Morocco: Selected Issues

International Monetary Fund. Middle East and Central Asia Dept.

doi:10.5089/9781484346419.002.A001

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Morocco: Selected Issues

Author: International Monetary Fund. Middle East and Central Asia Dept.

Publication Date:: 12 Mar 2018

eISBN:: 9781484346419

Language:: English

Keywords:: ISCR; CR; Morocco; tax rate; rate; tax; VAT regime; corporate tax tax rate; property tax tax rate; reform scenario; tax exemption; Consumption taxes; Income and capital gains taxes

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Selected Issues

Abstract

Selected Issues

Distributional Effects of Tax Reforms in Morocco¹

Morocco would benefit from a comprehensive and well explained tax reform strategy aiming to reduce inequality and boost growth. For this, a recommended tax reform package should combine several key components: aligning the reduced VAT rate on manufacturing goods and services to the standard VAT rate; reducing tax exemptions; raising property tax; and lowering corporate tax rates. At the same time, the targeting of social programs should be strengthened. Such a reform approach would protect the most vulnerable and help broaden the tax base, remove tax distortions, and better share the tax burden.

A. Introduction

1. Since the 2013 National Tax Conference, Morocco has identified and started implementing several priority tax reforms. A consensus emerged in 2013 that Morocco’s tax system had to be more equitable and supportive of competitiveness.² Key priorities included: removing tax exemptions on large agricultural firms, simplifying the value-added tax (VAT) regime and corporate taxation, and better enforcing tax payments from self-employed and liberal professions. Reforms implemented since then have been going in this direction, but at varying pace.³

2. Tax reforms should be part of a comprehensive and well explained approach. Such an approach should consider the combined impact of various tax measures in several dimensions, including growth, revenue, and fairness, as well as parallel efforts to improve the targeting and impact of public social spending. In the absence of comprehensive strategy, the risks are that isolated reforms are not sequenced properly, that they either introduce inconsistencies or distortions, or that they be perceived as unfair, and in the end counter-productive from the perspective of improving the quality, efficiency, fairness, and acceptance of the tax system.

3. This paper aims to contribute to a better understanding of tax reforms in Morocco by quantifying the potential effects of various reform scenarios, especially on inequality and growth. The paper builds a dynamic stochastic general equilibrium (DSGE) model adapted to Morocco’s specificities (and applicable to similar developing and emerging market countries), which allows to capture all key reform dimensions mentioned above. The literature also provides useful guidance on the relationship between taxation and economic growth, how taxation can help reduce inequality, and the importance of strengthening social safety nets to mitigate the effects of tax reform on inequality (Box 1).

Box 1.

Summary of the Literature on Tax Reforms

A key focus of the literature is on the relationship between tax reforms and economic growth. The evidence is mixed, and to some extent controversial. A large literature focuses on advanced economies, especially the U.S., and the conventional wisdom is that tax rate increases could dampen growth (McBride, 2012). For developing economies, where the body of empirical evidence is smaller, the relationship between tax and growth seems inconclusive, which has in part been attributed to the role of other factors, such as weaker tax administration and enforcement (Acosta-Ormaechea and Yoo 2012).

Regarding the growth-equality trade off, the literature is clear on the need to strengthen social safety nets to mitigate the adverse impact of tax reforms. Bird and Zolt (2014) suggest focusing on improving the design of consumption taxes, and adjusting social programs to compensate for the impact on the poor. Lustig et al. (2012) emphasize cash transfer programs over tax reform to address inequality. Other experts suggest that when designing tax policy, there is a need to balance growth and redistribution objectives and, for the poorest countries, to shift to redistributive tax policies only once a sufficient income-per-capita level has been reached (Ravallion, 2010).

The literature often classifies taxes as progressive (e.g., personal income tax), proportional (e.g., property tax), and regressive (e.g., consumption, trade taxes), each having a different impact on growth and inequality. Cross-country analyses suggest that income taxes tend to be detrimental to growth in advanced and emerging economies, and that shifting towards consumption and property taxes, while keeping overall tax revenues unchanged, can modestly increase growth (McBride, 2012; Acosta-Ormaechea and Yoo, 2012). One key reason is that progressive taxation may reduce the returns on production factors and therefore the incentives to work and invest, which in turn could undermine growth. Another reason is that disparities in effective marginal tax rates across asset types can increase resource misallocation, steering investors toward lower return tax-favored investment (IMF 2017). These effects are not evidenced in low-income emerging and developing economies. However, some studies argue that a shift from trade and consumption taxes to personal income tax, if kept tax revenue-neutral, may be detrimental to growth in some developing economies (McNabb and LeMay-Boucher, 2014). Tax reforms can also address economic distortions and unlock additional growth (Karim and Mansouri, 2005).

Finally, the tax mix has implications for gender biases and for the efficiency of tax administration. Income and consumption taxes can be gender-biased because of differences between men and women in household income and expenditure (Grown and Valodia, 2010), and targeted consumption tax reforms can improve consumption patterns and gender outcomes (e.g., through a lower rate on children’s clothes). Tax reforms can also reduce tax evasion and avoidance, leading to more efficient and fairer tax systems (Fjeldstad, 2014). However, property tax reforms may fail in developing economies due to higher administrative and land reform costs relative to tax revenue gains (Slack and Bird, 2014). Stronger tax administration can help reduce unfair cost advantages enjoyed by the informal sector (IMF, 2017).

B. Key Features of Morocco’s Tax System

4. Overall, the performance of Morocco’s tax system is satisfactory, but there is scope to strengthen it and make it more equitable and less distortive. Morocco’s tax revenues declined somewhat in recent years, from almost 24 percent of GDP in 2012 to 21.5 percent in 2016,⁴ but they remain above the average for middle income economies.

5. Morocco’s tax base is relatively narrow and skewed. As in many countries, there is an important gap between the potential tax base (what the country could collect with an efficient tax system) and actual tax collection (what it does collect). Factors behind this gap include tax exemptions, evasion and avoidance. Morocco’s tax base is also skewed towards (corporate and personal) income and goods and services, with these two components accounting for about 80 percent of tax revenues. The VAT does not apply to all purchases of goods and services, since several items (e.g., some foods items, medicine) are exempted. The income tax base is relatively narrow because many liberal and independent professions, and many firms (about 64 percent), avoid it.⁵

6. Morocco’s tax rates vary significantly. Overall, they are above regional average. Corporate tax brackets were introduced in the 2016 budget, departing from a unique 30 percent corporate income tax rate. The VAT regime has remained unchanged since 2012, with a standard rate of 20 percent, but several items have been subject to reduced rates,⁶ which has been at the sources of VAT refund issues. The current personal income tax regime has been in place since January 2010, and its rate ranges between 0 and 38 percent across income brackets.

7. Total tax expenditure is relatively low in percent of GDP, but exemptions are numerous and introduce distortions.⁷ In 2016, total tax expenditure was about 3.2 percent of GDP (15.2 percent of tax revenue). The largest fraction of tax expenditure is related to VAT (1.5 percent of GDP) and to administrative fee and corporate income tax (0.6 percent and 0.5 percent of GDP, respectively). The number of exemptions reached 407 in 2016, of which about 30 percent were related to consumption tax, 45 percent to income tax, and the rest to administrative fees, excises, and customs duties. While the objective of the exemptions was to provide incentives to certain economic activities (such as agriculture and fishing, food industries, real estate, or financial intermediation), they have also introduced a range of distortions.⁸

8. Public transfers have expanded in recent years, but they are very poorly targeted. The overall level of public social expenditures is relatively high in Morocco, and the share of households receiving public transfers more than doubled between 2001 and 2014 (from 10.8 percent to 22.9 percent). However, the bulk of this increase has benefited urban areas, while most of the poor reside in rural areas. In 2014, only 8.9 percent of households in the bottom quantile received public transfer as opposed to 40.2 percent in the top quintile. The average annual amount transferred to the poorest households in 2014 was 4,067 dirhams, while the wealthiest households received 25,266 dirhams, i.e., about six times more.⁹

9. Finally, the untaxed informal sector employs a large part of Morocco’s labor force. The informal sector is estimated at about 15 percent of total economic activity, and about 22 percent of total employment. Survey data indicate that more than 78 percent of the informal sector production and about 73 percent of its labor force are concentrated in the services sector (HCP 2009).

