framework for local revenue mobilization innovations in local revenue course 23-24 june 2003 dana...
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Framework for Local Revenue Mobilization
Innovations in Local Revenue Course
23-24 June 2003
Dana WeistPRMPS
(dweist@worldbank.org)
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Policy Framework Fiscal equivalence: To greatest extent
possible, each government should finance its own expenditures out of its own revenues
Subsidiarity: Assign to lowest “tier” of government that can administer tax, and for which it is not inappropriate
Need for mix of local taxes and revenues No one assignment fits all As external factors change, so may policy
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Demographic, economic and institutional setting
Matrix of potential revenue sources
Similar expenditure needs exercise
Fiscal Architecture
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What is a “Local” Tax? Who determines whether the tax is imposed? Who determines the tax base? Who determines the tax rate applied to that
base? Who collects the revenue and enforces the
tax? Who receives the revenue?
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Criteria for Local Taxation
Accountability and transparency Benefit/tax-price link Neutrality (non-distortion) Taxpayer equity Regional (place) equity Reliability, stability, buoyancy/elasticity Administration and compliance
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Accountability Criterion Local politicians should be responsive to
expressed preferences of citizens
Implications: Local officials should have power to determine
their “own” tax rates– Who should determine tax base?– Who should administer tax base?
Tax burdens should be borne by local citizens Information as key to accountability
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Accountability Favors
What Ranks Poorly
Local personal income
User Charges
General Business taxes
(GR, VAT, Company Profits
Visitor (e.g., tourist) taxes
Accountability Options
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Benefit/Tax-Price Link To extent possible, taxes should function as a “price”
for benefits of public services that accrue to taxpayer/citizen
Implications Taxes play a similar role to prices in market
transaction Adjust for local and regional variations in preferences
for public goods (social welfare functions) Spillovers may call for (i) sub-municipal government;
(ii) local cooperation; (iii) middle-tier governments; (iv) regional authorities
Efficiency meets equity (rather than conflict)
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Benefits Received Favors
What Ranks Poorly
Whenever possible charge
Visitor Taxes
Business Taxes
Non resident based personal income tax
Benefits-Received Options
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Non-Distortion Criterion Taxes should not unintentionally interfere with private
decisions of consumers, factor suppliers, and producers; they should be “neutral”
Implications Heart of “efficiency in taxation,” difficult to achieve Variability in tax rates possible Key issue: price elasticity Immobile tax bases rank high; “footloose” tax bases are
a problem Interjurisdictional tax competition: good or bad? Case for uniform tax bases, and watch out for quality of
administration
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Non-Distortion Options
Non-Distortion Favors What Ranks Poorly
Local real estate tax generally
Land value tax plus charges
User charges
Resident based PIT
Sumptuary taxes
Some general business taxes
Taxation of “bads”
Poll taxes
Non-resident based PIT
Gross receipts taxes
Severance taxes (keep in mind rate matters)
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Taxpayer Equity Criterion Tax burden must be measured by some measure of economic ability
to pay and/or benefits received
Terminology Vertical equity (Differential treatment of unequals)
– Regressivity, progressivity, proportionality Horizontal equity (Equal treatment of equals)
– Individuals vs. businesses Measurement
– Individuals: Income and additions to wealth (broad vs. narrow income)
– Businesses• Gross Product (if can be estimated)• Multi-jurisdictional apportionment complicated
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Taxpayer Equity Options
Taxpayer Equity Favors What Ranks Poorly
Resident Personal Income Tax
Ad valorem property taxes
Poll Taxes
Area-based property taxes
Gross Receipts taxes
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Regional (Place) Equity Criterion
Local tax bases that are unevenly distributed across jurisdictions are not suited for regional use if they entail large regional inequities
Implications Requires good judgment: much is pinned on “what
matters” for social fairness and national cohesion Not-inconsistent with benefits-received argument Regulation and intergovernmental revenue sharing
come into play; intergovernmental structure and nation building
What about multinational natural resources?
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“Place” Equity Options
Place Equity Favors What Ranks PoorlyCentral taxation of natural resources; multi or supranational
Local severance taxes
Wealth taxes may fit here
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Reliability/Stability/Buoyancy/Elasticity
What should be the elasticity:“Automatic” changes in Revenues = % Change in Yield
Change in some economic base
Implications Obvious tradeoff: stability vs. buoyancy Not to be confused with “adequacy” Stability is conducive to competitiveness Also relevant for intergovernmental grant pool
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Stable vs. Buoyant Options
Stable Revenue Bases
Buoyant Revenue Bases
Ad valorem property tax (distinguish between land and improvement components)
Area-based property tax
Proportional Rate PIT
VAT
Some excises
PIT
Corporate Profits Tax (CIT)
Gross Receipts
Some excises
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Administration and Compliance Taxes/tax systems should be transparently administered, at
low cost, and without placing an undue burden on taxpayers
Implications Keep it simple: especially locally
– What is optimal to economists may not “work”– Citizens should be able to understand and control their
tax system Standardized tax bases Cash flow accounting may be preferable to accruals Complexity may foster corruption
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Administration/Compliance Options
What Works What Ranks Poorly
Piggyback PIT
Excise and retail sales taxes
Turnover taxes
Wage tax
Some user charges
Multi-rate taxes
Lots of exemptions, deductions, incentive packages to businesses
Property tax
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Choosing Local Taxes
Few taxes comply with all desirable features for local taxation
Tradeoffs are inevitable
But clearly, there are better and worse tax and revenue assignments
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Choice of Subnational Taxes
At a minimum, tax assignments should provide:– Autonomy at the margin– Stability over time – Sufficient revenues for the wealthiest local
governments to be fiscally autonomous Design of local taxes has repercussions
on tax administration
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Promoting Tax Autonomy
Closed list Discretion to set tax rate Separate tax administrations not
necessary with incentive compatible arrangements
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“Good” Local Taxes
Municipal governments – Fees and user charges – Land/property taxes – Business registration– Vehicle fees and transportation taxes– Piggyback, flat-rate personal income tax
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“Good” Local Taxes (Cont.)
Regional/provincial governments
– Piggyback, flat-rate personal income tax– Piggyback for selected excise taxes – Business value tax falling on wages and
profits
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Property Tax: Advantages Revenue Local burden Not regressive Benefit tax Land use effects The “devil we know”
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Property Tax: Disadvantages
Little revenue Difficult and costly administration Judgmental assessment Tax on unrealized income Visible Difficult to enforce
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Local Income Tax: Advantages
Generally meets area-correspondence test
Revenue productive Not regressive Piggyback administration
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Local Income Tax: Disadvantages
Competition with central government Inter-regional tax competition Income distribution objectives Administration Equalization
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User Charges: Theory
Excellent source of local revenue – Economically efficient– Fair and equitable
Common notion: “whenever possible, charge”
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User Charges: Practice Not used as extensively as they should be Seldom well-designed Too often, local user charges are
– Inefficient– Inequitable– Costly to administer
Excessive focus on revenue with limited attention on design
Seldom politically popular, especially if imposed for a service that was previously under-priced
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Design and Implementation
Impose charges only where it pays to do so – especially public utilities such as water and electricity
Design charges efficiently Ensure public acceptance of charges, e.g.
through attention to distributional aspects Avoid “nuisance” charges
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Summary
No one mix of revenues nor magic bullet Fiscal architecture may clarify options Assess tradeoffs in choosing among options Devil is in detail: design matters Don’t forget administration and compliance
– simplicity and transparency
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