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LSE: Public lectures and events
IGC Growth Week 2010 - Domestic Resource Mobilisation and Growth
01:32:32
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A
Tim, I'd like to welcome you. My name is Tim Besley. I'm here at the LSE in the Economics Department and also a member of the steering group at the igc. And thanks to all of you for staying the course who've been at Growth Week all week. And for those of you for whom this might be your first event, welcome. We have an extremely distinguished panel this evening to discuss the very important issues around domestic resource mobilization and growth. As we're about to hear, the question of how you raise a level of resource that allows you to achieve the kinds of ambitions that governments have and the needs that they have is an absolutely crucial question. And we're going to have four perspectives on that during the evening from the panel. The panel have all reassured me that they can raise some provocative and interesting issues in just 10 minutes each. Thereafter we are going to open it up to the floor, although I may actually abuse my position as chair to try and have a bit of a structured discussion rather than just trying to have sort of disconnected comments. So we'll see how that goes as I moderate it. But in any case, let's get underway. The run order is slightly different from the order in which is listed in the, in the program. And we're going to kick off with Michael Keane from the imf. Many of you will know that Michael, in the spirit of the igc, has spanned both academia, research and now policy. And he's going to lead off our discussion on the topic. He's now Assistant Director of the Fiscal Affairs Department at the imf. So over to you Mick, for the first presentation.
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Oh, what do I do?
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You just click that page down and it should.
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B
Well that's clever. Well, thank you, thank you very much Tim and it's a great pleasure to be here. As Tim says, I'm at the imf, so I always have to start by saying that everything I say is my own view, not to do with the imf. Especially as in the spirit of Tim's introductory remarks, I should probably overstate few of the things I want to say for emphasis, but I was asked to talk about policy issues and research challenges. I think maybe one picture tells us a little bit about the key policy issues. This basically shows non resource revenue, so taking out as best we can revenue from natural resources as a share of GDP across three groups of countries. Low income countries are the ones in blue, lower middle and upper middle income. And really the story there, you see, is that particularly want to focus on the lower line there, which is the low income countries and I think the picture that certainly I tend to take away is on average there has been pretty much stagnation in non resource revenues for pretty much a long time. You can see a bit of, a, bit of an upward blip towards the end. But since then we've had the crisis. So I think overall I take away a picture of some degree of stagnation despite of course many efforts in advising and in countries themselves trying to reform tax systems over these years. For the other two groups, I think the thing that also stands out is for the upper middle income countries which are the kind of reddy orangey ones you see basically this kind of step down which is really the mirror image of the resource revenues of the high income countries and that's of the higher income countries in this group. And that's something I'll come back to. So I think we sort of start with this. Of course there are huge country variations, but a general picture of stagnation. Now, before I get into some of the issues, I just want to relieve myself of a quick rant on various things that irritate me when people talk about taxation and development. The first one is just the obvious point someone ought to make. The dangers of generalization, all these, the countries we're talking about vary hugely. Syria is very different from a small Caribbean island.
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Syria.
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Just to think that we can say things that apply to both in a useful way is slightly delusory. And there are differences, you know, in all kinds of things. Resources I think is one to stress if you were to look, I think for all countries, probably the single most important differential feature across countries is do they have resource revenue or not. Conflict situation matters. History matters an incredible amount in sometimes slightly arbitrary ways. For one example, being both India and Pakistan really inherited through the Government of India Act. Different but nevertheless qualitatively similar. Constitutional restrictions that says federal government can tax either goods or services, provincial government can tax the other one. And of course that becomes a huge issue when you're thinking about designing a vat. That becomes really the big issue of tax design in these countries, how you get around this constitutional restriction that it's pretty much just an aberration of history. It's also the case, something we're looking at at the moment, for example, that there are significant differences in performance both of the overall tax system and evaluated tax between francophone and Anglophone countries in sub Saharan Africa. And that suggests there's some deeper difference there that matters that we don't quite understand. A second danger I'm very conscious of, I think is really big ideas. This is an area in which periodically big ideas come along, get all the attention. And looking back, I think we can ask how useful did many of these prove? The first big idea was income tax. The global income tax was the way to go. Another idea was the formation of revenue authorities. Then there were large taxpayer units, value added tax, and now I think an emphasis on state building. And you can certainly look back at these and ask really how many of these, despite all the effort that went into them, actually succeeded much? Possibly you could argue of the ones here, probably clearest, I would guess for large taxpayer units, I would argue for the vat. State building, I think is the current sort of big idea. And I want to say a little bit about that later on, but I think we should be skeptical of big ideas. If you look back at the progress that's made, it's often in really kind of very boring nerdy tax things like having a sensible system for companies to prepay their income tax makes a huge difference. And when many of these more fashionable things I would argue at least haven't last quick rant I think is whenever you read about tax revenue mobilization in developing countries, you hear about, you know, well, there's this big informal sector that's a real problem. And I think the point I want to make, and it's maybe just a matter of words, is that informality isn't really the issue, isn't really the problem. It's a problem of non compliance of various different kinds. What I kind of have in mind here, for example, is that many informal operators in developing countries use. You really don't want to have in the tax system at all. They're too small in revenue terms at least. You simply don't want to have them in the tax system. That's not a problem. You don't want to tax these people at all. Conversely, some of the most important forms of evasion, important both in revenue terms and in terms of wider taxpayer culture, are by lawyers, architects, professionals, who clearly are basically in any meaningful sense best thought of as being in the formal sector. So those are things I wanted to get off my chest as a bit of a rant. Now I have a few minutes to go through. I think some of the issues that certainly, for example, recur for us at the Fund when we think about revenue mobilization problems. And these are not in any particular order and I've certainly left some out. But one big issue is dealing with the revenue consequences of trade reform. Again, we should remember that, for example, in sub Saharan Africa on Average countries are still getting about 25% of their revenue from tariffs and tariffs are clearly in the longer term on the way out. To some extent that's already going to happen. That's on automatic pilot because so many association agreements have been sold, have been signed with the eu. So we need to know where we're going to replace this revenue from. Some of the work we've done suggests that while middle income countries have pretty much managed to recover lost trade revenue, trade tax revenue from domestic sources, more or less a dollar for a dollar recovery, has been much weaker in many lower income countries and we don't again fully understand why. It's not, for example, simply to do with whether they have the VAT or not. There's clearly, I think, scope to find out, well, why is trade reform been much more problematic in some lower income countries, like for example in Egypt and less of an issue in others? For example, Pakistan, despite its many other weaknesses of its tax system, has actually done quite a good job of recovering trade tax revenue. So there's an issue there. There's an issue, I think in terms of improving the vat and I put improving here deliberately because I don't. Despite criticisms from a number of eminent sources, it's really not practical to think that we're going to suddenly get rid of the VAT and replace it by something else. But I think we clearly need to know more about what makes the VAT work and what makes it weaker. In some countries, for example, we've again done some work, some empirical work which suggests that pretty much there is clear evidence, empirical evidence at least I would say that in most countries that have adopted a VAT there are signs of efficiency gains in the overall tax system, statistically significant gains in efficiency, as advocates of VAT suggest. But that evidence is weakest in sub Saharan Africa and it's actually, I'm now learning, weakest in Francophone Africa. And again, we need, I think, to figure out why exactly that is. Are there particular features of the VATs in these countries or of the wider economy that is accounting for less impressive performance? There's an issue of bolstering corporate tax