## wpiea2020271-print-pdf

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### I. Introduction — role of taxation for inclusive growth
- Taxes affect employment, investment, GDP growth, redistribution, environmental quality and public health.
- Minimum tax-to-GDP level: once tax-to-GDP reaches around 12¾ percent, economic growth increases sharply and in a sustained manner over the following decade (Gaspar et al. (2016a) finding).
- Typical tax ratios:
  - Advanced economies (excluding social contributions) average around 25 percent of GDP.
  - Developing economies often below 15 percent of GDP.
- Composition matters:
  - Corporate and personal income taxes found more harmful for growth than consumption and property taxes.
  - Income taxes tend to reduce inequality more than consumption taxes (trade-off between efficiency and equity).
- Redistribution in advanced economies:
  - Average reduction in the Gini coefficient is 18 percent, of which ~one quarter is due to progressive taxation and ~three quarters due to social benefits.
- Recent policy debate:
  - Calls for wealth taxes and progressive taxation intensified by COVID crisis; trade-offs between revenue, enforcement, and growth effects emphasized.

### II. Taxation principles — efficiency, equity, enforcement
- Efficiency:
  - Taxes create deadweight loss; losses larger when tax base is more responsive and when tax rates are high.
  - Prescriptions: tax goods with inelastic demand/supply at higher rates; broaden bases and keep rates low; marginal excess burdens should be equalized.
  - Empirical finding: income taxes generally more distortive for growth than consumption or property taxes (Arnold et al. 2011; Acosta Ormaechea and Yoo, 2012).
- Equity:
  - Optimal tax theory departs from representative agent; progressive tax-benefit system depends on observable income versus unobservable innate ability.
  - Optimal marginal tax structure often U-shaped (high at bottom, lower for middle, rising toward top).
  - Trade-off between redistribution and efficiency; in second-best worlds with market imperfections, progressive taxes can improve welfare.
- Market imperfections that can justify progressivity:
  - Imperfect labor markets: trade unions and search frictions—progressive taxes can reduce unemployment.
  - Imperfect capital markets: borrowing constraints and learning—progressive taxes can reallocate across life-cycle and improve investment in human capital.
  - Imperfect insurance markets: job risk and learning risk—progressive taxes act as insurance and encourage risk-taking and education.
- Enforcement:
  - Minimize avoidance via design (anti-arbitrage); minimize evasion via administration, third-party reporting, self-assessment, detection probability and penalties.
  - Developing countries face capacity constraints and large informal sectors; recommend simplicity, targeted collection mechanisms (CIT, VAT, withholding, excises, import tariffs).

### III. Taxation of labor income — PIT design choices
- Revenue patterns:
  - In advanced economies, the PIT raises around 10 percent of GDP.
  - In developing countries, PIT raises generally not more than 3 percent of GDP and often from a small salaried population.
- Key design recommendations:
  - Use individual income as the tax unit to avoid marriage bonuses/penalties and gender bias.
  - Choose an appropriate PIT threshold:
    - OECD median threshold approximately 25 percent of the average wage.
    - Several developing economies have thresholds exceeding two times GDP per capita, reducing PIT coverage and yield.
  - Provide in-work relief for low-income wage earners:
    - Refundable tax credits increase labor supply incentives; example: in the U.S. in 2017 the earned income tax credit amounted to about $65 billion, estimated to have lifted 9.4 million people out of poverty, including 5 million children.
    - In-work credits require strong tax administrations; less suitable for many developing countries.
  - Rationalize tax deductions and tax expenditures:
    - Many deductions disproportionately benefit the rich. Example: eliminating individual income tax expenditures in U.S. 2011 would reduce after-tax income of the top 1 percent by 19.8 percent and the bottom quintile by 7.5 percent (Toder and Baneman 2012).
    - In Australia, superannuation tax concessions: top 20 percent receive almost 60 percent of tax expenditures (CEDA, 2015).
  - Use a stepwise rising PIT rate schedule instead of a flat tax to achieve non-linear marginal rates.
  - Top PIT rate considerations:
    - Median top PIT rate fell from 47 percent in 1990 to 30 percent in the past decade.
    - Revenue-maximizing top PIT estimates generally range between 50 and 60 percent (IMF, 2013b); some argue up to 80 percent for discouraging rent seeking (Piketty et al. 2014).
    - Administrative capacity differences imply revenue-maximizing rates may be lower in developing countries.