C. Scenario Simulations

10. A dynamic stochastic general equilibrium (DSGE) model has been designed specifically to match Morocco’s specificities (Annex). The model is applied to a closed economy with four types of households: informal sector workers, formal manufacturing and service workers, rural workers, and entrepreneurs.¹⁰ The economy produces three goods: foods, manufacturing products, and informal services. The manufacturing sector includes service industries that require capital for production (e.g., communication, tourism, and finance). The large number of households and products allows the model to capture the structure of Morocco tax system, and in particular the multiple tax rates for VAT, income, and corportate tax. In addition, there is a housing market in urban areas and an informal sector to assess the benefits and impacts of a broad-based property taxation and of an expansion of VAT and income tax on the informal sector.¹¹

11. The model allows to simulate a very broad range of tax reform scenarios. The simulations below focus on the impact of the following tax reforms scenarios: increasing VAT rates and/or property tax rate, reducing exemptions and corporate tax rates, introducing a flat tax rate, enforcing personal income tax rate in the informal sector, and strengthening the social safety net.¹² The key transmission channels can be summarized as follows: a tax reform changes the marginal costs/benefits of economic agents (e.g., marginal utility, relative prices, etc.), triggering a reallocation of consumption and production factors, which ultimately affects growth, tax revenue, or welfare. The welfare effects of these reforms are assessed using standard welfare measures.

12. Increased VAT rates would boost government revenues, but the impact on output depends on which types of goods are subjected to the increased rate (Figure 1). A marginal increase in VAT rate (1 percent) on food (respectively manufacturing goods) would raise government revenue by 0.9 percent (respectively 0.8 percent). However, GDP increases by 0.14 percent following an increase in VAT on manufacturing good but declines by 0.03 percent after the increase in VAT rate on food. Figure 1 shows the economy’s transition under the new VAT regime (food and manufacturing items): in the short run, output variations reflect changes in the work effort associated with marginal tax rates, while in the long run, higher (manufacturing good) prices induce greater capital accumulation. Welfare analysis suggests that entrepreneurs would benefit the most from such a reform as their profits would increase, while workers would generally be worse off. Given Morocco’s high VAT rates, and considering the growth effects of increased VAT on food, the appropriate approach to tax reform would seem to consist in aligning the reduced VAT rate on manufacturing goods and services to the standard VAT rate, to take advantage of both the growth and revenue enhancing impacts.

13. A combination of lower exemptions and lower corporate tax rates would boost government revenue and output (Figure 2). This combination would expand the tax base and reduce tax avoidance. Lower corporate tax rates would increase investment, while lower exemptions (e.g., in agriculture) and corporate tax would induce substitution effects encouraging lower food consumption and higher manufacturing good consumption. In the long run, output would increase by 0.7 percent. The combined tax mix would increase government revenue by 0.3 percent, compensating revenue loss from the lower corporate tax rate.

14. A broad-based property tax associated with increased tax rates would induce beneficial substitution effects in asset accumulation. It would encourage lower real estate, but higher capital accumulation, and thus increased manufacturing production. It could generate an increase of 0.2 percent in long-run output, and of 0.9 percent in government revenues. House prices are a key channel for these effects, as they affect incentives for home ownership versus renting (through relative returns).

15. The above simulations help inform the design of a recommended reform package. First, Morocco would benefit from designing a comprehensive tax reform strategy that would enhance tax revenue, boost growth, and improve fairness. Second, an optimal tax reform package should combine several key reform components: (i) aligning the reduced VAT rate on manufacturing goods and services to the standard VAT rate, (ii) reducing tax exemptions, (iii) raising property tax, (iv) lowering corporate tax rates, and (v) strengthening safety nets. Such a reform package should also help broaden the tax base (e.g., by taxing self-employed and liberal professions, and introducing a broader-based property tax), remove tax distortions, and better share the tax burden (e.g., through lower corporate tax rates). Finally, it would allow to mitigate adverse distributional effects by protecting the poor.

16. Such a reform package could bring about significant benefits in terms of growth, revenue mobilization, and welfare improvements. Figure 3 shows a smooth transition of the economy to the new tax system. Figure 4 summarizes the main long-run effects on the variables of interest (output, tax revenues, and consumption), calculated as percentage change between the two steady states following the implementation of various tax reform scenarios. The results indicate that the proposed comprehensive tax reform would boost growth by 1 percent in the long-run by reducing corporate taxation and raising production incentives. It would also enhance government revenues by 1.8 percent, which would help reduce the fiscal deficit and create additional fiscal space for investment and social spending. Finally, the welfare analysis in Figure 5 shows that it would improve fairness by addressing inequalities and making the tax system more progressive.

D. Conclusion

17. Morocco would benefit from designing and implementing a comprehensive approach to tax reform. Considering the distributional effects of taxation and the combined impact of tax reforms and stronger (better targeted) social safety nets on the economy and inequalities, a tax reform package should combine several key reform components: (i) aligning the reduced VAT rate on manufacturing goods and services to the standard VAT rate, (ii) reducing tax exemptions, (iii) raising property tax, and (iv) lowering corporate tax rates. These combined measures would help broaden the tax base (e.g., by taxing self-employed and liberal professions, and introducing a broader-based property tax), remove tax distortions, and better share the tax burden (e.g., through lower corporate tax rates).

18. Such a strategy could bring about significant benefits in terms of addressing inequalities and supporting growth, while preserving revenue mobilization. It would improve fairness by addressing lingering inequalities and making the overall tax system more progressive. It would also boost long-term growth by 1 percent through increased production incentives, and enhance government revenues by 1.8 percent, which would help to reduce the fiscal deficit and create additional fiscal space for investment and social spending.

Annex I. The Model Economy

In this annex, we present the dynamic stochastic general equilibrium (DSGE) model used to capture the main features of Morocco tax system and economic structure and to simulate the various impact of the tax reforms. The model simulates a closed economy with four types of households: informal sector workers, formal manufacturing and service workers, rural workers, and entrepreneurs. It produces three goods: foods, manufacturing products, and informal services. The large number of households and products allows the model to capture the structure of Morocco tax system, specifically, multiple tax rates for VAT, income, and corporate tax.

Households

Households have utility for consumption, housing, and leisure. The consumption basket has three main goods: food c^f , manufacturing products c^m, and services c^s, where the superscripts f, m and s represent food, manufacturing and services, respectively. Preferences are identical for all types of households, but the structure of the consumption basket and the importance of housing and leisure in utility vary across household types. The population is normalized to unit, and we assume households live infinitely. The households intertemporal utility function is given by

\begin{matrix} E_{t} Σ_{τ = t}^{\infty} β_{i}^{τ - t} [φ_{f}^{i} \ln c_{τ}^{i f} + φ_{s}^{i} \ln c_{τ}^{i s} + φ_{m}^{i} \ln c_{τ}^{i m} + φ_{h}^{i} \ln h_{τ}^{i} + φ_{l}^{i} \ln (1 - l_{τ}^{i})] & (3.1) \end{matrix}

where i ∈ {I, M, R, E} with I, M, R, E representing informal, manufacturing, rural workers and entrepreneurs, respectively. β_i is a discount factor specific to each type of household; h denotes housing services, and (1-l) leisure time. The share of each category of households in the population is given by μ_i, i, ∈ {M, R, E}; and the coefficients φ_j, j ∈ {f, m, s, h, l} reflect the relative importance of consumption goods, housing and leisure in the utility.