revenue. Corporate tax revenue, let's remember, is a bigger, is more important as a source of revenue in relative terms in developing countries than in OECD countries. Revenue over the last few years, at least prior to the crisis, had held up despite a reduction in kind of headline rates of corporate tax. And despite, and this is something that hasn't happened elsewhere in the world, a massive increase in special incentives that are given under the corporate tax. So I think we need to figure out whether we can, whether we can, what action we need to take to bolster the corporate tax, whether through scaling back incentives, whether we need regional agreements to do that. Clearly, given what I said before, a whole set of issues about improving compliance, we need to know what works in terms of both policy and administration. On the policy side, for example, many developing countries have experimented with withholding schemes of various kinds. And these are, these are not withholding in the sense we know of, kind of wage withholding, paye and so on. These are withholding taxes in relation to imports. They're kind of slightly weird withholding schemes that are embedded in VAT systems and views differ very sharply on for example, whether VAT withholding schemes work or not. But there's really very little serious evidence on that again and similar questions you can ask on the administration side. I think there's a bunch of issues to do with how we coordinate tax and spending policies. Again a bit of a kind of an exaggeration, but the sort of general view tends to be, well, the general kind of professional view, as it were, tends to be use the tax system to raise revenue. Do you pursue your equity objectives on the spending side? But we have very little sort of micro evidence on really how persuasive that argument is in countries where of course the range of spending instruments available is rather limited. There's a very good study for Ethiopia that does this looking at microdata both on the tax and the spending side, but which tends to warrant this kind of standard view. But I think we need to know to understand it much better and certainly to do a better job, if it's correct, of, of persuading policymakers, as I mentioned, taxation and state building as I think this idea has attracted quite a lot of attention lately. The idea that we can use taxation to encourage good governance in the broad sense, a whole set of issues there I think that economists have only started recently, I think to look at. But from the kind of more practical perspective I come from, the questions, well, what, what difference does that really make to the kind of day to day policy advice you give to these countries? Does it really make any difference to what we say about the vat? And one argument for example, is one area where I can see makes a potentially very huge difference is in the treatment of small enterprises. Because a standard view has often been that small enterprises, at least so far as we focus on revenue, we really don't care about them. There's very little revenue there. But this would say, well, no, you actually want to include small enterprise in the tax system, not only to minimize whatever inefficiency costs excluding the may involve, but really as a way of involving them in the governance broader tax system. So the question is, you bring people into the tax system even if on average you're probably going to be losing revenue, at least in the short term by doing so. And finally, Tim will be pleased to hear, I think there's a whole set of issues about. I'm going to take the liberty of so small plug here. There's a whole set of issues about resource taxation, let's say resource taxation. Well, resources is clearly a key division in terms of how we think about revenue raising in different countries. And it's not even just whether you have resources or not, it's whether you're likely to have more resources in the future, which is probably almost as important as whether you have them now. So there are issues about how do you balance royalties, rent taxation. Economists might say, well, rent taxation sounds good. But of course there are all kinds of political pressures to get revenue coming in soon, as soon as the first bit of stuff comes out of the ground which points you towards royalties. And there's a set of issues about how you deal with a potential timing consistency problem that arises because of these huge sunk costs in resource investments followed by very long production periods. And how you also deal with the kind of political pressures that emerge whenever resource prices are high for governments to be visibly getting a large amount of revenue from the sector. And that may, for example, press us towards using resource tax regimes that have a kind of a significant element of progressivity in there. And I think we're really only now starting to look seriously at whether there is evidence that the contract design, resource, resource contracts does indeed whether you can essentially detect significant differences and the impact of contract design on longer term government revenues as well as on transparency related issues. So with that I'll finish and hand back to Tim. Thank you very much.
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Thank you very much. So our next speaker is Ramas Khanan from the who has been for 10 years the finance Minister of Mauritius, recently stepped down and vice Prime Minister also Mauritius. And he doesn't have a set of slides but he's going to talk to us for 10 minutes about his perspective on these issues. So Rama, thank you very much.
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Thank you. Good evening everybody. I'll take a slightly different angle to approach this issue of domestic resource mobilisation and growth as a practitioner and also as a political actor responsible for creating the climate for growth, for poverty alleviation and for reduction inequality. I think even political actors acknowledge and recognize the crucial importance of domestic resource mobilization for capital accumulation, investment growth and poverty alleviation. And as Minister of Finance or as Prime Minister or Minister in the government, you're always concerned how you're going to mobilize resources to finance infrastructure, economic infrastructure, social infrastructure, and how do you raise this money. And we are all concerned also about too heavy a reliance on external funding for obvious reason. Very often when we need to bridge the gap between a deficit, we said, look, will the FDI come in? Will the portfolio investment come in? So there is an element of greater volatility in external funding. There is also less predictable. First time I was Minister of Finance, we had a program with imf, so I know what policy space means. And the second time we do not have a program. So you have some greater policy space if you are capable of mobilizing more resources on your own. There's also this issue of where priorities are. Some development economists will call it ownership. And we've done some of the things that have just been mentioned by gentlemen from the imf. We used to have different departments to collect revenue. One for custom duties, one for EXR duties, one for vat, one for income tax. And we also have property tax and one for property. And initially we created a revenue authority to exchange information in order to better administer all these department to raise revenue more did not work. You're right. Then we tried something else. We set up a corporate entity, Mauritius Revenue Authority, a single authority that will be responsible for collecting all taxes in Mauritius. That's difficult to say whether it has worked because other things have happened at the same time. So there has been improved administration, better collection, especially from some of the big players were playing around with the tax system, but also with professional lawyers, doctors, chartered accountants in Mauritius were known not to pay their fair share of taxation. So if you look at the figures, it has improved. But I think the reason why it has increased considerably, I think it's about 22% of GDP tax revenue is because we have diversified the economy and we have broadened the base of economic activities. And as Minister of Finance and responsible for the economy, you have to do two things. Mobilize revenue, but at the same time use taxation as an instrument, as a tool for changing the architecture of the economy. I was telling a friend yesterday, when you come from a developing country that is not richly endowed in resources, you don't have a huge market, you don't have gold, how do you attract attention? And you need to have a story to tell. And we have used fiscal policy in order to change the architecture of the Mauritian economy. And what we've done was very bold. Not everybody agreed to this. When I came back to power the second time, we had reached the end of a cycle were dependent on trade preferences. So there was trade preference erosion, the end of the Multi Fiber Agreement, the sudden change in the sugar regime of the eu. And we depended a lot on sugar and textile. So we had to find a new paradigm of development. So we sat down and we said, look, what do we do with the taxation system was very complicated. It's very complex, high level, many bans, a lot of tax expenditures. So I said let's get rid of all of this. And we went for a simple low tax regime but with very few tax expenditures. It was a gamble. So we had three bands of corporate tax, four bands of direct tax and all now is a simple single rate of taxation at 15%. But there are fewer tax expenditures. And what this has done first, better compliance, I think psychologically I've met many friends, you know, after delivering the speech, he said, look grandma, we don't mind paying 15%, but we're employing chartered accountants and fiscal specialists to tell us how to reduce our burden of taxation when it is 30, 35%. And the other thing it has done is to improve the attractiveness of Mauritius as an investment destination. And whenever I go around to promote diversification and people ask me the question, can you give me two reasons why I should invest in your country and not elsewhere? And this extends us out of the crowd that Mauritius is one of the few countries where taxation is simple, it's rule based.
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Also.