### IV. Taxation of capital income — principles and design
- Distinction: normal return to capital vs. economic rent; taxes on rents favored (non-distortionary in principle).
- Chamley–Judd result: optimal tax on capital income is zero under certain infinite-horizon assumptions; criticisms and nuances make positive capital income taxes often desirable.
- Policy options:
  - Global income tax (sum of labor and capital taxed progressively) vs. dual income tax (progressive labor rates, flat capital rate).
  - Residence vs. source principle in open economies; corporate taxes as source-based may shift incidence to wages.
- Design recommendations:
  - Ensure neutral taxation of entrepreneurial income to avoid arbitrage between labor and capital treatment of closely-held businesses.
  - Tax investment income uniformly (interest, dividends, capital gains) to avoid portfolio distortions and base erosion.
  - Minimize evasion via third-party reporting and withholding; international information exchange reduced deposits in low-tax jurisdictions by 25 percent (Beer et al. 2019).

### V. Taxation of wealth — instruments, revenue, enforceability
- Wealth inequality: top 10 percent hold on average 50 percent of wealth in OECD vs. 24 percent of income share.
- Wealth taxes and revenues:
  - Recurrent property taxes: average ~1 percent of GDP in advanced economies; up to 3 percent in UK and Canada; in developing countries generally less than ½ percent of GDP.
  - Net wealth taxes and recurrent taxes on net wealth vary; Switzerland NWT yields around 1 percent of GDP; the Netherlands “Box 3” yields around 0.6 percent of GDP.
  - Inheritance taxes average around 0.1 percent of GDP; Belgium and France raise 0.7 and 0.6 percent of GDP respectively from inheritance/gift taxes in examples.
- Policy recommendations and challenges:
  - Strengthen recurrent property taxes: update valuations, improve cadaster, consider area-based alternatives where market valuation is hard; shift from transfer taxes to recurrent taxation.
  - Net wealth tax challenges:
    - Equity: capital income tax may be more progressive if wealthy get higher returns.
    - Efficiency: NWT can distort investment and risk-taking; government does not share investment risk.
    - Administration: comprehensive NWT requires extensive third-party reporting and valuation rules; difficult valuation for closely-held businesses, defined-benefit pensions, art.
    - Evasion and behavioral responses can be large: estimated declines in reported wealth between 32 and 44 percent in Denmark, Spain and Switzerland in response to a 1 percent tax on wealth (Scheuer and Slemrod 2020); Panama Papers evidence suggests evasion concentrated among ultra-wealthy (Alstadsæter et al. 2019).
  - Inheritance and gift taxes: useful to limit intergenerational inequality; revenues around 0.1 percent of GDP on average but scope exists to raise more where enforcement and fewer exemptions are implemented.

### VI. Corporate income taxation — rationale and design
- CIT roles:
  - Tax economic rents (including resource rents); important in extractive industries and certain digitalized business debates.
  - Administrative role as withholding agent and backstop for taxing retained earnings and capital gains.
- Aggregate patterns:
  - CIT raises around 3 percent of GDP on average worldwide; proportionally larger share of revenue for low-income countries.
  - Combined statutory CIT rates fell from around 40 percent in 1990 to slightly more than 20 percent today.
- Design recommendations:
  - Design the CIT as a rent tax to eliminate distortions on investment and debt bias; options include cash-flow taxes (full expensing) or allowance for corporate capital (ACC).
    - Evidence: ACC-like systems associated with reduced corporate debt, higher investment; simulation: ACC in Europe reduces corporate debt-to-asset by 5 percent, boosts investment by around 6 percent and raises GDP by 2 percent (De Mooij and Devereux 2011).
  - Prefer cost-based investment incentives over profit-based incentives (patent boxes) for efficiency.
  - Adopt tailored anti-tax avoidance measures to limit profit shifting (BEPS, EU Anti-Tax Avoidance Directives, domestic minimum taxes); developing countries need tailored, simple measures (caps on deductions, alternative minimum taxes on assets/turnover/cash-flow).

