population growth rate (2013): 1.2% [1.2%]
• Life expectancy at birth (2013): 76.6 [70.9]
• GDP/capita (USD current PPP): $19,027 [$10,023]
• Real GDP growth: 2.9% [5.0%]
• Inflation rate (all items): 8.9% [6.4%]
• PPP (TRY per USD): 1.20 [Rp 3,942/USD]
• Exchange rate change from 2013: -15.3% [-13.4%]
9
Source: OECD Country Statistical Profiles
Turkey Tax Reform (2)
Tax Revenue as a % of GDP
Source: OECD Tax Statistics Database
10
Turkey Tax Reform (3)
Changes in tax to GDP ratio (percentage points), 1995-2006
Turkey
Korea
Spain
Portugal
Mexico
Norway
United Kingdom
Greece
Italy
Switzerland
Sweden
France
Japan
Belgium
Aus tria
Denmark
United States
Ireland
Czech Republic
Luxembourg
Germany
Netherlands
Canada
Finland
Poland
Hungary
Slovak Republic
OECD - Total
OECD - Europe
-8.00
-6.00
-4.00
-2.00
0.00
Source: IMF Fiscal Affairs Department 2009
2.00
4.00
6.00
8.00
10.00
11
Turkey Tax Reform (4)
Composition of Tax Revenue in 2012
Source: OECD Tax Statistics Database
12
Turkey Tax Reform (5)
Overview of tax reform in Turkey:
• Long, incremental reform – not 䇾big bang䇿 approach
• Main objective was to increase revenue by
improving the stability, transparency, and equity of tax
system through rate reduction and base broadening/tax
system simplification
• Main elements were:
– Rationalization of indirect taxation
– Rationalization of personal and corporate income taxes
– Reorganization of tax administration
13
Turkey Tax Reform (6)
Key features of tax reform in Turkey
• PIT unified tariff schedules for wage and non-wage
income, reduced both tax rates and tax brackets
• CIT tax rate reduced, introduced stronger rules on transfer
pricing and thin capitalization
• Special Consumption Tax (SCT) replaced 16 selective
excise taxes/fees/charges (VAT is charged on top of SCT)
• MoF established a Directorate of Tax Policy
• Semi-autonomous Presidency of Revenue Administration
was created, complemented by automation and enhanced
taxpayer services and improved tax audit capacity
14
Argentina Tax Reform (1)
A note about VAT reform in Argentina:
• Argentina known as low-tax country since late 1950s, but
its tax/GDP ratio after 2010 is second only to Brazil in LA
• Much of this is attributed to VAT increases, but a puzzle:
– VAT often seen as regressive
– Since 2002, no large LA country increased VAT (and overall tax
revenue) more than Argentina, and no LA country reduced
inequality more than Argentina
• Key is incentivizing consumers to shift regular HH
consumption from informal to formal markets by getting
consumers to use more electronic methods of payment
• Easier to track, easier to tax, wealthy more likely to switch
15
Argentina Tax Reform (2)
Source: OECD Tax Statistics Database
16
Argentina Tax Reform (3)
Source: OECD Tax Statistics Database
17
Argentina Tax Reform (4)
Source: OECD Tax Statistics Database
18
REFORM
Hotel Grand Hya-, Nusa Dua - Bali
10-11 December 2015
Presented by:
JAY K. ROSENGARD
KENNEDY SCHOOL OF GOVERNMENT
HARVARD UNIVERSITY
Sen. Russell Long on Tax Reform
• “A tax loophole is something that
benefits the other guy. If it
benefits you, it is tax reform.”
• “Tax reform means, 'Don’t tax
you, don’t tax me. Tax that fellow
behind the tree.'”
2
Roadmap of Presentation
• Part I:
Key principles and global lessons
• Part II:
Examples from Turkey and Argentina
3
Rationale For Tax Reform
• Fiscal: ↑ Tax Revenue
(revenue enhancing vs. revenue neutral)
• Social: ↓ Horizontal or Vertical Inequities
(redistributive vs. distributionally neutral)
• Economic: ↓ Resource Allocation Inefficiencies
(interventionist vs. economically neutral)
• Administrative: ↑ Efficiency and Service
(lower administrative and compliance costs vs. business as usual)
Primary objective in Indonesia? Cannot be all….
Maximize revenue in the most economically efficient,
socially equitable manner, relying on voluntary
compliance?