Informal Worker Households

Informal workers are self-employed who produce services in competitive markets. They live in urban areas where they rent houses owned by entrepreneurs. The budget constraint for a representative informal household is given by:

\begin{matrix} (1 + τ_{f}) p_{t}^{f} c_{t}^{I f} + (1 + τ_{m}) p_{t}^{m} c_{t}^{lm} + (1 + τ_{s}) p_{t}^{s} c_{t}^{I s} + p_{t}^{r} h_{t}^{r} = (1 - ξ τ_{w}^{I}) w_{t}^{I} l_{t}^{I} + Γ_{t}^{I} & (3.2) \end{matrix}

where $c_{t}^{S i}$ and pⁱ, i ∈ {f, m, s} represent consumption and price for food, manufacturing goods and services, respectively. $h_{t}^{r}$ are houses rent by informal workers and $p_{t}^{r}$ is the rental price, determined in a competitive house renting market. The production of services in the informal sector is labor intensive, $w_{t}^{I} = p_{t}^{S} Z^{I}$ is the labor unit cost in the sector, and it depends on a constant productivity z^I and the service market price $p_{t}^{S} . Γ_{t}^{I}$ is a government lump-sum tranfer to informal sector households. Informal sector workers face: (i) VAT when they purchase goods and services; VAT rates are established by the tax code and are respectively τ_f, τ_m, and τ_s for food, manufacturing goods, and services that they consume; (ii) personal income taxation that depends on tax administration collection efficiency rate ξ ∈ [0,1] for the informal sector.

The representative informal sector household maximizes his utility (3.1) subject to the budget constraint (3.2). The optimum conditions for consumption, housing and leisure are as follows:

\begin{matrix} \frac{φ_{f}^{I}}{c_{t}^{I f}} = (1 + τ_{f}) p_{t}^{f} λ_{t}^{I} & (3.3) \end{matrix}

\begin{matrix} \frac{φ_{m}^{I}}{c_{t}^{Im}} = (1 + τ_{m}) p_{t}^{m} λ_{t}^{I} & (3.4) \end{matrix}

\begin{matrix} \frac{φ_{s}^{I}}{c_{t}^{I s}} = (1 + τ_{s}) p_{t}^{s} λ_{t}^{I} & (3.5) \end{matrix}

\begin{matrix} p_{t}^{r} = \frac{φ_{h}^{I}}{λ_{t}^{I} h_{t}^{I}} & (3.6) \end{matrix}

\begin{matrix} \frac{φ_{l}^{I}}{1 - l_{t}^{I}} = λ_{t}^{I} (1 + ξ τ_{w}^{I}) w_{t}^{I} & (3.7) \end{matrix}

where λ^I is the Lagrangian multiplier for the informal sector worker’s budget constraint. The optimal allocations of consumption and labor by informal sector workers depend on tax rates, the marginal rate of substitution between labor and leisure in the informal sector could be affected by tax collection.

Formal Manufacturing and Service Workers

Manufacturing and service sector households supply labor to productive units managed by entrepreneurs. They live in urban areas, buy and sell houses, and pay taxes, specifically, VAT on the purchase of goods and services, personal income tax, and property tax at a rate τ_h. The representative household’s budget constraint is given by

\begin{matrix} (1 + τ_{f}) p_{t}^{f} c_{t}^{M f} + (1 + τ_{m}) p_{t}^{m} c_{t}^{M m} + (1 + τ_{s}) p_{t}^{s} c_{t}^{M s} + p_{t}^{h} (h_{t}^{M} - (1 - τ_{h}) h_{t - 1}^{M}) = (1 - τ_{w}^{M}) w_{t}^{M} l_{t}^{M} + Γ_{t}^{M} + A C_{t}^{M} & (3.8) \end{matrix}

where $c_{t}^{M i}, i \in {f, m, s}$ represent food, manufacturing goods and services consumption; h^M is housing for manufacturing workers and $p_{t}^{h}$ is housing price, $l_{t}^{M}$ worked hours, and $Γ_{t}^{M}$ a lump-sum transfer received from the government. Manufacturing and service workers supply labor on competitive market at a wage $w_{t}^{M}$ , subject to a personal income tax rate $τ_{t}^{M}$ , which applies to their income backet. There are some adjustment costs attached to homeownership since acquiring a house could be a costly process due to administration fees and searching time. The adjustment costs add some frictions to the housing market and are defined by the quadratic function

A C_{t}^{M} = (ψ_{h} / 2) p_{t}^{h} {(\frac{h_{t}^{M} - h_{t - 1}^{M}}{{\bar{h}}^{M}})}^{2} .

The representative household maximizes his utility (3.1) subject to the budget constraint (3.8); his optimum conditions for consumption, housing and leisure are given by:

\begin{matrix} \frac{φ_{f}^{M}}{c_{t}^{M f}} = (1 + τ_{f}) p_{t}^{f} λ_{t}^{M} & (3.9) \end{matrix}

\begin{matrix} \frac{φ_{m}^{M}}{c_{t}^{M m}} = (1 + τ_{m}) p_{t}^{m} λ_{t}^{M} & (3.10) \end{matrix}

\begin{matrix} \frac{φ_{s}^{M}}{c_{t}^{M s}} = (1 + τ_{s}) p_{t}^{s} λ_{t}^{M} & (3.11) \end{matrix}

\begin{matrix} p_{t}^{h} = \frac{φ_{M h}}{λ_{t}^{M} h_{t}^{M}} + β_{M} E_{t} \frac{λ_{t + 1}^{M}}{λ_{t}^{M}} p_{t + 1}^{h} (1 - τ_{h}) & (3.12) \end{matrix}

\begin{matrix} \frac{φ_{l}^{M}}{1 - l_{t}^{M}} = λ_{t}^{M} (1 - τ_{w}^{M}) w_{t}^{M} & (3.13) \end{matrix}

where λ^I is the Lagrangian multiplier for manufacturing and service sector worker’s budget constraint

Rural Workers

Rural workers live in rural areas and supply labor (for which they receive wages) to productive units (farms) that belong to entrepreneurs. Rural activities include working on land to produce food. We assume that frictions limit population movements across urban and rual areas, which eliminates migrations from wage differential, and renders the share of rural and urban population relatively stable. Rural households are composed by individuals who spend all their income in consumption. Because of high poverty in rural areas, the government implements a generalized subsidy scheme to lower the price of food items and to help low-income households satisfy their food needs. We further assume that rural workers own their own houses; these are typically small dwellings of low value than urban houses, and for that reason they are exempted from property tax. Moreover, the housing market remains very shallow in rural area, and homeowners keep their houses infinitely.

The budget constraint for a representative rural worker is given by:

\begin{matrix} (1 + τ_{f} - σ_{R}) p_{t}^{f} c_{t}^{R f} + (1 + τ_{m}) p_{t}^{m} c_{f}^{R m} + (1 + τ_{s}) p_{t}^{s} c_{t}^{R s} = (1 - τ_{w}^{R}) w_{t}^{R} l_{t}^{R} + Γ_{t}^{R} & (3.14) \end{matrix}

where $c_{t}^{R i}, i \in {f, m, s}$ denote food, manufacturing goods and service consumption respectively, $w_{t}^{R}$ is the wage paid in rural labor market, $Γ_{t}^{R}$ is the government lump sum transfer to rural households, $τ_{w}^{R}$ is the personal income tax rate for rural workers and the lowest payroll tax rate, σ_R is the government subsidy (and policy parameter) to lower food price in rural areas. The representative rural household maximizes his utility (3.1) subject to the budget constraint (3.14). The optimum conditions for consumption and leisure are the following:

\begin{matrix} \frac{φ_{f}^{R}}{c_{t}^{R f}} = (1 + τ_{f} - σ_{R}) p_{t}^{f} λ_{t}^{R} & (3.15) \end{matrix}

\begin{matrix} \frac{φ_{m}^{R}}{c_{t}^{R m}} = (1 + τ_{m}) p_{t}^{m} λ_{t}^{R} & (3.16) \end{matrix}

\begin{matrix} \frac{φ_{s}^{R}}{c_{t}^{R s}} = (1 + τ_{s}) p_{t}^{s} λ_{t}^{R} & (3.17) \end{matrix}

\begin{matrix} \frac{φ_{l}^{R}}{1 - l_{t}^{R}} = λ_{t}^{R} (1 - τ_{w}^{R}) w_{t}^{R} & (3.18) \end{matrix}

where $λ_{t}^{R}$ is the Lagrangian multiplier for the rural worker’s budget constraint. The optimal allocations of consumption and labor for rural workers are affected by tax rates. A marginal increase in VAT rate for a consumption good or service would make that item relatively more expensive than other, lowering its consumption and switching the structure of consumption basket. The government could attemp to influence food consumption by adjusting food subsidies to change the effective food price.

