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Taxing tobacco and the new vision for financing development

Patricio V. Marquez's picture

As part of the 2016 World Bank Group-International Monetary Fund Spring Meetings held this past week in Washington, D.C., a fascinating panel discussion, A New Vision for Financing Development, took place on Sunday, April 17. Moderated by Michelle Fleury, BBC's New York business correspondent, it included World Bank Group President Jim Yong KimBill Gates, Justine Greening (UK Secretary of State for International Development), Raghuram Rajan (Governor of the Reserve Bank of India), and Seth Terkper (Minister for Finance and Economic Planning of Ghana).
A construction worker takes a break in Timor-Leste. © Alex Baluyut/World Bank The panel was in consensus about the current challenging economic and social environment facing the world as a whole.  That environment includes low rates of economic growth across the world, drastic reductions in the price of commodities that are impacting negatively low-and middle-income countries, rising inequality, frequent natural disasters and pandemics, increased number of displaced populations and refugees due to conflict and violence spilling across national borders and continents, and the ambitious United Nations 2030 Agenda for Sustainable Development, which includes a set of 17 Sustainable Development Goals (SDGs). A question debated in the panel was, Where will the resources be found to address these challenges? This question is critical under the current scenario if countries are to continue to build on the progress achieved over the last decade and maintain previous gains.

Panama Papers underscore need for fair tax systems

Sri Mulyani Indrawati's picture

High-rises and hotel buildings in Panama City, Panama. © Gerardo Pesantez/World Bank

The so-called “Panama Papers” scandal reminds us that concealing wealth and avoiding tax payments is neither uncommon nor — in many cases — illegal. But the embarrassing leak exposes something else: The public trust is breached when companies, the rich and the powerful can hide their money without breaking the law. If this breach is left unaddressed, those who aren’t rich enough to hide money will be less willing to pay and contribute to the social contract in which taxes are exchanged for quality services.

As finance minister in my home country of Indonesia, I saw firsthand how a weak tax system eroded public trust and enabled crony capitalism. Shadow markets arose for highly subsidized fuel, family connections secured jobs, and bribes helped public servants beef up their salaries. Tax avoidance among the elites was common and the country couldn’t mobilize the resources we needed to build infrastructure, create jobs, and fight poverty.

The Prime Minister’s Delivery Unit in Romania is saving taxpayers their time

Andrea Sitarova's picture



What’s a major challenge for Romanian taxpayers? They spend hours waiting in line at tax offices.
 
In March 2014, with support of the World Bank, a Delivery Unit (DU) was set up in the Romanian Prime Minister’s Chancellery. Its mission: Get better results quicker for the PM in four priority areas.
 
Tax administration was one of them. The PM’s concern was the pain of paying taxes. Offering online services, for the first time, was one of the ways to decrease the cost of compliance. The DU estimated that they could save the taxpayer up to 12 days a year of waiting at the tax office.
 
The DU’s role was to plan for these improvements together with the Romanian Ministry of Public Finance and the Tax Administration Agency (NAFA). In a Delivery Agreement, the specific targets, metrics, activities, deadlines and responsibilities were spelled out. The DU was to then monitor the progress monthly against an agreed trajectory and help unblock problems in implementation.
 
In September 2014, the NAFA launched the online taxpayer platform called Private Virtual Space (PVS). It allows taxpayers to file their tax returns, get their tax bills and see their payments. The target was to enroll 30% of the eligible taxpayers by December 2015. Though the DU tracked progress monthly, the enrollment rate was still at 0.6% in June 2015. Clearly, the monitoring on its own did not help.

A tool at the right time for tax reform

Jim Brumby's picture


In today’s world, international aid is fickle, financial flows unstable, and many donor countries are facing domestic economic crises themselves, driving them to apply resources inward. In this environment, developing countries need inner strength. They need inner stability. And they deserve the right to chart their own futures.

This is within their grasp, and last week the launch of an unassuming-but-powerful tool marked an important step forward in this quiet independence movement. It’s called the TADAT, or Tax Administration Diagnostic Assessment Tool. At first glance, this tool may look inscrutable, technical, and disconnected from development. But listen. 

Financing for Development: World Bank's role in supporting tax and revenue mobilization reforms is critical

Rajul Awasthi's picture

Melissa Thomas, author of Govern like us, speaking at the World Bank recently raised a very interesting question: is our expectation that poor countries with limited resources can deliver high-quality governance unrealistic?

Can these countries provide the public goods and services that citizens demand and need, to be able to forge a strong social contract?

She compares the levels of revenue per capita in rich and poor countries and finds that in the poorest countries, levels of revenue per capita are so low that it would be years, or even decades, until they have enough to provide a decent level of public goods and services.

It is in that context that I thought of Sri Mulyani’s appeal during the Spring Meetings when she spoke of the need to clamp down on tax evasion and avoidance and boost the domestic resource mobilization (DRM) capacities of developing countries as a means of finding resources for financing development going forward.

How to narrow the gap between the rich and poor in Malaysia?