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What I did was to remove all the discretionary power of the Minister of Finance on tax issues. So what you see is what you get. And people know that there is certainty, there is stability, there is predictability. And when this has done that two years following this reform, FDI was 40 times higher than it was in the preceding five years. But we did that at the same time as to offer opportunities for the diversification of the economy. And we had to face the same problem that was raised yesterday. If you don't have the capacity to diversify the economy, what do you do? We did it by trial and error. But we put all assets on our side to make sure that the trial will work and if it was a mistake, that we'll learn the lesson very fast and change. And we've been able to diversify the economy into real estate development, into ICT and BPO and into financial services sector. If you had asked expect 10 years ago whether we could do that, they would have told you no. The great advantage of that it has created private sector economic activities in the country that provided jobs to people, high productivity jobs with high wage. So obviously this is the way in which we have broadened the tax base. More firms are making more money and new firms are joining new activities. The tax take from these three new financial services, ict, BPO and real estate development are quite high. And also income tax has increased not only because of the reform but also because of new activities that have been created as a result of reform. New people are working in high wage sector, in high productivity sector and this is the way it has been done. I do realize the case of Mauritius cannot be exported to many other countries where they still have to rely to a large extent on overseas development assistance, on remittances and also on foreign direct investment. But I think this is a chicken and egg situation because very often you look at revenue mobilization only from a tax perspective and not from a broad economic perspective perspective in order to diversify the economy, but also within a particular sector. How you transform economic activities from the low end of the supply chain to the high end of the supply chain. We've done that in the sugar sector. We used to plant cane and transform it into raw sugar. Market has gone. So we use fiscal incentives in order to move from a sugar sector to a cane cluster. So now what we do, we convert the raw sugar into white sugar or special sugar. We use the byproduct of sugar for electricity, we manufacture ethanol and we also produce some high end cane spirit. So I think we should not lose sight of how you can use this fiscal instrument in order to diversify the economy and also to improve the supply chain. Thank you very much.
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Thank you very much, Rama. Now this should just see why this isn't working. There we go down to our next presenter who's Mashur Rahman from Bangladesh who is the economic affairs advisor to the Prime Minister. Over to you to give us a Bangladeshi perspective. Does this key when you want to change this one? Number three.
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Okay, thank you. I guess what I will do is take a look at our experience of tax changes, tax reforms and try to understand or explain in how we get back to where we start from. If you look at our tax performance in recent years it has been growing at a healthy 40% or so which is above the nominal rate of growth at about 11 or 12%. But we remain stuck at 11%. NBR sorry, tax GDP ratio. And if you take the major taxes like customs, VAT and income tax, it is is only about 9%, maybe slightly higher. The major tax reforms were in 1980 and 1990s. The 1990s tax reforms was much wider in scope. It aimed at reducing the nominal protection. The assumption was that if nominal protection is lower, the effective protection also would be lowered. And calculating effective protection was too difficult. There was also a shift of reliance from customs revenue to domestic revenue like VAT and income tax. The VAT was imposed at an uniform rate of 15%. Trade neutrality, etc. Was there. But in course of time what happened was VAT became a kind of discretionary excise duty varying in rates and the trade neutrality was lost. At the time of these tax reforms we had introduced also a joker in the pack of cards called supplementary duty. The basic assumption was that when you reduce the rates, assuming that the economy remains at the same level or it improves to some extent, the revenues from customs duty will fall. And what you do then so you introduce supplementary duty in order to recoup the losses. And the supplementary duty roughly was the difference between the new lower rates and the higher rates which were applied before to excise items and to imported items. Import was subjected to sales tax at varying rates and domestic production was subjected to sales tax. Are very great, but sorry, excise duty. But excise duty on most of the products was lower. We have something called a regulatory duty which is the least understood, but merely applied in order to provide protection in order to raise revenue. So it appears that we try to get around this nominal rate of duty, nominal protection and so on by playing with this supplementary duty and playing with vat. VAT assists to be basically a consumption tax. It has become an excise duty at variable rates. And there are instances, not many, of applying VAT to import or to production, but not to VAT at the downstream down to the level of retained. And the weaknesses are the record keeping is very weak, the audit is very weak and the compliance also is weak. And there is a bit of coercion or negotiation between the tax administration and the taxpayer. What you also notice is that there has been changes in the rates between the lowest and somewhere in the middle which facilitate import of industrial raw materials. Import of intermediate, industrial intermediates. So that also reflects a kind of approach to industrialization. The import of raw materials and intermediates indicate that there is some kind of belief that industrialization will follow the path of import substitution. And the difference between the rates of raw materials and intermediates and the final product of import. That difference protects the profit of the entrepreneur. So there is a demand from the entrepreneur for protection and the government response by supplying this kind of modified VAT and freely applied supplementary duty in order to provide the protection. And that's something that becomes from the political economy perspective to get rid of now income tax also there has been a healthy growth of income tax. Personal income tax structure is simple and transparent. We have about four rates which have remained there for about how many years? 15, 20 years. The rates have not changed. The threshold have been adjusted from time to time. But that also remains more or less constant. When the new government comes or when the new government goes to election, there is some change, otherwise it remains more or less constant. The corporate tax is not that simple. We have four rates for the private, for the proprietorship organization, for the private limited companies. The rates, the joint trusted companies get the lowest rate and the next hire is for the proprietorship and private companies, limited companies. Then as you go on to non bank and bank financial institutions, the tax rates goes up to 42.50%. And for mobile operators the highest is the highest rate is applied. 45% is basically because as the profit increases, the rate of profit increases, the tax rate also increases. And there are too many exemptions by categories of operators, by categories of manufacturing, by categories of location. And you name what. And there is some saying, I do not know whether it is true or not, that the exemptions and the customized tax rates are so many that no one in the board of revenue is able to keep track of who is getting what and who is paying what. So anybody can say that okay, my competitor gets his exemption, therefore I should also get that exception. There is also a lack of compliance. And if you listen to the people, you find that there's a kind of distrust or there's a kind of low confidence in the government, which I believe derives from the colonial experience experience of authoritative government for a long time. And also the current loud neoliberal rhetoric that government is bad, don't allow the government, don't permit the government to do too many things. I also feel that the development partners engagement in tax reforms have been. Have not been deep enough long enough. They address to some extent the initial problem of revenue slippage. But as you go on, there is a question of the restructuring of the industries which had been operating because of the lower protection and also investment in new industries which will be consistent with the new regime of tariff. That investment doesn't come, as the finance minister, Deputy Prime Minister of Mauritius said, the economy expands. And even if you have a relatively low rate, the revenue increases. In our case, the economy did not expand to that extent. So even by playing with the rates, we did not have that good fortune of collecting more revenue. There is something paradoxical. The multinational corporations and the international organization, UN bodies, they expect that their operations and their employees would be tax exempt. Paradoxically, they are the people who always advise, raise tax, raise tax, raise tax, don't give exemption, those exemptions. Now, that derives from an obsolete or an outdated concept of sovereign ruling jurisdiction. I guess we should make a difference differentiation between sovereign ruling jurisdiction and tax jurisdiction. If you are using the infrastructure, utilities of a country, the policing of a country, you should pay for it. And if there is a difference between the home country rates and the host country rate, the difference should be sorted out between the two countries. And I believe whatever is taxable in the host country should be done. I think there are two other things we should look at. One is small savings mobilization and remittance. Remittance has been growing as far as Bangladesh is concerned. And we hear about remittance being converted into investment resources. If we want to do that, then whatever instrument we design it has to satisfy the remittance recipient's expectations, which are basically, he buys land as a source of income. Land is also a security and it also gives social status. The instrument can give all of these things except social status. Land is very closely connected with social status. National small savings, the postal savings and national savings certificate schemes were meant for that. But when the government felt and the authority talked down the bank's interest rate, there was a shift of savings to small savings. The government savings certificates and so on. These are small bubbles. But at the same time, there were bubbles in the stock market, there were bubbles in the land prices, some or other the government could not tackle that. But the government has reduced the interest rate. And there, I presume, would be a lower sale of certificates. To conclude, I believe that in order to address the problem of taxation and resource mobilization, efficiency and equity of government fiscal policy are very important. And in tax, I believe equity and efficiency cannot be separated. If people are convinced that the government acts in an equitable manner, then there is a voluntary compliance. Let me end with a remark which was made by someone who is associated with this institution at the beginning. His remark was that law is best enforced, which is obeyed willingly and with least coercion. It was Harold J. Rusky. That lesson is important for all of us.
