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Nicoletta Batini, Ian Parry, and Mr. Philippe Wingender
Denmark has a highly ambitious goal of reducing greenhouse gas emissions 70 percent below 1990 levels by 2030. While there is general agreement that carbon pricing should be the centerpiece of Denmark’s mitigation strategy, pricing needs to be effective, address equity and leakage concerns, and be reinforced by additional measures at the sectoral level. The strategy Denmark develops can be a good prototype for others to follow. This paper discusses mechanisms to scale up domestic carbon pricing, compensate households, and possibly combine pricing with a border carbon adjustment. It also recommends the use of revenue-neutral feebate schemes to strengthen mitigation incentives, particularly for transportation and agriculture, fisheries and forestry, though these schemes could also be applied more widely.
Kodjovi M. Eklou and Mamour Fall
Do discretionary spending cuts and tax increases hurt social well-being? To answer this question, we combine subjective well-being data covering over half a million of individuals across 13 European countries, with macroeconomic data on fiscal consolidations. We find that fiscal consolidations reduce individual well-being in the short run, especially when they are based on spending cuts. In addition, we show that accompanying monetary and exchange rate policies (disinflation, depreciations and the liberalization of capital flows) mitigate the well-being cost of fiscal consolidations. Finally, we investigate the well-being consequences of the two well-knowns expansionary fiscal consolidations episodes taking place in the 80s (in Denmark and Ireland). We find that even expansionary fiscal consolidations can have well-being costs. Our results may therefore shed some light on why some governments may choose to consolidate through taxes even at the cost of economic growth. Indeed, if spending cuts are to generate a large well-being loss, they can trigger an opposition and protest against a fiscal consolidation plan and hence making it politically costly.
Lisbeth Rivas and Mr. Joe Crowley
Statistical agencies worldwide are increasingly turning to new data sources, including administrative data, to improve statistical coverage. Administrative data can significantly enhance the quality of national statistics and produce synergies with tax administration and other government agencies, supporting better decision making, policy advice, and economic performance. Compared to economic censuses and business surveys, administrative data are less burdensome to collect and produce more timely, detailed, and accurate data with better coverage. This paper specifically explores the use of value added tax and income tax records to enhance the compilation of national accounts statistics.
International Monetary Fund. Fiscal Affairs Dept.
This report presents estimates of the tax gap for Denmark for the period 2008–12. There are two main components to the RA-GAP methodology for estimating the VAT gap: 1) estimate the potential VAT collections for a given period; and 2) determine the accrued VAT collections for that period. The difference between the two values is the VAT gap. The methodology employs a top-down approach for estimating the potential VAT base, using statistical data on value-added generated in each sector and constructs the accrued VAT collections value from tax record data. One of the main purposes of this report is to estimate the compliance gap. The compliance gap is the difference between the potential VAT that could have been collected given the current policy framework and actual accrued VAT collections. Other tax gap measures can be determined using different methods for determining potential VAT, and these other measures are important in understanding all the factors which are affecting current collections. This report will provide estimates for these other gap measures as well, and compare and contrast them with the compliance gap.
International Monetary Fund. Fiscal Affairs Dept.
