PAYING THE BILLS: COMPARATIVE TAX
REFORM
Hotel Grand Hya-, Nusa Dua - Bali 10-11 December 2015
Presented by:
JAY K. ROSENGARD
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Sen. Russell Long on Tax Reform
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“A tax loophole is something that
benefits the other guy. If it
benefits you, it is tax reform.”
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“Tax reform means, 'Don’t tax
Roadmap of Presentation
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Part I:
Key principles and global lessons
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Part II:
Examples from Turkey and Argentina
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Rationale For Tax Reform
• Fiscal: ↑ Tax Revenue
(revenue enhancing vs. revenue neutral)
• Social: ↓ Horizontal or Vertical Inequities
(redistributive vs. distributionally neutral)
• Economic: ↓ Resource Allocation Inefficiencies
(interventionist vs. economically neutral)
• Administrative: ↑ Efficiency and Service
(lower administrative and compliance costs vs. business as usual)
Primary objective in Indonesia? Cannot be all….
Maximize revenue in the most economically efficient, socially equitable manner, relying on voluntary
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Obstacles To Tax Reform
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Context: Political
– Winnings Concentrated à Winners Organized & Active – Losses Diffuse à Losers Disorganized & Passive
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Internal: Technical
– Limited Information On Present Situation & Simulation of Possible Impact à Weak Planning Capacity
– Limited Financial & Human Resources à Weak Implementation Capacity & Internal Sabotage
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External: Foreign Aid
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Principles Of Tax Reform
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Approximately Right vs. Precisely Wrong:
Simple > Optimal
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Emphasize Maximum Revenue & Efficiency:
Equity Best Addressed With High Thresholds,
Blanket Exemptions, and Expenditure Policy
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Economics Of Taxation:
Low Rate, Large Base
à
Minimize economic
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Independent Revenue Authorities
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Why?
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Need for rapid change in organizational culture
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Need to attract and retain competent staff
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Requirements?
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Strong political support at the top
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Adequate operational and investment funding
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Operational autonomy/freedom from interference
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Appropriate governance and oversight
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Symptoms or Causes?
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10 Lessons Of Tax Reform
• Most successful when least needed
• Continuity among decisionmakers/policies is critical • Hurried reforms are à failed reforms
• Essential to focus on tax administration & implementation • Critical to have good mass communications
• Revenue shortfalls doom reform
• Simplification and rate reduction are complementary • Withholding systems are vital for income taxation
Turkey Tax Reform (1)
Profile of Turkey in 2014 [Indonesia in brackets]
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Population: 77 million [253 million]
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Population < 15 years old: 24.3% [28.5%]
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Population growth rate (2013): 1.2% [1.2%]
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Life expectancy at birth (2013): 76.6 [70.9]
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GDP/capita (USD current PPP): $19,027 [$10,023]
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Real GDP growth: 2.9% [5.0%]
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Inflation rate (all items): 8.9% [6.4%]
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PPP (TRY per USD): 1.20 [Rp 3,942/USD]
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Exchange rate change from 2013: -15.3% [-13.4%]
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Turkey Tax Reform (2)
Tax Revenue as a % of GDP
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Turkey Tax Reform (3)
Changes in tax to GDP ratio (percentage points), 1995-2006
-8.00 -6.00 -4.00 -2.00 0.00 2.00 4.00 6.00 8.00 10.00 OECD - Europe
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Turkey Tax Reform (4)
Composition of Tax Revenue in 2012
Turkey Tax Reform (5)
Overview of tax reform in Turkey:
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Long, incremental reform – not
䇾
big bang
䇿
approach
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Main objective was to increase revenue by
improving the stability, transparency, and equity of tax
system through rate reduction and base broadening/tax
system simplification
•
Main elements were:
– Rationalization of indirect taxation
– Rationalization of personal and corporate income taxes – Reorganization of tax administration
Turkey Tax Reform (6)
Key features of tax reform in Turkey
• PIT unified tariff schedules for wage and non-wage income, reduced both tax rates and tax brackets
• CIT tax rate reduced, introduced stronger rules on transfer pricing and thin capitalization
• Special Consumption Tax (SCT) replaced 16 selective
excise taxes/fees/charges (VAT is charged on top of SCT) • MoF established a Directorate of Tax Policy
• Semi-autonomous Presidency of Revenue Administration was created, complemented by automation and enhanced taxpayer services and improved tax audit capacity
Argentina Tax Reform (1)
A note about VAT reform in Argentina:
• Argentina known as low-tax country since late 1950s, but its tax/GDP ratio after 2010 is second only to Brazil in LA • Much of this is attributed to VAT increases, but a puzzle:
– VAT often seen as regressive
– Since 2002, no large LA country increased VAT (and overall tax revenue) more than Argentina, and no LA country reduced
inequality more than Argentina
• Key is incentivizing consumers to shift regular HH
consumption from informal to formal markets by getting consumers to use more electronic methods of payment
• Easier to track, easier to tax, wealthy more likely to switch
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Argentina Tax Reform (2)
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Argentina Tax Reform (3)
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