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Thank you.
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Thank you very much.
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Masher.
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Let me just go through and get to Joel's presentation. Presentation here. Okay. Our fourth speaker is Joel Slemrod, who is he has the longest title, I think, of everyone here, The Paul W. McCracken Collegiate professor of Business Economics and Public Policy at the Michigan Ross School of Business. Joel is a great expert, indeed pioneer in the field of public economics looking at tax compliance issues. So, Joel, over to you to give your perspective.
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Well, thanks for the invitation to be here. Before I begin my formal remarks, I want to congratulate the organizers for in a session about taxes, not using the word taxes in either the title or the description of the subject, presumably this was done to maximize the audience. Coming from the United States, I am certainly familiar with the extreme sensitivity to this term. I am not afraid. I am not afraid though, to use the term, the word, and I will today. And if growth depends on the public sector raising resources, how and how well a government levies taxes is a crucial ingredient in growth. So let me begin. So my charge from the organizers was, and I quote, to outline an integrated research program that is helpful to guide policy in five slides or less and 10 minutes or less. On the one hand, that is not a whole lot of time. On the other hand, it's true that not having to provide provide answers certainly saves some time. So what I'm going to do today is raise questions that might form the basis of a research program going forward. And the way I interpret that charge is to ask some big picture raise some big picture issues in taxation that matter in many developing countries and where research can provide credible, generalizable results. So that's what I'll try to do today. Some background, though. Let me begin by characterizing the conventional wisdom about taxation not only in developing countries, but generally. One, avoid taxing mobile factors because in trying to raise revenue from mobile factors, you cause the factors to leave and you end up with the economic cost per dollar raised being high. Second, strive for a tax system that is neutral and preserves production efficiency so that whatever goods the economy produces are produced in the most efficient possible way. Third, conserve scarce administrative resources by levying simple taxes. Fourth, devote adequate resources allocated rationally to enforcing the taxes in place. Now, what makes this business interesting is that these reasonable nuggets of wisdom often conflict. For example, as I'll talk about, often, simple taxes violate production efficiency because they tend to favor small firms over larger firms. The practical prescriptions that come from this conventional wisdom often stresses value added taxes rather than trade taxes. Simple income taxes, often presumptive income taxes, meaning not actually based on income, but based on indicators of income and a focus on large taxpayers, including multinational corporations. So with that background of the conventional wisdom, I now want to go through my research program. And it's very naturally organized. I have five topics, and each of the topics has two research questions. Now, like any serious program, this has 10 steps. Okay, here's number one. What we know from the US and the UK that firms remit over 80% of all taxes. That doesn't mean in the tax code it says that firms are liable for taxes, but it means that firms end up writing the checks for the great bulk of taxes. And it includes in particular withholding taxes triggered by payments to workers, but owed literally by firms. Nobody has done the study to confirm that this number is as high in developing countries, but the people I know who know developing countries say the number is almost certainly higher than 80% in developing countries. Well, what this means is that poor tax policy imperils production efficiency. That is, if some firms are remitting and others are not, either legally or illegally, that means that resources are going to move to the sector that pays less remits less tax, and that will cause production inefficiency. And it also means if you're trying to understand which people ultimately bear the burden of a tax system policy, it's not transparent because you have to understand who owns the firms in which firms benefit from the particular policy. So this leads me to two research questions. First, what is the pattern of tax remittance by firms versus individuals and by firm size? This is a basic fact characterization of a tax system which we have a good handle for in many developed countries, but not at all in developing countries. And once we know about this pattern, can improvements be identified? Second, what incentives can be provided to firms that will improve their performance as de facto tax collectors? And this is actually what firms are. They're doing a lot of the work that would otherwise be done by a tax administrating administration remitting taxes triggered by, say, labor income. The big picture question here, if for the theorists here, is that the optimal size of firms, and therefore the optimal boundary between firms, one of Ronald Coase's two big questions, is affected by the need to raise revenue in light of the value to a legitimate tax system of basing tax on arm's length, verifiable quantities, which is often transactions between firms or between a firm and an individual.
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Okay.
- [44:46]
E
Number two, enforcement. The conventional wisdom stresses deterrence achieved through information reporting and matching plus auditing. There's clear evidence deterrence can matter. Some argue, though, as Mick alluded to that feelings of legitimacy, sometimes called tax morale, can override free rider impulses to affect compliance. Although this is an interesting concept, as of yet there's very little evidence outside of the lab that these feelings can be influenced by a tax authority and make a difference to compliance. Two research questions what is the relative impact on compliance of a marginal change in deterrence? How likely non compliant taxpayers are to be caught and what the penalty is versus a marginal manipulation in, say, making the process more taxpayer friendly? And Question two Is the contribution of tax legitimacy in the eyes of taxpayers to state building diminished by the important role of firms as de facto tax collectors? 3. Taxing multinational corporations Multinational corporations are large, which is part of the conventional wisdom tax large entities, but both their real operations and the location of where they report taxable income are mobile. So conventional wisdom is self contradictory. Tax authorities in developing countries have great difficulty monitoring transfer pricing and other multinational income shifting strategies. Two research questions to what extent do efforts to collect income triggered taxes from multinational corporations induce base shifting or erosion? There's a lot of research on this question in developed countries, very little in developing countries. Second, are there alternative tax bases other than income accounting based income, such as presumptive income taxes, perhaps based on assets that trigger less base erosion? Fourth, and next to last, if you've been following along the 10 step program value added taxation, the conventional wisdom argues that value added tax collected from firms exclusively right individuals have no direct role in remittance is neutral and relatively simple. Certainly the value added tax of textbooks is that. But value added taxes in developing countries often collect most revenue at borders and little internally, and also exempt and or offer simplified regimes to small firms. Both these aspects of real value added taxes violate neutrality either by penalizing trade or production efficiency by favoring small firms over bigger firms. Two research questions what is the actual pattern of value added tax collection in developing countries by firms and what are its efficiency and incidence implications? Second, do VAT chains where exempt or non compliant firms sell to each other all the way to the consumer so no tax is ever collected on the whole chain? Do these chains form and what policies can break these chains so as to collect some revenue? And last, the informal economy. Mick and I have a long history of differing on what to call things, but I think in this case, although Mick doesn't like the term, I think we mean the same thing. The tax authority in many countries effectively ignores small businesses and in so doing it may economize on scarce administrative resources because the bang in terms of revenue collection per buck of administrative resources can be small, but this strategy rewards smallness, resulting in a production inefficiency that favors small versus larger businesses. And I think is part of the reason why we see a missing middle of firm size in many countries, 2 and 9th and 10th research questions of my program. How can small businesses be coaxed into formality, for example, by subsidizing their interaction with the financial sector, which is easier for a tax authority to track. And how can information technology be harnessed to efficiently monitor taxpayers? There are some very encouraging stories developing countries sort of leapfrogging into very advanced information technology to help deal with. So let me conclude and summarize that to the extent that growth strategies make public sector resources taxation, in my word, mobilizing resources. In the title of this session, from the private to the public sector, absolutely critical. The primary mobilization strategy involves tax taxes. So because this research program I've laid out will largely be carried out by the next generations, which I'm happy to see are well represented here today, I hope I've convinced some of you that the issues of taxation in developing countries are three things. One, they're critically important to growth. Two, they're intellectually fascinating. And three, they're linked to other issues prominent in the IGC overall programs such as the organization of production, trade, harnessing information technology, the role of multinational corporations and the legitimacy of states.