Frederico Gil Sander's picture

If you could make one New Year’s wish for your country, what would it be?

For many Malaysians, Prime Minister Najib Razak’s wish for “a safer, more prosperous, and more equal society” likely resonated with their hopes for 2015.

Malaysians appear to be increasingly concerned about income inequality. According to a 2014 Pew Global survey, 77% of Malaysians think that the gap between the rich and poor is a big problem. The government has acknowledged that inequality remains high, and that tackling these disparities will be Malaysia’s “biggest challenge” in becoming a high-income nation.

How can Malaysia narrow the gap between the rich and poor? Global experience suggests two possible levers to achieve a more equitable income distribution.

Winning the Game of Mining Taxation

Paul Barbour's picture

The last few years have brought an uptick in the number of mining investments that have been the subject of disputes between investors and governments. This trend is of considerable concern to the players in the sector across the globe.
 
Yet, there is a wealth of wisdom to be—pardon the pun—mined from the literature over the past few decades in an attempt to distill what the main risk factors are in agreements that govern investments in the sector, with specific focus on taxation regimes. 

Number of Expropriatory Acts by Sector – three-year rolling averages
 
Source: Chris Hajzler (2010), “Expropriation of Foreign Direct Investments: Sectoral Patterns from 1993 to 2006,” University of Otago in MIGA,World Investment and Political Risk 2011

Aid Must Change in order to Tackle Inequality: The OECD Responds to Angus Deaton

Duncan Green's picture

Jon Lomoy OECD
Guest post from
Jon Lomøy, Director of the OECD Development Co-operation Directorate (DCD)

Official development assistance – or aid – is under fire. In The Great Escape, Angus Deaton argues that, “far from being a prescription for eliminating poverty, the aid illusion is actually an obstacle to improving the lives of the poor.”

Yet used properly, “smart aid” can be very effective in improving lives and confronting the very issue that Deaton’s book focuses on, and which US President Obama has called the “defining challenge of our time”: rising inequalities.

As a recent UNDP report shows, more than three-quarters of the global population lives in countries where household income inequality has increased since the 1990s. In fact, today many countries face the highest inequality levels since the end of World War II.

There is clearly moral ground for arguing that it is unjust for the bottom half of the world’s population to own only as much as the world’s richest 85 people. Above and beyond this, however, academics, think tanks, and international organizations such as the OECD have found that rising inequalities threaten political stability, erode social cohesion and curb economic growth.

It is not surprising, then, that reduction of socio-economic inequality has moved to the centre of global discussions on the post-2015 goals. The OECD, responsible for monitoring official development assistance (ODA) and other financial flows for development, is complementing these discussions by exploring ways to better use existing financial resources – and mobilise additional ones – to promote inclusive and sustainable development. This includes redefining what we mean by ODA, as well as looking at the ways it can best be used to complement other forms of finance.

Tax Reforms for Ageing Societies

Sebastian Eckardt's picture

Taxing Labor versus Taxing Consumption?

 Europe’s welfare systems face substantial demographic headwinds. Increasing life expectancy and the approaching retirement of “Baby Boomers” will increase public expenditures for years to come. Rightfully, much attention is focused on containing additional spending needs for pensions, health and long term care.  But how is all this being paid for?
 
Currently, the majority of social spending, including most importantly pension benefits, in most countries in Europe and Central Asia is financed through social security contributions, which are essentially taxes on labor.  This has two important implications. First, in terms of fiscal sustainability, the growth in spending is only a concern if expenditures grow faster than the corresponding revenues. Since labor taxes are the predominant source of financing for most welfare systems in both EU and transition countries, aging will not only increase spending, but simultaneously exert pressure on revenues. With the exception of countries in Central Asia and Turkey, the labor force, and hence the number of taxpayers that pay labor taxes will decline by about 20 percent on average across the region. Second, already today, labor taxes, including both personal income taxes and social security contributions account on average for about 40 percent of total gross labor costs in Europe and Central Asia (including EU member states), compared to an average of 34 percent in the OECD. This means that for every US$ 1 received in net earnings, employers on average incur a labor cost of US$ 1.67. And out of the 67 cents that are paid in labor taxes, 43 cents (or 65 percent) are directly used to finance social security benefits. By increasing the cost of labor, the high tax burden potentially harms competitiveness, job creation, and growth in countries in the region.

Weekly Wire: the Global Forum

Kalliope Kokolis's picture

These are some of the views and reports relevant to our readers that caught our attention this week.

Financing progress independently: taxation and illicit flows
Development Progress

“With less than two years to go before the deadline for the achievement of the Millennium Development Goals (MDGs), it is time to take stock of what the goals have achieved and, just as importantly, what the goals have overlooked – including finance.

The debate on what follows the MDGs – the post-2015 framework – is a chance to focus on two major finance themes that are not reflected in the goals themselves. First, that taxation is the central source of development finance; and second, that illicit financial flows undermine effective taxation and require international action. If this chance is not to be wasted, we need a consensus – and soon – on targets in these interlinked areas.” READ MORE
 


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