Download - Tax Potential vs. Tax Effort: Factors Behind the Stubbornly Low Tax Collection in Armenia
Tax Potential vs. Tax Effort: Factors Behind the Stubbornly Low Tax Collection in Armenia
Hamid R. Davoodi and David A. Grigorian
Armenia: Challenges of Sustainable Development
Conference in Honor of Professor Armen Alchian
UCLA, May 6, 2006
Outline
I. Overview
II. Armenia’s Tax Performance• Evolution over time and vis-à-vis other CIS• Fund-supported programs, 1996-99 and 2001-04• Current PRGF program 2005-08
III. Cross-Country Regression Analysis• Methodology and Data• Regression Results• Robustness
IV. Conclusion
I. Overview of Economic Performance
Generally strong macroeconomic performance Yet, weak structural foundations:
– Large scale emigration– Poverty– Corruption– Weak fiscal package/incentives
Need to improve tax collection because:– Long-term growth potential– Poverty reduction goals (as outlined in the PRSP) – Expected decline in concessional borrowing
Figure 1. Armenia: Central Government Tax Revenues(In percent of GDP)
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10
11
12
13
14
15
16
17
18
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Figure 1a. Armenia: Main Components of Tax Revenues(In percent of GDP)
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
VAT Excises CIT PIT Customs
2000 2001 2004
Figure 1c. Direct Taxes(In percent of total taxes)
0
10
20
30
40
50
60
70
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Figure 1f. CIS: Tax Revenue, 1998-2004(In percent of GDP)
0
5
10
15
20
25
30
Figure 1g: CIS, Direct Taxes, 1998-2004(In percent of GDP)
0
2
4
6
8
10
Figure 2. CIS: Total Tax Revenues vs. Direct Taxes, 1998-2004
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5
10
15
20
25
30
5 10 15 20 25 30 35 40 45
Share of direct taxes in total tax revenue (%)
Tota
l tax
reve
nue-
GD
P ra
tio (%
)
T ajikistan
Armenia Kyrgyz Republic
Moldova
Russia
Azerbaijan
Figure 2a: CIS, VAT Revenues, 1998-2004(In percent of GDP)
0
2
4
6
8
10
Figure 3. CIS . Tax Revenues vs. VAT Productivity
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10
15
20
25
30
0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45 0.50
VAT productivity
Tax
-GD
P ra
tio
Armenia
Russia
AzerbaijanTajikistan
Figure 3a. CIS: Tax Revenue Buoyancy, 1998-2004
0.6 0.8 1.0 1.2 1.4
Ukraine
Uzbekistan
Armenia
Moldova
Belarus
Turkmenistan
Kyrgyz Republic
CIS11
CIS6
Russia
Tajikistan
Azerbaijan
Georgia
Kazakhstan
Figure 3b: CIS, VAT Revenue Buoyancy, 1998-2004
0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60 1.80
Ukraine
Uzbekistan
Armenia
Belarus
Moldova
Turkmenistan
Kazakhstan
Russia
CIS11
CIS6
Kyrgyz Republic
Azerbaijan
Georgia
Tajikistan
Figure 3c: CIS, Direct Tax Buoyancy, 1998-2004
0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60 1.80
Armenia
Tajikistan
Uzbekistan
Belarus
Turkmenistan
Ukraine
Moldova
CIS6
Kyrgyz Republic
CIS11
Russia
Azerbaijan
Georgia
Kazakhstan
Figure 4. Tax Revenues in Armenia: Performance Under ESAF and PRGF
(Percent of GDP)
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10
11
12
13
14
15
16
17
1996 1997 1998 1999 2001 2002 2003 2004
Program Outcome
What’s wrong with this picture? Tax collection low compared to other CIS
countries Tax collection low compared to its potential Decline in share of direct taxes → Poor balance
between equity and efficiency Lowest buoyancy of (especially direct) taxes in
CIS Low VAT productivity, reflecting problems in
administration and exemptions
Eighteen revenue measures in 2005-08 PRGF– Six tax policy measures– Seven tax administration measures– Five customs administration
III. Regression Analysis
Following the literature, determinants of tax-GDP ratio across countries and time are:
Per capita GDP Institutional quality Inflation Share of agriculture Openness of the economy Shadow economic activity Fuel share of merchandize exports Share of Urban population
Data Sources
Publicly available data on up to 113 countries For the period of 1990-2004 Indicators of institutional quality from the
International Country Risk Guide (ICRG) Estimates of Shadow economy from Schneider (2005) VIOLENCE, constructed based on the dataset
provided by Center for Systemic Peace
Determinants of Shadow Economy
All coefficients have expected signs: Bureaucratic quality reduces shadow
economic activity, but at a declining rate Corporate tax rate is not significant Higher per capita income is associated