- [50:35]
B
Thanks.
- [50:43]
A
Well, thank you very much to Joel and to all of our panelists. So my job now is to try and moderate a discussion. I'm going to try, try and do it on some themes and I'm going to. One of the great things about having Mick Keane here is that he's from the imf and it's always easy to tease people from the imf. So I'm going to begin by provoking him and perhaps into a discussion. I'm reminded of Ronald Reagan. One of the things he said, the scariest things that you could hear is, I'm from the government and I'm here to help. Well, I think if you paraphrase that, as I'm from the IMF and I'm here to help, having regularly sat through my when I was a policy maker, the Article 4 meetings with the IMF. I remember only too well how scary you guys can be. But let me take you up on the. Let me take you up on the. And I want to sort of really pick up on Joel's last point and something I thought you were a little bit dismissive of. Too readily dismissive. Maybe you're just sort of dismissive of A fad here, but the whole question of the political economy, of taxation. And while you said, you said, well, at the moment the discussion is around state building, there's a specific instance of that, and it's true the fads will change in terms of the terminology. But you really didn't talk very much about political economy issues, perhaps because it's a difficult issue for the imf. So perhaps if we could open up a bit of a discussion more on the political economy of taxation and how you see. And of course, we have two policy makers here, so they're only too well aware of that. Although actually, surprisingly, in Rama's presentation, he talked about the achievements that he made as a policy maker, but very little about how the politics really worked around achieving that. And so perhaps we can open up to begin with. I'd love for people who've got questions relating to political economy to raise their hand at this point, but let me begin with Mick. And then what we'll do is, is I'll suggest some other themes and people who have contributions on that and at the end will have a kind of mopping up in case I miss some of the themes people want to ask questions on. So, Meg, why don't you lead off a little bit on why you had almost no political economy in your presentation?
- [52:48]
B
Good question. Well, of course, we're now the friendly imf. So we're not the very friendly face of the imf. I think the political economy is quite different from, for us, in the two very different cases. One is where there is a country that has a program with the imf, and the other case is where the country doesn't have a program. And it's a very different story. I think in both cases, when there is a program, in a way, it's difficult because the IMF is part of the political. It's not like you take the political economy as given you're actually part of the political economy, which in many cases works out to be quite complicated in those contexts. In other contexts, too, part of a. Of the role. Part of the role of the IMF can actually be to help the existing government overcome political economy constraints and essentially blame it on the imf. There are certainly cases where you negotiate things and the government tells you, could you ask us to do this? Because we find it very difficult to do this. And that's one case. In some sense, it's a less rewarding and probably a less effective case in some in terms of giving the kind of advice and the kind of things we're talking about, because I think we heard already the word ownership. And more and more, I believe in the word that ownership really matters, that when policies are changed in that context, it's really often not a very real change. But certainly I think there are cases there where, as I say, we are addressing vested interests. Vested interests have a huge impact on incentives and these kind of things. And that's clearly. That's clearly, for example, as we heard, a large part of why people are hesitant about special tax incentives, because we know that's driven by bread speaking, euphemistry. And then there's advice that we give to countries which is. And there we really are here to help you because we only go to these countries if they ask us to help, if they ask us to give advice. And there I think we are offering much more. It's in the sense of more rewarding, more effective vehicle. It seems to me, in many ways to give me advice because there you are essentially giving your best technical advice. But I think I'm not, I'm not trying to downplay the political economy. I think it's very hard for me to. I can't think of very useful generalizations because every country is different. I think the point I wanted to make was simply on clearly, historically, taxation and state building. There's no doubt there's a close relationship relationship. I'm still kind of struggling for what it means. What it means for the kind of things Joel will talk about. Do we actually want to kind of forgo some money to get systems to get companies into the tax system? Should we spend money on developing software that we give to companies that interacts with the Revenue Administration's software? So I'm not really answering your question, but it's probably the best I can do on that for the moment.
- [55:30]
A
So do you want to come in? People have questions in relation to this issue. I'll bring you in in a moment, but raise your hand and I'll collect questions on local economy issues.
- [55:40]
C
Look, in fact, when I was thinking what I would say to this audience, I was going to discuss this particular issue of political economy. In fact, some people back home said that I lost my job because of that, that I'm the man from the imf. I was not sensitive to some of these vested interests when we carried out the reform. And as I indicated earlier on, this may not be the case in other countries. I'm a great believer in a unique selling proposition. You must give an incentive for people to come and do business with you, especially if you are not China. You're not India, you're not Nigeria, you don't have oil, gold. So we've used taxation to attract investors, but also as I mentioned earlier on, to change the architecture of the economy. Now when we have to move from a high level and complex to taxation, but with a lot of tax measures, high tax expenditure, allowances, deduction to a low level of taxes, a simple tax that means few tax expenditure. The problem was one of perception rather than reality. We did a calculation to find out that about 83% of people were winners. The problem was that 17% were very strong and they made disproportionate noise compared to what was happening to them. Now for those of you who know, Mauritius is a very robust democracy, so the opposition will add on it and we have to make some concessions. Now this was very far from the initial proposal. Our friends from Washington, that would have been murdered in broad daylight if I had introduced it. And the way we went around it was basically to make sure that these reforms would yield some low hanging fruits very fast and that would give trust and confidence to people. Second, you have to sweeten the pit. And there are various ways of sweetening the pill. The most difficult one, how do you sweeten the pill? For those people who don't pay any tax, who believe that by giving concession to high income earners and to the multinational corporation that obviously you're giving a big favor to them and there's nothing for him, even though he might think that in two years time, in three years time he might get a job, good job. So that was a difficulty that we had to face. And we have a very good dialogue and consultative process with different stakeholders. But vestal interests were very strong. Let me give you one example. We brought down the top level of taxation from 30% to a flat level of 15%. But we have a very clumsy way of taxing interest in the whole system that the initial X of interest from the bank deposit is not charged. And you can see what is happening in the system. There was fragmentation of accounts. So I removed that, I removed that. I said, look, all interest now will be taxed but the initial allowance that you were deducting will increase to take into account, to take into account the average amount that were deducted by citizens. But you know the problem with average, you have two person, one has 10, the other one has eight, you go for nine, you get into trouble with both of them because there's nobody who is at 9. So we have this, we have this problem. So much so that the opposition took a pledge that they were going to reverse it. Now, obviously, they will not be able to do it. Now, the second issue that we had to face was one of progressivity. The reason why we went for a flat tax was to attract business, and it has attracted business. But obviously it's unfair from a redistributive point of view. And what we tried to do is to find alternative ways of getting some additional money from those who are better off. And the only way you can do that is on property or assets. And we introduce a property tax, small amount. And we did the calculation to find out that even those who were paying the property tax, we're better off compared to the old system. But you know how human beings are. They say, look what you've done to bring down my tax burden, I'm very happy. But what you have done to increase my burden on the other side, I'm not happy. So these are the issues that we have to tackle. And the other one is when you reduce the number of allowances, notwithstanding the fact that you have increased the personal allowance significantly, there were some people who were worse off. And these people were complaining. My wife, I'll give you the example of my wife, the day I delivered the speech, I went home. She fought with me because at that time we had two kids studying abroad. And if you had kids studying abroad, you will get a deduction. So I had to explain to her they were going to Tibet University only for free or four years. So you have to look at the net present value. She told me, go and explain that to the electorate. They won't understand. So it is very difficult. But I think the way to go around it is basically to get some earlier results in terms of your reform, to give confidence and trust to the people, but it's worth doing it. Second, I think you need to have a program that will support those who are likely to lose from the system, and this is extremely important. So we introduce a major empowerment program that will support those people that were likely to be affected by the reforms. So I think this is basically what we did in order to attenuate the resistance to the fiscal reform.