4
Obstacles To Tax Reform
• Context: Political
– Winnings Concentrated à Winners Organized & Active
– Losses Diffuse à Losers Disorganized & Passive
• Internal: Technical
– Limited Information On Present Situation & Simulation
of Possible Impact à Weak Planning Capacity
– Limited Financial & Human Resources à Weak
Implementation Capacity & Internal Sabotage
• External: Foreign Aid
– Conditionality & Inexpert Experts à Advice That Is
Inappropriate But Difficult To Reject
5
Principles Of Tax Reform
• Approximately Right vs. Precisely Wrong:
Simple > Optimal
• Emphasize Maximum Revenue & Efficiency:
Equity Best Addressed With High Thresholds,
Blanket Exemptions, and Expenditure Policy
• Economics Of Taxation:
Low Rate, Large Base à Minimize economic
distortion, share burden widely, promote voluntary
compliance/reduce incentive to evade
6
Independent Revenue Authorities
• Why?
– Need for rapid change in organizational culture
– Need to attract and retain competent staff
• Requirements?
– Strong political support at the top
– Adequate operational and investment funding
– Operational autonomy/freedom from interference
– Appropriate governance and oversight
• Symptoms or Causes?
– Calling a dog’s tail a leg does not make it a leg….
7
10 Lessons Of Tax Reform
•
•
•
•
•
Most successful when least needed
Continuity among decisionmakers/policies is critical
Hurried reforms are à failed reforms
Essential to focus on tax administration & implementation
Critical to have good mass communications
•
•
•
•
Revenue shortfalls doom reform
Simplification and rate reduction are complementary
Withholding systems are vital for income taxation
Indirect tax reform currently a major worldwide focus
• There are no quick fixes
8
Turkey Tax Reform (1)
Profile of Turkey in 2014 [Indonesia in brackets]
• Population: 77 million [253 million]
• Population < 15 years old: 24.3% [28.5%]
• Population growth rate (2013): 1.2% [1.2%]
• Life expectancy at birth (2013): 76.6 [70.9]
• GDP/capita (USD current PPP): $19,027 [$10,023]
• Real GDP growth: 2.9% [5.0%]
• Inflation rate (all items): 8.9% [6.4%]
• PPP (TRY per USD): 1.20 [Rp 3,942/USD]
• Exchange rate change from 2013: -15.3% [-13.4%]
9
Source: OECD Country Statistical Profiles
Turkey Tax Reform (2)
Tax Revenue as a % of GDP
Source: OECD Tax Statistics Database
10
Turkey Tax Reform (3)
Changes in tax to GDP ratio (percentage points), 1995-2006
Turkey
Korea
Spain
Portugal
Mexico
Norway
United Kingdom
Greece
Italy
Switzerland
Sweden
France
Japan
Belgium
Aus tria
Denmark
United States
Ireland
Czech Republic
Luxembourg
Germany
Netherlands
Canada
Finland
Poland
Hungary
Slovak Republic
OECD - Total
OECD - Europe
-8.00
-6.00
-4.00
-2.00
0.00
Source: IMF Fiscal Affairs Department 2009
2.00
4.00
6.00
8.00
10.00
11
Turkey Tax Reform (4)
Composition of Tax Revenue in 2012
Source: OECD Tax Statistics Database
12
Turkey Tax Reform (5)
Overview of tax reform in Turkey:
• Long, incremental reform – not 䇾big bang䇿 approach
• Main objective was to increase revenue by
improving the stability, transparency, and equity of tax
system through rate reduction and base broadening/tax
system simplification
• Main elements were:
– Rationalization of indirect taxation
– Rationalization of personal and corporate income taxes
– Reorganization of tax administration
13
Turkey Tax Reform (6)
Key features of tax reform in Turkey
• PIT unified tariff schedules for wage and non-wage
income, reduced both tax rates and tax brackets
• CIT tax rate reduced, introduced stronger rules on transfer
pricing and thin capitalization
• Special Consumption Tax (SCT) replaced 16 selective
excise taxes/fees/charges (VAT is charged on top of SCT)
• MoF established a Directorate of Tax Policy
• Semi-autonomous Presidency of Revenue Administration
was created, complemented by automation and enhanced
taxpayer services and improved tax audit capacity
14
Argentina Tax Reform (1)
A note about VAT reform in Argentina:
• Argentina known as low-tax country since late 1950s, but
its tax/GDP ratio after 2010 is second only to Brazil in LA
• Much of this is attributed to VAT increases, but a puzzle:
– VAT often seen as regressive
– Since 2002, no large LA country increased VAT (and overall tax
revenue) more than Argentina, and no LA country reduced
inequality more than Argentina
• Key is incentivizing consumers to shift regular HH
consumption from informal to formal markets by getting
consumers to use more electronic methods of payment
• Easier to track, easier to tax, wealthy more likely to switch
15
Argentina Tax Reform (2)
Source: OECD Tax Statistics Database
16
Argentina Tax Reform (3)
Source: OECD Tax Statistics Database
17
Argentina Tax Reform (4)
Source: OECD Tax Statistics Database
18