It is argued that taxation causes deadweight losses—from substitution, evasion, and avoidance activities—and direct, administrative and compliance, costs. Some of these social costs tend to be discontinuous and/or nonconvex. Because most models of taxation ignore some components of the social costs of taxation, their conclusions cannot be considered all-encompassing. An alternative approach to policy evaluation is to rely on a marginal efficiency cost of funds rule that can indicate appropriate directions of reforms. The paper discusses the merits, applicability, and limitation of this rule, as well as its relationship to other concepts,
Against a backdrop of the dismantling of apartheid and the current government's commitment to negotiating a new constitution based on universal suffrage and protected human rights, discussions are under way on the appropriate economic policies to be pursued in the new political climate. This paper focuses on the redistributive and growth policies needed in the new South Africa.
IN CONSIDERING CRITERIA for a tax system in a developing country the response of tax revenue to changes in income has often been singled out as a vital ingredient.1 This response is measured by the concepts of tax elasticity and tax buoyancy, the former measuring in some sense the automatic response of revenue to income changes (i.e., revenue increase, excluding the effects of discretionary changes), and the latter measuring the total response of tax revenue to changes in income. A high tax elasticity is said to be a particularly desirable attribute, as it allows growth in expenditure, preferably related to development, to be financed by rising tax revenue without the need for politically difficult decisions to raise taxes. However, in fact, major sources of government revenue may have a low elasticity, in which case the authorities must seek additional revenue by introducing discretionary changes. Then, growth in tax revenue may come about through a high buoyancy 2—including growth through discretionary changes—as opposed to the natural growth through elasticity. Using Paraguay as an example, this paper analyzes the growth of tax revenues over the 1962-70 period—an era of conscious tax reform—by examining two major questions: (1) what was the elasticity of the system and its components, and how is the size of the elasticity coefficient explained? and (2) what was the buoyancy of the system relative to its elasticity? With respect to individual taxes, where were the major differences between buoyancy and elasticity found? These latter questions point to the effect of discretionary changes.
DEVELOPMENT POLICY has, until recently, been concerned primarily with stimulating economic growth. In light of the widely accepted view that economic growth was a precondition for a more equal distribution of income, little attention was given to the highly unequal income distribution that prevails in the less developed countries. These inequalities, however, are becoming less and less acceptable politically. Concern with the income distributional aspects of development policies has thus acquired new respectability. As Mr. Robert McNamara, President of the World Bank Group, stated at the Annual Meeting of the International Monetary Fund and the International Bank for Reconstruction and Development in 1972: “When the highly privileged are few and the desperately poor are many—and when the gap between them is worsening rather than improving—it is only a question of time before a decisive choice must be made between the political costs of reform and the political risks of rebellion” (McNamara, 1972, p. 26).1 He added that “shifts in the patterns of public expenditure represent one of the most effective techniques a government possesses to improve the conditions of the poor…. Governments can best begin … by initiating surveys on the effects of their current patterns of disbursement…. The Bank will assist in such surveys and, based on them, will help design programs, to be financed by it and others, which will improve the distribution of public services” (McNamara, 1972, p. 28).
International Monetary Fund. External Relations Dept.
Discussing the flat tax always generates heated debate—even about its definition. Proponents claim its simplicity and efficiency can be a key to economic success, while critics argue that it has little effect on economic activity and can be unfair.
The paper first addresses the question of the sustainability of debt growth by examining the behavior of taxation implied by fiscal rules that respect a government’s intertemporal budget constraint. Sustainable debt growth may require the tax burden to rise above some socially acceptable level. In this case, whereas drastic remedies may prove ineffective, a more relevant choice concerns the degree of monetary financing of the deficit (as distinct from monetization of the debt), which affects the dynamics of taxation implied by the constraint. Monetary financing is then introduced into a model by Blanchard, and the effects of monetary financing on the interest rate and capital intensity are examined. Finally, some policy implications are considered.
At the breakup of the Soviet Union, the newly independent countries faced the daunting task of enacting their own tax laws and establishing separate tax and customs administrations. Initially, the new countries simply adopted the former Soviet tax system, which had been modified just days prior to the breakup of the Soviet Union to include a value-added tax (VAT). As the transition to a market economy proceeded, however, the new tax and customs administrations had to shift from handling the taxation transactions of a highly controlled state sector to dealing with the more challenging compliance activities of the emerging private sector and increasingly autonomous state-owned firms. This shift demanded a new approach to tax policy, and a totally different operational strategy for tax administration. Most of the countries of the Commonwealth of Independent States (CIS), which includes all countries of the former Soviet Union but the three Baltic countries, have struggled to adapt to the change and have experienced declining and inadequate revenue in varying degrees of severity.1
This study focuses primarily on the redistributive and growth policies that will be needed in a new South Africa, on the budget options available to effect such policies, and on the opportunities for outward-looking policies in the external sector that would result from the eventual elimination of trade and financial sanctions. The remainder of this introductory chapter provides a brief overview of the ensuing chapters and indicates the main conclusions that are to be drawn.
Poverty can be placed in context most easily by focusing on the bipolar nature of the South African economy—a bipolarity that was maintained until recently by the legal regime of apartheid. It manifests itself in a basic split between the high living standard enjoyed overwhelmingly by the white minority and the condition of poverty in which the majority of the black population lives. Aggregate social and economic indicators clearly underline these differences. Although, based on GNP per capita and the structure of production, South Africa is considered to be an upper-middle-income country, the benefits deriving from the economy accrue disproportionately to the white minority.1 The income levels of the black population and the social indicators pertaining to this sector of the community—such as life expectancy at birth and infant mortality—are comparable to those of the poorer countries that border South Africa.
General government revenues, which include revenue from both central and local governments, collected within the Baltics, Russia, and other countries of the former Soviet Union had already fallen below Soviet-era levels by 1993. Revenue as a share of GDP declined on average by the equivalent of about 5 percentage points, from about 35 percent of GDP (weighted average) in 1993 to under 30 percent of GDP in 1995. This reflects a modest increase in the Baltics since 1993, more than offset by a decline in the revenue to GDP ratio of substantially more than 5 percentage points for most CIS countries (Table 1). Thus, for example, the revenue-to-GDP ratio fell by 23 percentage points in Azerbaijan, probably at least 15 percentage points in Tajikistan, and 11 percentage points in Armenia from 1993 to 1996.2 In Georgia, while no comparable data are available for earlier years, the 1993 revenue-to-GDP ratio of 3.4 percent, reflecting the civil strife at the time, clearly indicates that there must have been a precipitous drop from the preceding period; thus the rising trend after 1993 is not surprising. To summarize the situation for the CIS countries in the late 1990s, experience ranged from a sizable decline in the revenue-to-GDP ratios—for example, in strife-torn Georgia and Tajikistan, where revenue dropped to 10–12 percent of GDP—to little if any change in places such as Ukraine and Belarus, where economic and structural reforms were less advanced and revenue remained as high as 40-45 percent of GDP.