- [62:25]
A
Okay, so I'll take some questions unless mishear. And Joel, you'll have time to come in on this and related issues. So we have one question. Can you keep questions very brief, please?
- [62:37]
F
Sorry, My name is Mr. Bonfire.
- [62:40]
A
Please can you be brief, because we've.
- [62:41]
F
Got a lot of questions. What I want to put as question to the panel and is concerning the, let's say, the issue of collection and information I mean all, all this issue is based on information. So what should be done is managing the information. Now you mentioned, professor from the CBSA mentioned this question of technology on IT technology to, I mean to manage the information, things like this. I think this is the base. And I would like to ask you, let's say two different countries, how many of you at ministerial level you have an IT monitoring system that you, that let you collect the data, organize the data in a more, let's say, comprehensive way, not only just natural resources data, but even let's say, not naturalist, the mobilization of data and monitoring the performance of data. This means you should have at your office and IT management storage strategy where you can coordinate IT and know what's happening. This means that you are going to have a really transparency, a real, a real strategy and then you can, let's say you can solve all your problem of a policy point of view as well as from the application point of view.
- [64:04]
A
So I think, I think we have.
- [64:06]
F
This is, I mean this is, something is missing on International Growth center where you need some project in developing countries that let you monitor what is going on and what is the performance? Thank you.
- [64:17]
A
Okay, thank you. So I'm going to bank the question though, because it's on a separate theme that I wanted to come to, which is this question. So we will come back to your question, but I want questions on the theme of the political economy at the moment and we'll come back to other areas. So it's yours? No, not at the moment, no. Any questions? Yeah, we have a question at the back of that, which is we will come to other areas, but I want to try and keep the debate around certain things if we can. You're on political economy and you're on political economy.
- [64:46]
G
Good evening. My question is about the level of government at which taxes should be levied. More precisely, whether you think that there is a role for local levels of government in taxation. There have been some papers by Dr. Keane, for instance, and others that show that taxation at the local level is suboptimal because it generates externalities and so forth. At the same time, however, and especially in developing countries, local levels of government might have certain pieces of information which the central government doesn't have about the agricultural sector or about land holding. So yeah, my question is whether you think that local governments have a role to play here.
- [65:23]
D
Thanks.
- [65:24]
A
Okay, good. We'll take the questions and I'll get the panel to come back. So you have the mic already? Can we bring the mic down there?
- [65:31]
H
Hello, Jonathan Glenny Overseas Development Institute. Very interesting to hear about all the problems about raising taxes. I read quite a lot of papers a couple of years ago and they seem to be fairly split between those that said that receiving a lot of aid helped countries change their tax regimes and actually increase their domestic resource mobilisation and a fair number also that said high receipts of aid was a disincentive to countries to take those difficult decisions that the finance minister for Mauritius talked about. I just wonder what your experiences were in Mauritius and Bangladesh and also in the other countries that the other members know about.
- [66:09]
A
Ok, excellent. And third question, and then I'll come to the panel.
- [66:13]
B
Thank you.
- [66:13]
A
It was a question for the minister from Mauritius.
- [66:16]
B
You mentioned that there was some advice.
- [66:18]
F
From your friends in Washington that you ignored.
- [66:20]
A
Could you say what that advice was, please?
- [66:23]
B
I could.
- [66:26]
A
Okay, so we have three issues we'll take in order and who wants to take them? The first is your views on decentralization and the right amount of decentralization in the tax system. Does anyone want to give us their views on the pros and cons? Mick, your work was.
- [66:41]
B
I'll be very brief on all those very good questions. Yes, I mean, I think clearly local government and provincial governments have an important role to play. I probably won't linger on that. Of course, at local government level, one of the key instruments is going to be the property tax. Typically is a typical recommendation which takes. Which is a slow developer, but that's I think certainly preferred instrument. There are further issues to do in larger federations, I think, about what powers you probably allocate to the center and to the provinces for the kind of reasons you would think about both the kind of theoretical issues of horizontal and vertical tax competition. In many countries, as in the case of India and Pakistan, I was mentioned just dealing with these rather weird constitutional restrictions you get, which are actually more common than you would think. I think on the aid impact, I think my understanding of the literature is that there's a difference between loans and grants and that grants typically do have some displacing effect, although I think not as marked as resource revenues. I can't resist leaping in on the question of ignoring advice. I mean, in a way that's fine. I mean, I think part of the job of the fund is to give advice, to give our best view and ideally to be talking to people who are usually clearly much well informed locally than us and often just technically just as good as us. And that's part of our job as a. I think just to be someone to talk to. But if I can briefly just make two points on the political economy thing going over in my mind, Tim's initial question. One is to say, I think that's been implicit in a lot of remarks so far. I think a lot of the standard tax policy advice, removing incentives, you know, removing incentives, a single rate for the vat, all these kind of things, simple income tax structure, are not driven by, you know, Ramsey tax results. These are actually seen as kind of basic bulwarks against abuse of various kinds. And I think the other thing that I was reflecting on is that often the most difficult and immediately relevant politics that one has to deal with are actually within the government, because governments aren't unitary things that speak with the same voice. Often you have, if you think about resource taxation, you have a Ministry of Mines to deal with, you have the tax administration to deal with. And even without the particular complications of resource industries, often getting the tax administration on board with significant reforms, which is really changing these people's daily lives in a very profound way, is a massive and very difficult, politically delicate undertaking. This is one of the. I think this is one of the issues with revenue authorities. It's a hugely draining thing to do. Sometimes these organizational changes are just immensely draining. And there's really nothing else countries can do on the tax side while they're doing this for three or four or five years. But did I pick up on this? We're coming back to the information thing.
- [69:32]
A
Yeah, yeah, we'll come back to that in a minute. So any other responses on decentralization.
- [69:38]
C
Would.