Entrepreneurs

Entrepreneurs manage productive units of this economy. There are two type of firms: agricultural firms in rural areas and manufacturing and service firms in urban areas. The production of foods combines land and labor from rural workers, while the production of manufacturing goods and (formal) services uses capital and the labor supplied by urban households. The technologies of production are given by a Cobb-Douglas functions in both sectors of production.

Food output $Y_{t}^{f}$ uses the technology

\begin{matrix} Y_{t}^{f} \equiv μ_{E} z^{F} L_{t}^{α_{F}} {(n_{t}^{F})}^{1 - α_{F}} & (3.19) \end{matrix}

where z^F is a productivity factor, L _t is land used in food production, $n_{t}^{f}$ rural workers labor, α_F and 1-α_F denote the share of land and labor in food output respectively.

The output from manufacturing goods and services $Y_{t}^{m}$ is given by the technology

\begin{matrix} Y_{t}^{m} \equiv μ_{E} z^{E} k_{t - 1}^{α_{E}} {(n_{t}^{E})}^{1 - α_{E}} & (3.20) \end{matrix}

where z^E is the technology factor, $n_{t}^{E}$ is the labor hired by entrepreneurs from manufacturing workers, k_t the capital effectively utilized by the manufacturing and services firms, α_E and 1-α_E represent respectively the shares of capital and labor in the output of manufacturing goods and services. The capital stock k_t evolves according to the law of motion

\begin{matrix} k_{t} = (1 - δ_{k}) k_{t - 1} + [1 - \frac{ψ_{k b}}{2} {(\frac{i_{t}^{k}}{i_{t - 1}^{k}} - 1)}^{2}] i_{t}^{k} & (3.21) \end{matrix}

where δ_k is the depreciation rate of the capital and $i_{t}^{k}$ is the economy’s gross investment. Manufacturing and service firms face internal adjustment costs given by $A C_{t}^{E} = \frac{ψ_{k b}}{2} {(\frac{i_{t}^{k}}{i_{t - 1}^{k}} - 1)}^{2} i_{t}^{k}$ when changing their capital stock. The adjustment cost equals zero at the steady state.

Entrepreneurs own all productive units in this economy. They finance investment for manufacturing and service firms and place their extra savings in government bonds. Their income includes corporate profits (from agricultural firms $π_{t}^{F} = p_{t}^{f} Y_{t}^{f} - w_{t}^{R} n_{t}^{F}$ and manufacturing and services firms $π_{t}^{E} = p_{t}^{m} Y_{t}^{m} - w_{t}^{M} n_{t}^{E}$ ), rent pay by informal sector workers, and interest payment from government bonds. Entrepreneurs are subject to VAT, personal income tax, and taxation at the firm. At the firm level, entrepreneurs pay corporate tax on profits. The corporate tax rate for agricultural firms $τ_{w}^{F}$ , is below that of manufacturing and service firms $τ_{w}^{E}$ .

The budget constraint of the representative entrepreneur is given by

\begin{matrix} (1 + τ_{f}) p_{t}^{f} c_{t}^{E f} + (1 + τ_{m}) p_{t}^{m} c_{t}^{E m} + (1 + τ_{s}) p_{t}^{s} c_{t}^{E s} + p_{t}^{h} (h_{t}^{E} - (1 - τ_{h}) h_{t - 1}^{E}) \\ + p_{t}^{h} (h_{t}^{r} - (1 - τ_{h}) h_{t - 1}^{r}) + p_{t}^{k} i_{t}^{k} + b_{t + 1} + δ_{L} L_{t} = \\ (1 - τ_{w}^{F}) π_{t}^{F} + (1 - τ_{w}^{E}) π_{t}^{E} + (1 - τ_{r}) p_{t}^{r} h_{t}^{r} + {(1 + r_{t - 1} (1 - τ_{b})) b}_{t} + Γ_{t}^{E} + A C_{t}^{E} & (3.22) \end{matrix}

where c^Ei, i ∈ {f, m, s} denote food, manufacturing goods and service consumption, respectively; $h_{t}^{E}$ residensial houses for entrepreneur, $h_{t}^{r}$ renting houses, δ_LL_t entrepreneur cost for land use, b government bonds bearing interest rate r_t subject to a tax rate τ_b , and $Γ_{t}^{E}$ a lump sump transfer from the government. The representative entrepreneurs household maximizes his utility (3.1) subject to the budget constraint (3.22). The optimum conditions for consumption, residential housing, rental housing, bonds, capital, land, and labors are the following:

\begin{matrix} \frac{φ_{f}^{E}}{c_{f}^{F f}} = (1 + τ_{f}) p_{t}^{f} λ_{t}^{E} & (3.23) \end{matrix}

\begin{matrix} \frac{φ_{m}^{E}}{c_{t}^{F m}} = (1 + τ_{m}) p_{t}^{m} λ_{t}^{E} & (3.24) \end{matrix}

\begin{matrix} \frac{φ_{s}^{E}}{c_{t}^{F s}} = (1 + τ_{s}) p_{t}^{s} λ_{t}^{E} & (3.25) \end{matrix}

\begin{matrix} p_{t}^{h} = \frac{φ_{h}^{E}}{λ_{t}^{E} h_{t}^{E}} + β_{E} E_{t} \frac{λ_{t + 1}^{E}}{λ_{t}^{E}} p_{t + 1}^{h} (1 - τ_{h}) & (3.26) \end{matrix}

\begin{matrix} p_{t}^{h} = β_{E} E_{t} \frac{λ_{t + 1}^{E}}{λ_{t}^{E}} p_{t + 1}^{h} (1 - τ_{h}) + (1 - τ_{r}) p_{t}^{r} & (3.27) \end{matrix}

\begin{matrix} 1 = β_{E} E_{t} \frac{λ_{t + 1}^{E}}{λ_{t}^{E}} (1 + r_{r - 1} (1 - τ_{b})) & (3.28) \end{matrix}

\begin{matrix} 1 = β_{E} E_{t} \frac{λ_{t + 1}^{M}}{λ_{t}^{M}} (1 - δ_{k} + (1 - τ_{w}^{E}) p_{t + 1}^{m} z^{E} α_{E} {(\frac{n_{t + 1}^{E}}{k_{t}})}^{(1 - α_{E})}) & (\begin{matrix} 3.29 \end{matrix}) \end{matrix}

\begin{matrix} δ_{L} = (1 - τ_{w}^{F}) (1 + σ_{f}) p_{t}^{f} z^{F} α_{F} {(\frac{n_{t}^{F}}{L_{t}})}^{1 - α_{F}} & (3.30) \end{matrix}

\begin{matrix} (1 - α_{E}) p_{t}^{m} z^{E} {(\frac{k_{t - 1}}{n_{t}^{E}})}^{α_{E}} = w_{t}^{M} & (3.31) \end{matrix}

\begin{matrix} (1 - α_{F}) p_{t}^{f} z^{F} {(\frac{L}{n_{t}^{F}})}^{α_{F}} = w_{t}^{R} & (3.32) \end{matrix}

The optimal allocations by entrepreneurs are affected by tax rates, which could switch production and saving incentives.