EXECUTIVE SUMMARY Iceland’s government, elected in 2013, is conducting a general review of its tax policy with a view toward making it more efficient and less distortionary.1 To this end, it has targeted VAT reform as a priority to become more reliant on consumption rather than income taxation. The narrow base and wide gap between the very high 25.5 percent main VAT rate and lower rate of 7 percent distort economic behavior and encourage tax arbitrage, evasion and lobbying. The efficiency of the Icelandic VAT is thus currently well below the European and OECD averages. To address this situation, the government plans in the near term to broaden the base by eliminating exemptions, raising the lower rate, and reducing the top rate. In the medium term, the government targets a single-rate system. To offset the potentially inflationary effects of VAT reform and reduce price distortions, the government is considering repealing the commodity tax and reviewing the trade regime for agriculture. It may also seek to increase social benefits for low-income households most affected by the VAT increases. These measures are all in accord with recommendations made by two previous IMF missions in 2010 and 2011. This mission reiterates its previous recommendations that Iceland should in the near term: (1) eliminate exemptions at least for tourism, transport, sports and culture; (2) limit VAT refunds to local government to services that could be outsourced; (3) double the lower rate to 14 percent; (4) reduce the top rate as revenue permits, depending on base broadening; and (5) in the longer term, move to a single VAT rate of about 21 percent. In addition, this report makes the following major recommendations: • Consider at least doubling the VAT threshold to ISK 2,000,000 (about USD 17,850 or EUR 12,900). A higher threshold will ease administration, allowing limited RSK resources to be focused on the large taxpayers who generate most VAT revenue. • Fully tax all sales and leasing of commercial buildings, as well as first sales of new residential buildings. While materials and construction activities are subject to VAT, sale of buildings has been exempt. This has created pressure for special refund schemes for builders to recoup their input VAT. Taxing commercial buildings and rent will remove this necessity and prevent cascading, while taxing first residential sales will broaden the VAT base to include housing consumption. • Eliminate special VAT refund schemes for buses, and domestic boats and aircraft, as well as CO2 tax refunds for rental car imports. These schemes have been encouraged by the exemption of passenger transport, and by the anomalous taxation of car rental services at the top rate. Taxing transportation will remove the need for these accommodations and level the playing field for car rental companies. • Repeal the commodity tax on building products, appliances and electronics. This will help offset the one-off inflationary effects of VAT reform and remove price distortions on these goods, which having neither inelastic demand nor negative externalities do not meet the criteria for special excise taxation. • If the sugar tax portion of the commodity tax is retained, conduct a study to ensure that the price increase it imposes on sweetened products is sufficient to discourage their consumption. Alternatively, repeal the sugar tax and move sweetened products to the top VAT rate.
Jennifer Blouin, Harry Huizinga, Mr. Luc Laeven, and Gaetan Nicodeme
This paper examines the impact of thin capitalization rules that limit the tax deductibility of interest on the capital structure of the foreign affiliates of US multinationals. We construct a new data set on thin capitalization rules in 54 countries for the period 1982-2004. Using confidential data on the internal and total leverage of foreign affiliates of US multinationals, we find that thin capitalization rules significantly affect multinational firm capital structure. Specifically, restrictions on an affiliate’s debt-to-assets ratio reduce this ratio on average by 1.9%, while restrictions on an affiliate’s borrowing from the parent-to-equity ratio reduce this ratio by 6.3%. Also, restrictions on borrowing from the parent reduce the affiliate’s debt-to-assets ratio by 0.8%, which shows that rules targeting internal leverage have an indirect effect on the overall indebtedness of affiliate firms. The impact of capitalization rules on affiliate leverage is higher if their application is automatic rather than discretionary. Furthermore, thin capitalization regimes have aggregate firm effects: they reduce the firm’s aggregate interest expense but lower firm valuation. Overall, our results show than thin capitalization rules, which thus far have been understudied, have a substantial effect on the capital structure within multinational firms, with implications for the firm’s market valuation.
Mr. Michael Keen
This paper sets out some tools for understanding the performance of the value added tax (VAT). Applying a decomposition of VAT revenues (as a share of GDP) to the universe of VATs over the last twenty years, it emerges that developments have been driven much less by changes in standard rates than by changes in ‘C-efficiency’ (an indicator of the departure of the VAT from a perfectly enforced tax levied at a uniform rate on all consumption). Decomposing C-efficiency into a ‘policy gap’ (in turn divided into effects of rate differentiation and exemption) and a ‘compliance’ gap (reflecting imperfect implementation), results pieced together for EU members suggest that the former are in almost all cases far larger than the latter, with rate differentiation and exemptions playing roles that differ quite widely across countries.