- [69:38]
D
You like to speak? Yeah, I guess on decentralization we have to look at what it means. One is in a federal government there is a division of taxation authority between the central of the federal government, the state government or the provincial government that is built into the constitution. I come from a state which is not federal, so I can't cite anything from my own country. But India, for instance, has subjects allocated to the state subject allocated to the federal government. And there are certain shared subjects. The taxes related to import and some of the local production service taxes, these are import taxes, are all given to the central government. Local production taxes is a problem and the rates also vary whether central government imposes tax, but the state government is free to impose its own tax. So if you move from one state to another, you might find that the goods, sales and services taxes, or vat, if they have VAT somewhere, these rates should vary. So they are trying to bring in some discipline, some order in their rates. And the way the taxes administered India also sets up a finance commission every four or five years that is built into the constitution, which allocates a portion of central taxes to the states and so on. The local government tax is a difficult issue. It is a difficult issue because most of the taxes on economic activities, production activities, are captured by the central government, in the federal government, by the state government. The local government are left only with some very minor economic activities. And the property taxes. The property taxes do not yield much revenue in most places. Because there are two reasons, I believe. One is if you are in a country where most people do not own a lot of landed property, you do not get much from that. And for land you pay land taxes or land revenue. So it is not a very promising area. If you have large landowners, then they have a way to get around it. And they pay a large amount of taxes on land, on irrigation and other services that are available to them or they have to buy. So it doesn't seem to me that the local tax is something very promising. On the other hand, the decentralization has also an expenditure aspect. There's a lot of things which are better done at the local level than at the central government level or even in the federation by the provincial, the state government. So what happens in those situation is sharing of of the resources of the central or the state government to the local government. The local government acts or carries out its program mostly with finances which are allocated to it by the central government or the state government. The local taxation proposal does not seem to be very promising, although in terms of decentralization or more autonomous local government system, it has get promises, but it doesn't yield much of revenue.
- [73:15]
A
Okay, so let's. I propose we go on to the next topic unless people. So let's take up the IT question. I'm going to ask Joel whether he has views on whether there. So I mean, development has always been full of people who think development is a problem of technological fixes. And it sounds like a perfectly credible one these days that somehow we're not fully exploiting a perfectly readily emotional technology. Is that true in the area of taxation or not?
- [73:42]
E
Get to that in one second. I want to tie together the issue, a very important political economy issue, which is the legitimacy of governments in raising taxes to information. I think I agree with the questioner that collecting taxation at its source is a question of information. But a legitimate tax system needs to base tax liability on monitorable and verifiable information. After all, we would hardly need a tax administration if the government could randomly impose taxes on people. So a legitimate tax system needs to. For a legitimate tax system, monitorable, verifiable information is really important. So actually I do think, coming back to the question that there, there are cases where a developing country can and there are cases where it has leapfrog into using very sophisticated information technology to make what I think are very significant improvements in levying of taxes. Now I'm sure there are cases, and Mick probably knows them, where it turns out to be a fool's paradise where you talk about information technology. The underlying system itself is flawed and it's a. Just doesn't work. But I do think it can be very effective.
- [74:58]
A
Okay, Mick, so your view on that then?
- [75:00]
B
Yeah, I think I'm kind of with Joel. I did maybe want to just inject. I think Joel hinted at a sort of slightly skeptical note not to deny the importance of gooding information systems, but to think that they're a substitute for the basic things like audit to do proper audit, which is, you know, these things are only as good as the information you get into them. And you know, many countries, I think not, you know, even when they haven't adopted software that kind of doesn't work or isn't compatible between customs and domestic administration, all those kind of things, you know, I think there's no. The idea that it's kind of a shortcut around a whole bunch of these collection difficulties in developing countries, I think is a little bit, we should be a little bit hesitant. It's true. There are examples. I mean the whole, you know, in China, for example, the whole experiments in actually cross checking VAT invoices and all this stuff shows that there are more things we can do than we thought. But again, that only makes sense if the VAT invoices reflect some kind of truth.
- [76:01]
A
One thing I can agree 100% with the question, Ron, though is it's an area where I think the IGC would like to identify projects to evaluate the impact of some of these technologies because I think the economic evaluation and at the moment, I'm sorry, I've got to get other people come in, but is there anyone else who wants to come in on this not justly narrow topic, but on the broader topic of economic structures and technology. There's a question up there.
- [76:31]
I
Thank you very much. On the issue of the link between formality or informality and non compliance? I think we should not just say the issue is non compliance because a lot of the time non compliance is actually driven by the informality. Because if you have a country, for example, where you do not have a system of addresses or you do not have a unique ID number, then you know, how do you tell or how do you track somebody? I mean, banks, for example, example, are not able to track defaulters because they don't have addresses that are identifiable readily or they cannot be identified uniquely. So I think that issue, I think should not be dismissed in that regard. Now, the issue of domestic resource mobilization. I like domestic resource mobilization because I think it's beyond just the public sector, the that you talk about mobilizing resources for the public sector in a tax way, but also the private sector in terms of the financial system. And I think that from the private sector's point of view, the issue of the unbanked, that is the number of people who really don't have access to the financial system in many low income countries. Countries is something that really we tend to ignore in the context of domestic resource mobilization. And if you have countries where you have 70, 80 or 90% of the bankable population who do not have access to a bank account, then the amount of resources that can be mobilized in the financial system for private sector investment is actually much, much less.
- [78:22]
H
Less.
- [78:22]
I
And I think, you know, some effort in this area can actually result in major, major impacts because we shouldn't leave everything to government.
- [78:34]
A
Okay, thank you. Any other comment or question? We'll go to the middle here and then we'll do two very quick questions and then we'll come back to the panel and we'll have to wrap up.
- [78:42]
B
Thank you.
- [78:42]
H
The focus has been very much on domestic policy and domestic capacity. And could the panel comment on the fact that multinationals are not currently required to disclose their profits and costs by country, broken down by country, and the impact that that has on their ability to tax multinationals and specifically on the proposal that's gaining momentum for country by country reporting for multinationals.
- [79:14]
A
Okay, and then just behind. And then that'll be it, I'm afraid.
- [79:20]
D
Could the.
- [79:23]
A
I think it's working.
- [79:25]
D
Could the panel please comment on the issue of windfall taxes, particularly in the.
- [79:30]
I
Light of high commodity prices?
- [79:33]
A
Okay, excellent. So there's a good range of questions there. I don't know which of them you want. You want to take. I think you've all got about a minute, so I'll go this way, along the table. So, Joel, you go first and decide.
- [79:46]
E
Let me say a word about the second part of the first question, which is the relationship between about mobilizing savings and the importance of that for growth and your mention of the unbanked there's an interesting connection between what you said and the fact that many, many countries are subsidizing people and small businesses interactions with the financial sector, not necessarily per se to increase savings, but to help with tracking them for tax purposes. And when I think that way, I wonder whether part of the problem of the unbanked is because people are worried that once they deal with the financial system they'll be more easily tracked.
- [80:28]
A
You'll recall that in China they made it legal to register bank assets in false names as a way of trying to ensure people would be protected from some of the perhaps unsavory aspects of this, which is kind of perverse until you realize why they did it. So let's go along the panel here about one minute.