Government

The government collects tax revenue and has a redistributive role through lump sum transfers to households and public spending. The government budget constraint is given by:

\begin{matrix} T_{t} + b_{t + 1} + G r_{t} = g_{t} + (1 + r_{t - 1}) b_{t} + Γ_{t} + S b_{t} & (3.33) \end{matrix}

where T_t is the tax revenue, b_t, government bond, g_t government expenditure, Sb_t food subsidies to rural workers, and Γ_t, total lump sump transfer to households. Gr_t represents other revenue received by the government, including grants and voluntary contributions¹³. We assume that government expenditure follows the path

\begin{matrix} g_{t} = ρ_{g} g_{t - 1} + (1 - ρ_{g}) \bar{g} & (3.34) \end{matrix}

where $\bar{g}$ is the steady state of government expenditure and ρ_g is a positive constant smaller than one. The total lump sump transfer is distributed to the four households following fixed proportions γ_i, i ∈ {S, M, R, E}, as a share of GDP. The government transfer and subsidy policies are defined as follows:

\begin{matrix} Γ_{t}^{i} = γ_{i} Y_{t}, i \in {S, M, R, E} & (3.33) \end{matrix}

\begin{matrix} Γ_{t} = μ_{S} Γ_{t}^{I} + μ_{M} Γ_{t}^{M} + μ_{R} Γ_{t}^{R} + μ_{E} Γ_{t}^{E} & (3.34) \end{matrix}

\begin{matrix} S b_{t} = σ_{R} μ_{R} p_{t}^{f} c^{R f} & (3.35) \end{matrix}

where Y is the economy GDP and Y^f the total food production. Government tax revenue includes VAT, property tax, income taxes on wage, profit and interest payment. The total tax revenue collected in this economy is given by:

\begin{matrix} T_{t} = τ_{f} p_{t}^{f} C_{t}^{f} + τ_{m} p_{t}^{m} C_{t}^{m} + τ_{s} p_{t}^{s} C_{t}^{s} + p_{t}^{h} τ_{h} H_{t - 1} + τ_{b} r_{r - 1} B_{t - 1} + τ_{r} p_{t}^{r} μ_{E} h_{t}^{r} \\ + ξ τ_{w}^{I} w_{t}^{I} + τ_{w}^{M} W_{t}^{M} + τ_{w}^{R} W_{t}^{R} + τ_{w}^{F} Π_{t}^{F} + τ_{w}^{E} Π_{t}^{E} & (3.36) \end{matrix}

where

\begin{matrix} C^{i} = μ_{s} c_{t}^{S i} + μ_{M} c_{t}^{M i} + μ_{R} c_{t}^{R i} + μ_{E} c_{t}^{E i}, i \in {f, m, s} & (3.37) \end{matrix}

\begin{matrix} μ_{E} h_{t}^{r} = μ_{S} h_{t}^{l} & (3.38) \end{matrix}

\begin{matrix} H_{t} = μ_{S} h_{t}^{I} + μ_{M} h_{t}^{M} + μ_{E} h_{t}^{E} & (3.39) \end{matrix}

\begin{matrix} W_{t}^{i} = μ_{i} l_{t}^{i} w_{t}^{i}, i \in {S, M, R} & (3.40) \end{matrix}

\begin{matrix} Π_{t}^{F} = μ_{E} π_{F} & (3.41) \end{matrix}

\begin{matrix} Π_{t}^{E} = μ_{E} π_{E} & (3.42) \end{matrix}

\begin{matrix} B_{t} = μ_{E} b_{t} & (3.43) \end{matrix}

Cⁱ, i ∈ {f, m, s} is the aggregate consumption of food, manufacturing goods and service, respectively; H_t is the number of houses and is normalized to one, $W_{t}^{i}, i \in {S, M, R}$ the wage income for informal, manufacturing, and rural sector, respectively; B_t is the stock of government’s bonds, and $Π_{t}^{F} a n d Π_{t}^{E}$ the aggregate profits from agricultural and manufacturing firms, respectively.

Market Clearing

Market clearing conditions hold in all goods and services markets, which implies:

\begin{matrix} Y_{t}^{f} \equiv μ_{E} z^{F} L^{α_{F}} {(n_{t}^{F})}^{1 - α_{F}} = C_{t}^{f} & (3.44) \end{matrix}

\begin{matrix} Y_{t}^{s} \equiv μ_{S} l_{t}^{I} z^{I} = C_{t}^{s} & (3.45) \end{matrix}

\begin{matrix} Y_{t}^{m} \equiv μ_{E} z^{E} k_{t - 1}^{α_{E}} {(n_{t}^{E})}^{1 - α_{E}} = C_{t}^{m} + μ_{E} i_{t} + g_{t} & (3.46) \end{matrix}

Manufacturing goods are used for consumption, investment, and government expenditure. In addition, manufacturing goods serve as numeraire in this economy. The GDP is the sum of all sectors’ output and is given by:

\begin{matrix} Y_{t} = p_{t}^{f} Y^{f} + p_{t}^{m} Y^{m} + p_{t}^{s} Y^{s} & (3.47) \end{matrix}

The labor market clearing conditions are

\begin{matrix} μ_{E} n_{t}^{F} = μ_{R} l_{t}^{R} & (3.48) \end{matrix}

\begin{matrix} μ_{E} n_{t}^{E} = μ_{M} l_{t}^{M} & (3.49) \end{matrix}

and total capital stock is

\begin{matrix} K_{t} = μ_{E} k_{t} & (3.50) \end{matrix}

The equilibrium is definied by the set of prices (p_f, p_m, p_s, p_h, p_r, p_k, r), the allocations of all the agents in the economy and the market clearings conditions.

Calibration

We calibrate the model to match Morocco’s economy and its long run properties as closely as possible. Since all the parameters (except those from the adjustment cost functions) relate to the optimality conditions, the calibration is an appropriate method to infer the model’s parameters.¹⁴ We reverse-engineer the process and solve the structural parameters as function of steady state ratios using non-linear decision rules, and then compute the parameters values with sample long-run averages. We conduct a sensitivity analysis to calibrate the parameters to the adjustment cost functions and retain the values consistent with the short run volatility of the economy.

The data are from Morocco’s 2007 Household Survey, macroeconomic variables, and Tax code (for VAT rates, income tax, property, and capital gains). Macroeconomic variables from national accounts, IMF and World Bank databases permit the calculation of the steady state values. The shares of each sector in total output and household consumption are derived from input-output tables published in the EORA Multi-Region Input-Output (MRIO) database. The distribution of households by type in the economy, the household wages and consumption of goods and services, and the transfers received from government, are calculated from the 2007 Household Survey (and when available, from the 2014 Household Survey). The table below provides the calibrated parameters.