with lower shadow economy More political/social violence leads to
more shadow economic activity
Dependent Variable:
Total Tax Revenue as a Share of GDP
Time trend -0.033 -0.034 -0.027 -0.029 -0.032 -0.082 -1.25 -1.29 -1.00 -1.04 -0.92 (1.93)* PPP-adjusted income p.c. 7.0E-05 7.0E-05 9.0E-05 9.0E-05 8.0E-05 1.1E-04 (2.20)** (2.24)** (2.55)** (2.59)*** (1.76)* (2.33)** Composite institutional quality 0.045 0.043 0.041 0.040 0.038 0.038 (3.94)*** (3.75)*** (3.61)*** (3.41)*** (3.04)*** (3.11)*** Shadow economy-1 -0.025 -0.026 -0.026 -0.025 -0.031 -0.029 (1.83)* (1.88)* (1.88)* (1.77)* (2.12)** (2.00)** Inflation -0.012 -0.012 -0.011 -0.021 -0.021 (1.72)* (1.72)* -1.6 -1.08 -1.1 Openness -0.009 -0.011 -0.005 -0.005 (1.76)* (1.98)** -0.77 -0.86 Share of agriculture in GDP -0.024 -0.001 -0.001 -0.93 -0.02 -0.01 Share of fuel in exports 0.081 0.084 (4.83)*** (5.03)*** Urban population 0.104 (2.00)** Constant 79.11 81.15 67.18 73.41 76.54 170.72 -1.52 -1.56 -1.28 -1.32 -1.12 (2.06)** Number of observations 898 898 896 863 775 775 Number of countries 113 113 112 111 107 107 Hausman test 1/ 48.43(8) 51.59(9) 52.90(10) 56.24(11) 53.37(12) 53.34(13) R-squared 0.03 0.03 0.04 0.04 0.06 0.07
Main Results
Positive effect of per capita GDP on tax revenue level
Positive and strong impact of institutional quality Negative and significant impact of the shadow
economic activity Negative but insignificant impact of agriculture Negative sign on inflation Negative correlation between openness and taxes Finally, OIL and URBAN are both positive and
significant
Post-estimation Analysis
Table 11. Summary Statistics for Actual vs. Predicted Total Tax Revenue 1/
Mean No. of Obs. Std. Dev. Min Max
Armenia Actual Tax Revenue 13.89 9 1.50 10.64 16.08 Predicted Tax Revenue 15.25 9 0.18 15.04 15.53 Ratio of Actual to Predicted 0.91 9 0.10 0.69 1.05
CIS 9 2/ Actual Tax Revenue 16.25 44 4.27 11.24 26.20 Predicted Tax Revenue 14.94 44 1.97 10.97 18.79 Ratio 1.10 44 0.30 0.71 1.85
Low-Income Countries Actual Tax Revenue 14.33 180 5.38 2.00 26.20 Predicted Tax Revenue 13.84 180 1.01 10.97 16.92 Ratio 1.05 180 0.41 0.15 2.05
Lower Middle-Income Countries Actual Tax Revenue 15.93 254 6.18 2.56 37.15 Predicted Tax Revenue 15.55 254 1.11 12.48 18.79 Ratio 1.03 254 0.41 0.17 2.28
Full Sample Actual Tax Revenue 16.46 851 6.52 0.09 37.15 Predicted Tax Revenue 16.46 851 2.36 10.97 22.38 Ratio 1.01 851 0.40 0.00 2.28 Memorandum items: All CIS 11 obs., including those not in the regressions 3/ 16.16 85 4.20 11.24 27.90 Baltic countries, including obs. not in the regressions 4/ 15.95 31 1.92 13.22 21.08
1/ Unweighted averages over the values of the indicators used in the regressions, unless specified otherwise. 2/ Includes Azerbaijan, Belarus, Moldova, Kazakhstan, Kyrgyz Republic, Russia, Tajikistan, Ukraine, and Uzbekistan. 3/ In addition to CIS 9, includes Georgia and Turkmenistan. 4/ Includes Estonia, Latvia, and Lithuania.
Post-estimation Analysis
Figure 6. Armenia: Tax Potential vs. Tax Effort, 1996-2004
10.0
11.0
12.0
13.0
14.0
15.0
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18.0
1996 1997 1998 1999 2000 2001 2002 2003 2004
0.60
0.65
0.70
0.75
0.80
0.85
0.90
0.95
1.00
1.05
1.10
Actual tax revenue (Left scale) Predicted tax revenue (Left scale) Ratio (Right scale)
Table 13. Armenia: Short-term Impact on Tax Revenue of Improvements in Institutional Quality
Resulting improvement in
potential tax revenue, based on:
Benchmark value of the
indicator Required
improvement Baseline
regressions Truncated regressions
Overall Institutional quality at the level of Baltic countries 75.6 15.3 0.58 0.74 Shadow economy at the level of Baltic countries 32.9 18.3 0.51 0.33 of which,
through improvements in Bureaucratic quality to the level of Baltic countries 2.5 1.5 0.17 0.11
Total impact (of improving institutional quality to the level of Baltic countries) 0.75 0.85
Conclusions Armenia demonstrates low (particularly direct) tax
buoyancy While finding oil may not be a feasible alternative, other
tools are available Better institutions appear to cause higher tax-GDP potential
both directly and indirectly (through shadow economy) Improvements in tax policy and administration would help
so long as they address the fundamental incentive issues Therefore, for any attempt to increase the tax performance
in Armenia to be successful, measures to improve governance, rule of law, and bureaucratic quality—all in the realm of the political will—should be in its core