- [80:50]
D
One minute. I guess silence being more eloquent than words. I can remain silent. Let me start with formality and informality because Bangladesh has a very large informal sector. According to some estimates it is about 1/3 or maybe 40% of the economy. We have also a good experience of bringing the informal activities into some kind of banking financial framework, not necessarily taxable, where the income they have is so low that most of them perhaps would not be liable to pay tax, as Joel Slemdrod had said, that you waste your administrative resources on taxing them. And the non government organizations also have been allowed to take deposit from their members. So that's one way of getting these people into what is fashionable to talk level as inclusive finances. On multinational. I did say in my statement that the multinationals should be subject to tax. And if they are not required to report their income from various country sources, I guess that's a deliberate way of suppressing information. What the host countries can do, perhaps in a technical, formal sense, is they must be reporting in one country at least their total income. They should pick up that and say, okay, I presume that the whole income was from my country, so pay me the tax. That is technically feasible. But the problem is the day you do that, the next day you will get a visit from the ambassador, high commissioner of that country and a letter from a high minister, high level minister of that country, saying that my company is being harassed. So it is the country which has to accept the principle of transparency, of honesty, in order to ask the multinationals to submit to the discipline of taxation. Unless the state takes the responsibility, the MNCs will comply with the rule and will cheat on taxes.
- [83:01]
A
Rama, do you have anything on the windfall question?
- [83:06]
C
Let me answer to the two questions that was raised by the gentleman. You know, on the use of aid, whether it's help or it penalizes the country, I think it depends to a large extent, you know, where it is going. I mentioned earlier on that we shifted from a sugar sector to a clean cluster and we did get some aid from the European Union. But the AID act to go in transforming the sugar sector into a cane cluster. So that was very important. So we agreed it's going to be used for infrastructure, it's going to be used for investment in technology, it's going to be used to help the small farmers in order to cope with the challenges arising from the change in the sugar regime. So I think to a large extent depends where it goes. The issue on with the imf. Look, I think it's very difficult to disagree with the IMF on macro framework stability. No, you don't think the IMF to come and tell you that it makes sense to have a low debt to GDP ratio, that your budget deficit, you know, should not exceed a particular amount and that you need to have financial stability. I think the disagreement arises very often is the speed with which they want to reach that particular destination. When I give you the example where we had some disagreement on in our VAT we've got three rates, zero exempt and 15%. And very often exempt is in the arena of political economy. And we all know in most of these countries what are the goods that are exempted. So the speed with which they wanted at one point in time to bring down the number of exempt goods, I mean, this could be a major source of political riot in our country. The second one where we had a lot of disagreement with them is the use of the fiscal stick and carrot in order to diversify the economy and to change the architecture of the economy. They don't believe in that. In fact, the financial secretary that I had for five years came from the imf. So I had to overrule all the time because he was telling me that he was against, but he wasn't telling me what is the alternative to diversify the economy. I said, look, I have to go to the population and tell them how we are creating jobs, how we are alleviating poverty, how we are reducing inequality. And in fact, in three areas where we were told we had no time chance whatsoever in the global financial sector, in ICT and BPO and in real estate development, we use some of the fiscal stick and the current. And today they are creating a lot of jobs, especially for people of high skill. And they are also contributing to revenue mobilization by government. So they have been Very, very difficult, you know, on using fiscal incentives in order to restructure the economy.
- [86:10]
A
Okay, thank you. So Mick, the final word is yours. You can tell us whatever you would like or answer any of the questions.
- [86:17]
B
Maybe I'll resist answering my friend Eli Mansour, I guess many emails, yes, but perhaps I won't respond directly to that, if I may, but some of the questions from the floor, I think just on the informality point to pick up the first question, Joel picked up the second aspect. I mean I'm not saying we should. I think I'm simply saying that informality as a word just doesn't really take us very far to say the problem is informality doesn't really. So what I mean, I think what we have to do is identify specific barriers to full compliance as you were doing. I think precisely in your example, if the problem is people don't have, you know, we haven't got a proper tax identification number, or if the problem is everybody has three taxpayer identification numbers, let's address that. So what I'm saying is let's figure out exactly what the problem is and try to act on it. Just like saying we can all say, well corruption is a problem. Well, so what, what do we actually do about this? I think that was the only point I was making there. I think on the country by country reporting transparency, I think I'm all in favor of, I think maybe also a link there with the information point. You know, I think, you know, information doesn't, doesn't solve all the underlying issues. I mean my model of multinationals is actually not that they're typically cheating, they don't need to cheat. They have enough devices to do things perfectly legally without actually cheating. The issue is even for resource country companies where you have the great advantage, at least the price of the product is very readily observable, but you still have so many financial arrangements to play with that they don't need to cheat. They can basically pay whatever the tax they want. One link with state building I think is that to a large degree I think, or one might argue, I'm not going to go down that route.
- [88:03]
F
I think.
- [88:04]
B
Okay, let me move on maybe in the pub after that one windfall taxes. I mean I think there are two different notions of windfall tax. One is a kind of an unexpected tax when resource prices turn out to be very high. The other one is a system that has a built in progressivity that means tax will be high, you know, is fully anticipated that the tax will be high when resource prices are high. Clearly the risk with the first form, the kind of unexpected is that you're basically reneging on a contract. And certainly for countries that are looking to attract this is where what I was mentioning, you know, it matters for that whether you are expected to have future discoveries because that reneging is much more damaging if you're actually attracting to trying to attract future exploration. But in general, of course, I think I'd certainly be against these kind of unexpected windfall taxes, although it has to be said that, for example, prior to the crisis, resource prices were so out of line of anyone's expectation that at least in some countries it was almost even the companies, I think, tended to a. Well, yes, this is a circumstance we couldn't possibly have envisaged when we signed this contract. So we will renegotiate without the sort of dangers of the credibility that might otherwise imply. And I think maybe I'll finish there. But I did want to say I very much agree with the remark about the tax preferences for international organizations and for aid in general. And that's certainly something the fund presses very hard that more and more aid projects, it's unreasonable to carve out these exemptions for aid projects. And I think, you know, the World bank and others are moving in that direction. But that's certainly something the fund as well as the OECD and the World bank are very actively Nothing annoys me more than getting a phone call from some guy complaining that, you know, his rights as an international diplomat are being violated. That's the only I rarely hang up on people, but sometimes they make an exception. Thank you.
- [89:56]
A
Okay, excellent. Well, thank you very much to all of the panelists for what's been an excellent session. So I'd like I've got in a moment, I'd like to formally close the whole meeting. But first of all, let's just thank the four speakers for what I thought.
- [90:11]
B
Was an excellent session.
- [90:17]
A
And I'd say my final task is to actually close this meeting. There ought to be medals available for endurance for, for those of you who are still here because we started at 9am on Monday. It was and now we're still going and we're about to close. For those of you who've been here over the three days, I think you will have appreciated that this has been a unique event, both in design and delivery, bringing together policymakers, academics, and trying to get them to grapple together together with what the issues are. And it's the beginning of a process for the IGC in launching a further set of research projects because for those of you who are not familiar with the growth center, the idea is to really allow the agenda, the research agenda, to be more demand driven than it has been in the past. And so finding projects through the kind of dialogues we've had this week between policy makers and others is crucial to launching the next phase of our work. And I think out of the acorn that has been planted in this meeting, I think we will find a number of oak trees will grow. I should end also, I don't know if he's in the room, by thanking Adam Green. Adam has been really the person who behind the scenes, some of you will have dealt with him, but perhaps many of you won't have noticed, but he has really been the person who has been key in the whole delivery of this meeting and making it the success it is. And I say I don't see him. He's been very modestly behind the scenes. But we will, I think we should applaud his contribution.
- [91:59]
C
And.
- [92:02]
A
I will be sure to someone will pass on the fact that we acknowledge that for those of you who are still here, this is the end of the proceedings. But let me issue an invitation already to you for next year when we will have our next growth week. Not entirely clear when it will be, but sometime during the next year. Thank you all for coming and for participating in this event.