Calibrated Parameters

Parameters	Symbol	Value
VAT on food, manufacturing, service	τ_f,τ_m,τ_s	0.10,0.20,0
Income tax on workers	$τ_{w}^{I}, τ_{w}^{M}, τ_{w}^{R}$	0.10,0.20,0.10
Income tax on Entrepreneurs	$τ_{w}^{F}, τ_{w}^{E}$	0.10,0.30
Tax on return, rent, property	τ_b,τ_r,τ_h	0.15,0.13,0.05
Share of each, agent	μ_S,μ_M,μ_R,μ_E	0.28,0.32,0.39,0.01
Targeted transfer	σ_R	0
Informality index	ξ	0
Discount factors	β_S,β_M,β_R,β_E	0.95,0.96,0.94,0.97
Direct transfer	γ_S,γ_M,γ_R,γ_E	0.028,0.039,0.010,0.0007
Coef. for utility, Service	$φ_{f}^{S}, φ_{m}^{S}, φ_{s}^{S}, φ_{h}^{S}, φ_{l}^{S}$	1.1,1,0.82,0.16,7.5
Coef. for utility, Manufac.	$φ_{f}^{M}, φ_{m}^{M}, φ_{s}^{M}, φ_{h}^{M}, φ_{l}^{M}$	0.90,1,0.61,0.15,8.3
Coef. for utility, Rural	$φ_{f}^{R}, φ_{m}^{R}, φ_{s}^{R}, φ_{h}^{R}, φ_{l}^{R}$	1,1,0.50,0,8.6
Coef. for utility, Entre.	$φ_{f}^{E}, φ_{m}^{E}, φ_{s}^{E}, φ_{h}^{E}, φ_{l}^{E}$	0.95,1,0.80,0.10,0
Capital depreciation rate	δ_k	0.1
Land preparation rate	δ_L	0.001
Elasticity of capital	α_E	0.35
Elasticity of land	α_F	0.70
Factor productivity	z_S,z_F,z_E	1,1.5,0.96
Adj. cost coeff.	ψ_k,ψ_h	2.4,2
AR parameter of government	ρ_g	0.95

Calibrated Parameters

Parameters	Symbol	Value
VAT on food, manufacturing, service	τ_f,τ_m,τ_s	0.10,0.20,0
Income tax on workers	$τ_{w}^{I}, τ_{w}^{M}, τ_{w}^{R}$	0.10,0.20,0.10
Income tax on Entrepreneurs	$τ_{w}^{F}, τ_{w}^{E}$	0.10,0.30
Tax on return, rent, property	τ_b,τ_r,τ_h	0.15,0.13,0.05
Share of each, agent	μ_S,μ_M,μ_R,μ_E	0.28,0.32,0.39,0.01
Targeted transfer	σ_R	0
Informality index	ξ	0
Discount factors	β_S,β_M,β_R,β_E	0.95,0.96,0.94,0.97
Direct transfer	γ_S,γ_M,γ_R,γ_E	0.028,0.039,0.010,0.0007
Coef. for utility, Service	$φ_{f}^{S}, φ_{m}^{S}, φ_{s}^{S}, φ_{h}^{S}, φ_{l}^{S}$	1.1,1,0.82,0.16,7.5
Coef. for utility, Manufac.	$φ_{f}^{M}, φ_{m}^{M}, φ_{s}^{M}, φ_{h}^{M}, φ_{l}^{M}$	0.90,1,0.61,0.15,8.3
Coef. for utility, Rural	$φ_{f}^{R}, φ_{m}^{R}, φ_{s}^{R}, φ_{h}^{R}, φ_{l}^{R}$	1,1,0.50,0,8.6
Coef. for utility, Entre.	$φ_{f}^{E}, φ_{m}^{E}, φ_{s}^{E}, φ_{h}^{E}, φ_{l}^{E}$	0.95,1,0.80,0.10,0
Capital depreciation rate	δ_k	0.1
Land preparation rate	δ_L	0.001
Elasticity of capital	α_E	0.35
Elasticity of land	α_F	0.70
Factor productivity	z_S,z_F,z_E	1,1.5,0.96
Adj. cost coeff.	ψ_k,ψ_h	2.4,2
AR parameter of government	ρ_g	0.95

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Prepared by Jean Frédéric Noah Ndela Ntsama, Hamed Ghiaie, and Gregory Auclair.

See “Synthèse des Propositions Issues des Assises Nationales sur la Fiscalité” (https://portail.tax.gov.ma/wps/portal/DGI/Documentation-fiscale/Recommandations-des-Assises)

They included: the introduction of corporate tax brackets in the 2016 budget—shifting away from a unique corporate income tax rate; the introduction of VAT exemptions for some agro-industrial inputs; improvements to the VAT refund system; increases in the social contribution for the public sector (as part of the 2016 pension reform); measures to enforce tax payments by self-employed and liberal professions; and, the simplification of various administrative procedures related to compliance and settlement of tax disputes.

The decline in the tax revenue-to-GDP ratio in recent years has been driven primarily by: (i) accelerated VAT refunds (with priority given to small and medium enterprises) and lower VAT revenues due to lower oil prices; and (ii) lower “other revenues,” including from administrative fees, penalties, and transfers, while the impact of large one-off “other revenues” (e.g., sales of telephone licenses) observed in previous years ended.

For instance, 5 percent of firms produce more than 80 percent of total corporate tax revenues.

For example: medicine and utilities (7 percent), essential food items (10 percent), and some processed food items and transportation equipment (14 percent).

Tax expenditure includes tax exemptions, deductions, or credits granted to specific activities.

Exemptions differ widely in their duration and scope. While some are discretionary, many are stipulated (e.g., some sectors are totally excluded). Their implementation takes different forms, including reductions in rate, deductions, allowances, lump sum taxation, and liquidity facilities. In 2016, agriculture and fishing benefited from 65.4 percent of them, and the real estate sector 23.6 percent.

The authorities have also expanded a range of social programs, such as RAMED, which provides medical benefits to poor families and covers more than 2.8 million households or 7.5 million beneficiaries (against 5.5 million beneficiaries in 2013), and Tayssir, which provides scholarships and allowances to poor households for each child attending school.

The authors acknowledge that the closed economy assumption is a strong assumption. It is used here because most of Morocco’s tax base rests on domestically produced goods and tax revenues from trade are less than 2 percent of GDP.

It is assumed that economic agents anticipate tax reforms and fully internalize their implications for their economic choices. The initial steady state is the same for all reform scenarios, calibrated for Morocco’s economy as described in the annex. The final steady state, and the transition paths to it, capture adjustments and responses of the economy and its agents to tax changes.

The simulations are based on one percentage point changes from the baseline steady state and follow a perfect foresight path from the initial steady state to the new one.

This variable follows a smooth trend and is treated as an AR (1) stochastic variable.

See Canova (2007), and Dejong and Dave (2007), for methods to infer DSGE models parameters.

Annex I. Error Correction Models for Labor Reallocation and Job Creation

Labor Reallocation

Following Ngai and Pissarides (2007), sectoral labor allocation and productivity are governed by a long-run equilibrium relationship equilibrium refers to the long run optimal case when employment shares follow value added shares of the different sectors in the economy. At this point, (1) total factor productivity (TFP) a_i of all i sectors grow with the same rate; (2) equilibrium sectoral prices are proportional to sectoral TFP, (or alternatively, labor productivity levels are equal); and, (3) labor shares n are allocated to sectors according to their relative consumption expenditure c × p.

When growth rates of productivity differ across sectors, the reallocation of labor takes place to compensate (i.e., structural transformation). Multi-sector growth models such as Ngai and Pissarides (2007) assume a frictionless world, where labor allocations and prices can fully adjust to restore optimality in response to changes in sectoral productivity growth. Nonetheless, frictions in the real world can slow this adjustment process, creating a wedge between the observed sectoral allocation of labor and the long-run optimal case where labor productivity across sectors is equalized. The speed by which labor flows towards its optimal allocation reflects the magnitude of the adjustment costs in the structural transformation process, which result from the institutional and policy frictions.

The costs facing the adjustment of employment levels across sectors can be estimated within an Error Correction Model (ECM). Let N, P, A, Ω be the relative values to agriculture of labor share, sector price level, sector TFP, and sector weight in consumption, respectively, for any sector i in a country j at time t. Following Pagan 1985 and Alogokoufis and Smith 1991, the ECM model can be interpreted as the optimal adjustment rule of an economy that faces a penalty for both deviations from equilibrium as well as rapid adjustments. Taking the simple case of a minimization of a myopic quadratic cost function,

\begin{matrix} Λ_{i, j, t} = \frac{1}{2} {(N_{i, j, t} - N_{i, j, t}^{*})}^{2} + \frac{κ}{2} Δ N_{i, j, t}^{2} & (7) \end{matrix}

where κ is the ratio of the marginal cost of adjustment relative to the marginal cost of being away from equilibrium. The optimal allocation of labor at time t would have the following solution,

\begin{matrix} Δ N_{i, j, t} = λ (N_{i, j, t}^{*} - N_{i, j, t - 1}) = Δ N_{i, j, t}^{*} - λ (N_{i, j, t - 1} - N_{i, j, t - 1}^{*}) & (8) \end{matrix}

where $λ = \frac{1}{1 + κ}$ is the speed of adjustment and lies between 0 and 1; the closer it is to 1 the faster the speed of adjustment, and the lower the costs created by frictions.

