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taxation

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
 

Doing Experiments with Socially Good but Privately Bad Treatments

David McKenzie's picture

Most experiments in development economics involve giving the treatment group something they want (e.g. cash, health care, schooling for their kids) or at least offering something they might want and can choose whether or not to take up (e.g. business training, financial education). Indeed among the most common justifications for randomization is that there is not enough of the treatment for everyone who wants it, leading to oversubscription or randomized phase-in designs.

What have We Learned about Crisis/Fragile States? Findings of a 5 Year Research Programme

Duncan Green's picture

Cards on the table, confronted with a closely argued 11 page exec sum, I am unlikely to then read the full report. But the short version of Meeting the Challenges of Crisis States, by James Putzel (LSE) and Jonathan Di John (SOAS), is a meal in itself. It summarizes 5 years of DFID-funded research by the Crisis States Research Centre, led by the London School of Economics, and is a great way to take the temperature of academic thinking on ‘states with adjectives’ – fragile, failing, crisis etc etc.

The key question it seeks to answer is why the daily and inevitable tensions of politics and ‘conflict as usual’, which exist in any society, tip some states over into a downward spiral of distintegration, grand theft and violence, while others, even poor ones, prove resilient. Key Findings?

Like most political scientists, Putzel and Di John believe that if you want to understand politics, you have to understand elites. And that means jettisoning preconceptions of ‘good governance’ (aka how much do the institutions resemble an idealized notion of American/European democracy) and thinking instead about the underlying political settlement. How do individuals and groups with different slices of power protect and negotiate over their pieces of the pie?

What leads to fragility? In the rather disturbing language of the report:

Realizing India’s Potential

Kalpana Kochhar's picture

Yesterday, I discussed India’s incredible economic transformation over the last two decades and some of the challenges that the country is currently facing. So, what can India do to reduce the impact of global uncertainty and improve growth performance and boost investor confidence?

India’s firepower to respond to a crisis with traditional monetary and fiscal stimulus is much weaker now than prior to the 2008 crisis. Fiscal space for additional spending is severely constrained in light of continued high deficits. Room for monetary policy easing is modest in light of continued high inflation, and still low real interest rates. Moreover, when investor confidence is at a low ebb as it is in India, easing monetary policy would be tantamount to “pushing on a string.”

Doing Business Report 2010: South Asia

Joe Qian's picture

The World Bank released its annual Doing Business report (pdf) last week which tracks regulatory reforms for conducting business and ranks countries based on their ease of doing business.

Countries are evaluated and ranked by indicators such as starting a business, employing workers, getting credit, paying taxes, etc.

In South Asia, seven out of eight (75%) of the countries instituted reforms that were conducive to business, higher than any previous year of the study.

Pakistan was the highest ranked country in the region at number 85 while Afghanistan and Bangladesh were the most dynamic reformers with three reforms each. Afghanistan’s rank in the study also increased the most in the region, climbing eight spots.