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International Monetary Fund. External Relations Dept.

The IMF Executive Board completed the third review under the Stand-By credit for Argentina on May 21, approving a strengthened policy program. Completion of this review opens the way for the release of a further SDR 976 million (about $1.2 billion) from the credit, of which SDR 211.7 million (about $267 million) is available under the Supplemental Reserve Facility (SRF). The full text of News Brief No. 01/44, dated May 21, is available on the IMF’s website (

International Monetary Fund. External Relations Dept.

The Caribbean Regional Technical Assistance Centre (CARTAC), located in Barbados, is celebrating its first anniversary, and its ambitious work program suggests it got off to a flying start.

Mr. Joel Slemrod and Shlomo Yitzhaki

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,

Mr. Peter Stella

For the latest thinking about the international financial system, monetary policy, economic development, poverty reduction, and other critical issues, subscribe to Finance & Development (F&D). This lively quarterly magazine brings you in-depth analyses of these and other subjects by the IMF’s own staff as well as by prominent international experts. Articles are written for lay readers who want to enrich their understanding of the workings of the global economy and the policies and activities of the IMF.

Mr. Charles Y. Mansfield

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.

International Monetary Fund. External Relations Dept.

Close to 130 countries—with the notable exception of the United States—have adopted the value-added tax (VAT) over the past 30 years or so. The VAT is a broad-based tax on all domestic sales that allows businesses to take a credit or receive a refund for the tax charged on their inputs so as to ensure that the tax bears only on final domestic consumption. The distinctive structure of this powerful source of revenue gives rise to special problems of control—an issue that formed part of the agenda of a March 14-16 conference held in Rome, organized by the International Tax Dialogue (ITD) —a joint initiative of the IMF, the Organization for Economic Cooperation and Development, and the World Bank (see box).

International Monetary Fund. External Relations Dept.

Over the years, African policymakers have become knowledgeable about the reforms needed to promote investment, but they continue to have difficulty implementing them. A high-level seminar, organized by the IMF Institute under the auspices of the Joint Africa Institute in Tunis, Tunisia, and held on February 28–March 1, looked at how some of the main obstacles to investment—infrastructure, tax systems, access to finance, and governance—were hindering the implementation of reforms.

Mr. Vito Tanzi

It has often been argued that many developing countries, in their pursuit of growth through capital accumulation, may have no choice but to run fiscal deficits in order to finance their development expenditures. The reasons given are: (a) that their tax bases are inadequate to allow a high tax burden; (b) that even when adequate tax bases are available, the countries’ tax administrations are too inefficient to take advantage of them; or (c) that, in any case, the political realities are such that high tax burdens are not possible.1 In the absence of developed capital markets or external borrowing, these fiscal deficits are often financed wholly or partly by central banks (i.e., through money creation). This printing of money brings about increases in the general price level and thus reduces the real value of the monetary unit. This reduction can be seen, as Friedman and Bailey showed many years ago, as a kind of tax on those who are holding money.2

Teruo Hirao and Mr. Carlos A. Aguirre

INFLATION affects the incidence, yield, and administration of an income tax in various ways. As money income expands with a rapid rise in the price level, the tax burden is intensified unless adjustments are made in personal exemptions and rates. Because of the increased pressures of rising living costs, taxpayers seek ways to evade higher taxes and delinquencies may increase sharply. From the government’s point of view, a serious lag in tax revenues may develop. If tax collections are not kept current with rapidly rising prices, and if tax payments are not synchronized with accrual of the tax liability, payment is made in devalued money and the treasury may have difficulties in meeting growing expenditure demands.