From equation (3), we know that the long-run equilibrium relationship is,

\begin{matrix} N_{i, j, t}^{*} = f (P_{i} \times C_{i}) = f (P_{i} \times V A_{i}) & (9) \end{matrix}

Substituting equation (9) into (8) yields an ECM for labor reallocation:

\begin{matrix} Δ \log N_{i, j, t} = \underset{s h o r - t e r m d y n a m i c s}{\underset{︸}{β_{1} Δ \log V A_{i, j, t} + β_{2} Δ \log P_{i, j, t}}} - \underset{lo n g - t e r m d y n a m i c s}{\underset{︸}{λ [\log N_{ι, j, t - 1} - (δ_{1} \log V A_{i, j, t - 1} + δ_{2} P_{\dot{i} j t - 1} + δ_{3} X_{t - 1})] + β_{3} Z_{j t} + u_{t}}} & (11) \end{matrix}

where λ is the speed of adjustment, X_t and Z_t are vectors of control variables. X_t includes the growth rate of GNP per capita, the population growth rate, as well as constant and linear trend fixed effects (sector × country), while Z_t includes an index for the global business cycle, a global linear trend, countries’ GNP per capita growth rates, and population growth rates.

We modify the baseline equation (11) to study the contribution of specific structural frictions. These are introduced via an interaction term with the speed of adjustment:

\begin{matrix} Δ \log N_{i, j, t} = \underset{s h o r t - t e r m d y n a m i c s}{\underset{︸}{β_{1} Δ l o g V A_{i, j, t} + β_{2} Δ 1 o g P_{i, j, t}}} - λ_{1} E r r o r_{i, j, t - 1} - λ_{2} E r r o r_{i, j, t - 1}^{2} - \underset{s t r u c t u r a l i n d i c a t o r s int e r a c t i o n}{\underset{︸}{λ_{3} R_{j, t} \times E r r o r_{ι, j, t - 1}}} + β_{3} Z_{j t} + u_{t} & (12) \end{matrix}

Where Error is the deviation from the equilibrium relation, and Error² controls for the size of the productivity gap. R_i,j,t is an aggregate structural indicator, and λ₃ is a measure of its contribution to the speed of adjustment. Within the setting of equation (2), adjustment speed is a function of the error size as well as the structural indicator we include, λ = λ₁ + λ₂Error_i,j,t-1 + λ₃R_j,t.

The Error Correction Model (ECM) captures the main empirical patterns of structural transformation: The (i) underlying process of structural transformation is non-stationary, meaning that sectoral labor shares and productivities maintain a secular trend over time, as observed in the data; (ii) since these trends are driven by the same underlying process of technical change, they are co-integrated; (ii) in the short run, sector output and employment are subject to disturbances that move them away from their co-integration equilibrium values; (iv) there are frictions in the adjustment process of labor, output and prices that prevent an instantaneous reversion to the trend. By preserving the co-integration relation between the variables, the ECM model distinguishes and allows the estimation of short-term fluctuations and long term adjustment speed.

Results

Table 1.

Results: Baseline ECM: Labor Reallocation

*** Significant at 1 percent

Table 1.

Results: Baseline ECM: Labor Reallocation

Dependent variable: Δlog(N_t)
Explanatory variables:		Estimate
		Without Gap Size	With Gap Size
Relative value added Growth	Δlog(VA_i,j,t)	0.281***	0.278***
Relative sectoral prices growth	Δlog(P_i,j,t)	0.0409***	0.039***
Deviation from long-run target	Error_i,j,t-1	-0.137***	-0.139***
(Deviation from long-run target)²	${E r r o r}_{i, j, t - 1}^{2}$	---	0.074***
GDP per capita growth rate	$Δ \log (\frac{G N P}{P o p_{j, t}})$	0.0646***	0.0636***
Population growth rate	Δlog(Pop_j,t)	0.347***	0.282***
Global business cycle index		0.000	0.000

*** Significant at 1 percent

Table 1.

Results: Baseline ECM: Labor Reallocation

Dependent variable: Δlog(N_t)
Explanatory variables:		Estimate
		Without Gap Size	With Gap Size
Relative value added Growth	Δlog(VA_i,j,t)	0.281***	0.278***
Relative sectoral prices growth	Δlog(P_i,j,t)	0.0409***	0.039***
Deviation from long-run target	Error_i,j,t-1	-0.137***	-0.139***
(Deviation from long-run target)²	${E r r o r}_{i, j, t - 1}^{2}$	---	0.074***
GDP per capita growth rate	$Δ \log (\frac{G N P}{P o p_{j, t}})$	0.0646***	0.0636***
Population growth rate	Δlog(Pop_j,t)	0.347***	0.282***
Global business cycle index		0.000	0.000

*** Significant at 1 percent

Table 2.

Results: Baseline ECM: Labor Reallocation by Subgroup

Note: All estimates are significant at a 1 percent level of significance.Source: IMF staff estimates.

Table 2.

Results: Baseline ECM: Labor Reallocation by Subgroup

Income groups	Estimate	Sectors	Estimate
High income	0.278	Mining	0.178
Upper middle income	0.206	Utilities	0.148
Lower middle income	0.115	Construction	0.117
Low income	0.055	Government services	0.115
		Transport, Storage and Communication	0.108
		Manufacturing	0.103
		Trade, Restaurants and Hotels	0.102

Note: All estimates are significant at a 1 percent level of significance.Source: IMF staff estimates.

Table 2.

Results: Baseline ECM: Labor Reallocation by Subgroup

Income groups	Estimate	Sectors	Estimate
High income	0.278	Mining	0.178
Upper middle income	0.206	Utilities	0.148
Lower middle income	0.115	Construction	0.117
Low income	0.055	Government services	0.115
		Transport, Storage and Communication	0.108
		Manufacturing	0.103
		Trade, Restaurants and Hotels	0.102

Note: All estimates are significant at a 1 percent level of significance.Source: IMF staff estimates.

Table 3 compares the effect of the structural indicators across five main categories—education, governance, labor regulations, product market regulations, and trade and openness—on the adjustment speeds. The higher the value of α₃, the slower the speed of labor reallocation.

Table 3.

Structural Indicators and Speed of Labor Reallocation

Source: IMF staff estimates.

Table 3.

Structural Indicators and Speed of Labor Reallocation

Aggregate Indicator	λ₃	Pr(>\|t\|)
Financial
Interest Rate Controls	0.244	0.000
Privatization	0.271	0.010
Banking Supervision	0.274	0.004
Security Markets	0.325	0.001
Banking (composite)	0.367	0.000
Domestic Finance (composite)	0.375	0.000
Entry Barriers/Pro-Competition Measures	0.140	0.063
Labor
Employee Payroll Taxes, lowest level	-0.859	0.000
Employer Payroll Taxes, lowest level	-0.413	0.041
OECD Score: Severance Pay (20 years)	-0.563	0.000
OECD Score: Severance Pay (maximum, in months)	-0.256	0.080
Education
Cumulative Drop-out Rate (primary education)	-0.004	0.002
Gross Enrollment Ratio (secondary, female)	0.002	0.092
Net Enrollment Rate (secondary, both sexes)	0.002	0.091
Governance
Judicial Independence	0.072	0.052
Regulatory Quality	0.084	0.061
Sale of Real Property Restrictions	0.112	0.000
Bureaucracy Costs	0.189	0.000
Inflation Most Recent Year	0.202	0.029
Trade and Openness
Compliance Costs	0.119	0.002
Capital Flows	0.228	0.025
Financial Restrictions on Current Account Transactions	0.417	0.000
Restrictions on Capital Account Transactions	0.447	0.001

Source: IMF staff estimates.