### VII. Consumption taxation — VAT, excises, environmental taxes
- Conceptual notes:
  - Uniform consumption tax akin to taxing wages plus rents; progressive individualized income tax superior for redistribution.
  - Ramsey and Corlett-Hague rules guide differentiation: tax inelastic goods more; tax close complements to untaxed items more heavily.
- VAT design:
  - VAT in 160+ countries; often ~one-quarter or more of total tax revenue.
  - Design principles: high threshold, broad base, single rate.
    - High threshold reduces compliance costs for small traders and can strengthen progressivity.
    - Minimize exemptions; limited exemptions for margin-based financial services, basic health care and education are common.
    - Single VAT rate preferred; reduced rates poorly targeted and complicate administration; in developing countries reduced rates may be justifiable.
- Environmental taxes:
  - Pigouvian taxes to internalize externalities; unit taxation related to social cost (e.g., social cost of carbon).
  - Environmental taxes revenue:
    - Advanced economies around 1.5 percent of GDP on average; EU around 2.5 percent of GDP.
    - A carbon tax of $75 per ton estimated to yield more than 1.5 percent of GDP in G20 countries.
    - Metcalf and Stock (2020) find no evidence of negative growth effects of carbon taxes in Europe.
  - Compensating measures may be needed if regressive impacts occur.
- Excises:
  - Excises on alcohol, tobacco and unhealthy food motivated by health and revenue; administratively attractive in developing countries.
  - Revenue ranges from an average of 1 percent of GDP in low-income countries to around 2.5 percent in advanced economies.
  - Index specific rates to inflation; scope to raise more revenue without adverse distributional effects in many countries.
  - Luxury excises generally raise little revenue and add administrative complexity; motor vehicle excises can be significant and progressive.

### VIII. How to make it happen — managing tax reform for inclusive growth
- Country differentiation:
  - Advanced/emerging economies: options include more progressive PIT, neutral capital and corporate taxation, VAT improvements, carbon/property/inheritance taxes.
  - Developing countries: prioritize administrative capacity, simplify VAT/excise, protect income tax base, reduce discretionary incentives, improve extractive industry regimes, exploit property and pollution taxes.
- Political-economy and management recommendations (10 issues highlighted):
  - Ensure strong political commitment and whole-of-government leadership (Minister of Finance typically leads).
  - Build consensus and public support via extensive consultations across stakeholders, with attention to under-represented low-income groups.
  - Develop clear, broad communication strategy emphasizing inclusive growth objectives.
  - Emphasize joint tax-and-expenditure impact to demonstrate redistribution and public goods financing; avoid earmarking.
  - Quantify reform impacts on revenue, distribution and the economy to structure debate and build trust.
  - Use windows of opportunity:
    - Good times: employ rate reductions with base broadening to compensate losers.
    - Crises: be cautious of quick distortive fixes; crises can also open opportunities for structural reform.

### Crisis as an opportunity for reform; sequencing; administrative capacity; institutional constraints
- Crisis as an opportunity:
  - Crisis times may offer an opportunity for reform as urgency facilitates political agreement.
  - Examples of special temporary levies:
    - Introduced in Germany to cover the costs of unification.
    - Introduced in Japan to finance the reconstruction efforts after the 2012 earthquake.
  - COVID crisis triggered debate on using such levies to cover the increased debt—perhaps as a structural measure to increase tax progression.
- Sequence reforms well:
  - Incremental reforms advantages: avoid large shocks in incomes or asset prices; allow anticipation.
  - Incremental risks: may not be credible if time span too long because interest groups can mobilize opposition.
  - Comprehensive reforms advantages: package deals can offset income effects across measures; sequencing within comprehensive reform often desirable to avoid overburdening taxpayers and administrations.
- Recognize institutional constraints:
  - Revenue agencies should participate in reform design; involve enforcement, legal and decentralized fiscal actors.
  - Prevent excessive complexity, undue compliance costs, or requirements for unavailable third-party information.
- Build effective administrative capacity:
  - Revenue administrations should have sound management, modern systems, and taxpayer segmentation strategies.
  - Enforcement benefits from simple, clear legislation; remittance and withholding regimes; large scale information cross-matching based on third party information.
  - Administrative design principles emphasize simplicity, voluntary compliance mechanisms, and easy collection by use of withholding.
  - Timing consideration: revenue effects of tax reform often occur with a time lag as administrations adapt.

### Selected citations (as presented)
- Acosta-Ormaechea, S. and A. Morozumi. 2019. “The Value Added Tax and Growth: Design Matters.” IMF Working Paper No. 19/96, International Monetary Fund, Washington DC.
- Acosta-Ormachea, S., and J. Yoo. 2012. “Tax Composition and Economic Growth.” IMF Working Paper No. 12/257, International Monetary Fund, Washington DC.
- Akcigit, U., J. Grigsby, T. Nicholas and S. Stantcheva. 2019. “Taxation and Innovation in the Twentieth Century”, NBER Working Paper No. 24982.
- Alstadsæter, A., N. Johannesen, and G. Zucman. 2019. “Tax Evasion and Inequality.” American Economic Review 109, pp. 2073–2103.
- Beer, S., M. Coelho, and S. Leduc. 2019. “Hidden Treasures: The Impact of Automatic Exchange of Information on Cross-Border Tax Evasion.” IMF Working Paper 19/286, International Monetary Fund, Washington, DC.
- International Monetary Fund. 2013. Fiscal Monitor: Taxing Times. Washington DC.
- International Monetary Fund. 2016a. “Taxation, leverage and macroeconomic stability,” IMF Policy Paper. Washington DC.
- International Monetary Fund. 2019b. Corporate Taxation in the Global Economy, IMF Policy Paper. Washington DC.
- Metcalf, G.E. and J.H. Stock. 2020. “Measuring the Macroeconomic Impact of Carbon Taxes.” American Economic Association Papers and Proceedings, pp. 101-106.
- Saez, E., 2001. “Using Elasticities to Derive Optimal Income Tax Rates.” Review of Economic Studies Vol. 68 (1), pp. 205–29.
- Zucman, G. 2013. “The Missing Wealth of Nations: Are Europe and the U.S. Net Debtors or Net Creditors?” Quarterly Journal of Economics 128 (3). pp. 1321–1364.

*Source: wpiea2020271-print-pdf*

### References .............................................................................................................

### References

### I. Introduction — role of taxation for inclusive growth
- Taxes affect employment, investment, GDP growth, redistribution, environmental quality and public health.
- Minimum tax-to-GDP level: once tax-to-GDP reaches around 12¾ percent, economic growth increases sharply and in a sustained manner over the following decade (Gaspar et al. (2016a) finding).
- Typical tax ratios:
  - Advanced economies (excluding social contributions) average around 25 percent of GDP.
  - Developing economies often below 15 percent of GDP.
- Composition matters: corporate and personal income taxes found more harmful for growth than consumption and property taxes; income taxes tend to reduce inequality more than consumption taxes (trade-off between efficiency and equity).
- Redistribution in advanced economies: average reduction in the Gini coefficient is 18 percent, of which ~one quarter is due to progressive taxation and ~three quarters due to social benefits.
- Recent policy debate: calls for wealth taxes and progressive taxation intensified by COVID crisis; trade-offs between revenue, enforcement, and growth effects emphasized.