Table 3.

Structural Indicators and Speed of Labor Reallocation

Aggregate Indicator	λ₃	Pr(>\|t\|)
Financial
Interest Rate Controls	0.244	0.000
Privatization	0.271	0.010
Banking Supervision	0.274	0.004
Security Markets	0.325	0.001
Banking (composite)	0.367	0.000
Domestic Finance (composite)	0.375	0.000
Entry Barriers/Pro-Competition Measures	0.140	0.063
Labor
Employee Payroll Taxes, lowest level	-0.859	0.000
Employer Payroll Taxes, lowest level	-0.413	0.041
OECD Score: Severance Pay (20 years)	-0.563	0.000
OECD Score: Severance Pay (maximum, in months)	-0.256	0.080
Education
Cumulative Drop-out Rate (primary education)	-0.004	0.002
Gross Enrollment Ratio (secondary, female)	0.002	0.092
Net Enrollment Rate (secondary, both sexes)	0.002	0.091
Governance
Judicial Independence	0.072	0.052
Regulatory Quality	0.084	0.061
Sale of Real Property Restrictions	0.112	0.000
Bureaucracy Costs	0.189	0.000
Inflation Most Recent Year	0.202	0.029
Trade and Openness
Compliance Costs	0.119	0.002
Capital Flows	0.228	0.025
Financial Restrictions on Current Account Transactions	0.417	0.000
Restrictions on Capital Account Transactions	0.447	0.001

Source: IMF staff estimates.

Annex II. Measuring Sectorial Distortion in Morocco

Large sectoral distortions illustrate the extent of labor misallocation in Morocco. Sectoral distortions are defined as the difference between employment and value added shares of a sector in relative terms.¹ In Morocco, distortions are driven mainly by the agriculture, construction and trade sectors. They are large compared to other countries and reducing them could help boost productivity growth. In general, total distortions for developing economies have diminished since 1990.

Further structural change could increase labor productivity by almost 40 percent in Morocco.² When the value-added share equals the labor share for all sectors in an economy, structural change no longer contributes to growth since there is no benefit to reallocating labor. Given the disparities between the relative value added and employment shares in the Moroccan economy, structural transformation can make a large contribution to growth.

Average years of schooling is strongly correlated with sector productivity levels. This correlation is generally observed across countries with data available. As low or unequal human capital constrains the movement of labor across sectors, it is an important determinant of distortions.

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Prepared by Khalid ElFayoumi, Anta Ndoye, Sanaa Nadeem, and Gregory Auclair.

In a multisector economy, gains to aggregate productivity can stem from productivity growth in a sector, i.e., within-sector productivity growth, or the reallocation of resources from lower to higher productivity sectors. This paper focuses on the latter driver of productivity growth.

The relative contributions of “structural” and “within” changes depend on the number of sectors measured. For example, dividing manufacturing into subsectors would capture the movement of labor from textiles to car production. This would increase the observed contribution of structural change to productivity growth.

The generalized method of moments (GMM) approach addresses the endogeneity between employment and value added shares, and relative sectoral prices. GMM also handles the endogeneity induced by the inclusion of the fixed effect in our dynamic setting (Nickell 1981). Fixed effects help minimize the bias due to unobserved factors over time and across sectors/countries.

These are annual indicators of enacted reforms at the country level. These measures are supplemented with variables on institutional quality and regulatory restrictiveness from the Economic Freedom index. Institutional variables also include the quality of labor market institutions, business regulations, and governance as captured by the Fraser index.

By taking the difference between sectoral employment and value-added shares, we calculate the level of sectoral distortion using the following index (Ando and Nassar, 2017): $d_{i} : = \frac{E_{i}}{Σ_{k} E_{k}} - \frac{V A}{Σ_{k} V A_{k}}$ , where E is employment and VA is value-added for sector i. The overall sectoral distortion for a country is then $d = \sqrt{Σ_{i} d_{i}^{2}}$ .

Calculated as $Δ P = Σ_{i} (P_{i}^{E} - P_{i}^{0}) S_{i}^{0} + Σ_{i} (S_{i}^{V A} - S_{i}^{0}) P_{i}^{0}$ where P^E is the average labor productivity of the economy and S^VA sets the employment share of sector i equal to its value-added share.

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Morocco: Selected Issues

Author: International Monetary Fund. Middle East and Central Asia Dept.

Volume/Issue:: Volume 2018: Issue 076

Publisher:: International Monetary Fund

ISBN:: 9781484346419

ISSN:: 1934-7685

Pages:: 44

DOI:: https://doi.org/10.5089/9781484346419.002

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Morocco’s Tax System

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Comparison of Tax rates

(Average by country group)

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Household Tax Burden

(By household type, in MDH)

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Annual Household Expenditure

(By household type, in MDH)

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Average Income Tax and VAT Paid in Percent of Total Household Expenditure

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Revenue Losses Due to Exemptions

(Percent of GDP)

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Share of Households Receiving Transfers by Income Quintile and Source

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Transfers by Income Quintile

(In Moroccan dirhams)

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Transition Paths from VAT Rate Increase ^1/

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Transition Paths from Reductions in Exemptions and Corporate Tax

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Transition Paths from a Comprehensive Tax Reform

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Impact on Macroeconomic Aggregates of Tax Reform Scenarios ^1/

(Comprehensive Reform’ Scenario = 1, better outcomes are greater than 1)

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Impact on Household Welfare of Tax Reform Scenarios

(Comprehensive Reform’ Scenario = 1, better outcomes are greater than 1)

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Sectoral Distortions Index, 1990–2010

(Index, 0 = no distortion)

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Sectoral Distortions in Morocco by Industry, 1999–2015

(index, 0 = no distortion)

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Morocco: Average Years of Schooling by Sector

(By census round)

Table 3.

Structural Indicators and Speed of Labor Reallocation

Aggregate Indicator	λ₃	Pr(>\|t\|)
Financial
Interest Rate Controls	0.244	0.000
Privatization	0.271	0.010
Banking Supervision	0.274	0.004
Security Markets	0.325	0.001
Banking (composite)	0.367	0.000
Domestic Finance (composite)	0.375	0.000
Entry Barriers/Pro-Competition Measures	0.140	0.063
Labor
Employee Payroll Taxes, lowest level	-0.859	0.000
Employer Payroll Taxes, lowest level	-0.413	0.041
OECD Score: Severance Pay (20 years)	-0.563	0.000
OECD Score: Severance Pay (maximum, in months)	-0.256	0.080
Education
Cumulative Drop-out Rate (primary education)	-0.004	0.002
Gross Enrollment Ratio (secondary, female)	0.002	0.092
Net Enrollment Rate (secondary, both sexes)	0.002	0.091
Governance
Judicial Independence	0.072	0.052
Regulatory Quality	0.084	0.061
Sale of Real Property Restrictions	0.112	0.000
Bureaucracy Costs	0.189	0.000
Inflation Most Recent Year	0.202	0.029
Trade and Openness
Compliance Costs	0.119	0.002
Capital Flows	0.228	0.025
Financial Restrictions on Current Account Transactions	0.417	0.000
Restrictions on Capital Account Transactions	0.447	0.001

Source: IMF staff estimates.

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Abstract

Distributional Effects of Tax Reforms in Morocco1

A. Introduction

B. Key Features of Morocco’s Tax System

C. Scenario Simulations

D. Conclusion

Annex I. The Model Economy

Households

Informal Worker Households

Formal Manufacturing and Service Workers

Rural Workers

Entrepreneurs

Government

Market Clearing

Calibration

References

Annex I. Error Correction Models for Labor Reallocation and Job Creation

Labor Reallocation

Results

Annex II. Measuring Sectorial Distortion in Morocco

References

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Food and Agriculture Organization

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Distributional Effects of Tax Reforms in Morocco¹