### II. Taxation principles — efficiency, equity, enforcement
- Efficiency:
  - Taxes create deadweight loss (excess burden); losses larger when tax base is more responsive and when tax rates are high.
  - Prescriptions: tax goods with inelastic demand/supply at higher rates; broaden bases and keep rates low; marginal excess burdens should be equalized.
  - Empirical finding: income taxes generally more distortive for growth than consumption or property taxes (Arnold et al. 2011; Acosta Ormaechea and Yoo, 2012).
- Equity:
  - Optimal tax theory departs from representative agent; progressive tax-benefit system depends on observable income versus unobservable innate ability.
  - Optimal marginal tax structure often U-shaped (high at bottom, lower for middle, rising toward top).
  - Trade-off between redistribution and efficiency; in second-best worlds with market imperfections, progressive taxes can improve welfare.
- Market imperfections that can justify progressivity:
  - Imperfect labor markets: trade unions and search frictions—progressive taxes can reduce unemployment.
  - Imperfect capital markets: borrowing constraints and learning—progressive taxes can reallocate across life-cycle and improve investment in human capital.
  - Imperfect insurance markets: job risk and learning risk—progressive taxes act as insurance and encourage risk-taking and education.
- Enforcement:
  - Minimize avoidance via design (anti-arbitrage); minimize evasion via administration, third-party reporting, self-assessment, detection probability and penalties.
  - Developing countries face capacity constraints and large informal sectors; recommend simplicity, targeted collection mechanisms (CIT, VAT, withholding, excises, import tariffs).

### III. Taxation of labor income — PIT design choices
- Revenue patterns:
  - In advanced economies, the PIT raises around 10 percent of GDP.
  - In developing countries, PIT raises generally not more than 3 percent of GDP and often from a small salaried population.
- Key design recommendations:
  - Use individual income as the tax unit to avoid marriage bonuses/penalties and gender bias; many advanced economies have individualized PIT systems.
  - Choose an appropriate PIT threshold:
    - OECD median threshold approximately 25 percent of the average wage.
    - Several developing economies have thresholds exceeding two times GDP per capita, reducing PIT coverage and yield.
  - Provide in-work relief for low-income wage earners:
    - Refundable tax credits (in-work benefits) increase labor supply incentives; examples: in the U.S. in 2017 the earned income tax credit amounted to about $65 billion, estimated to have lifted 9.4 million people out of poverty, including 5 million children.
    - In-work credits require strong tax administrations; less suitable for many developing countries.
  - Rationalize tax deductions and tax expenditures:
    - Many deductions (mortgage interest, superannuation concessions) disproportionately benefit the rich. Example: eliminating individual income tax expenditures in U.S. 2011 would reduce after-tax income of the top 1 percent by 19.8 percent and the bottom quintile by 7.5 percent (Toder and Baneman 2012).
    - In Australia, superannuation tax concessions: top 20 percent receive almost 60 percent of tax expenditures (CEDA, 2015).
  - Use a stepwise rising PIT rate schedule instead of a flat tax to achieve non-linear marginal rates and meet equity-efficiency trade-offs.
  - Top PIT rate considerations:
    - Median top PIT rate fell from 47 percent in 1990 to 30 percent in the past decade.
    - Revenue-maximizing top PIT estimates generally range between 50 and 60 percent (IMF, 2013b); some argue up to 80 percent for discouraging rent seeking (Piketty et al. 2014).
    - Administrative capacity differences imply revenue-maximizing rates may be lower in developing countries.

### IV. Taxation of capital income — principles and design
- Distinction: normal return to capital vs. economic rent; taxes on rents favored (non-distortionary in principle).
- Chamley–Judd result: optimal tax on capital income is zero under certain infinite-horizon assumptions; criticisms and nuances:
  - Finite horizons, heterogenous saving behavior, market imperfections, enforcement constraints make positive capital income taxes often desirable.
- Tax policy options:
  - Global income tax (sum of labor and capital taxed progressively) vs. dual income tax (progressive labor rates, flat capital rate).
  - Residence vs. source principle in open economies; corporate taxes as source-based may shift incidence to wages.
- Design recommendations:
  - Ensure neutral taxation of entrepreneurial income to avoid arbitrage between labor and capital treatment of closely-held businesses.
  - Tax investment income uniformly (interest, dividends, capital gains) to avoid portfolio distortions and base erosion; neutrality reduces preference-driven distortions.
  - Minimize evasion via third-party reporting and withholding; international information exchange (AEOI, FATCA) reduced deposits in low-tax jurisdictions by 25 percent (Beer et al. 2019).

### V. Taxation of wealth — instruments, revenue, enforceability
- Wealth inequality: top 10 percent hold on average 50 percent of wealth in OECD vs. 24 percent of income share.
- Wealth taxes and revenues:
  - Recurrent property taxes: average ~1 percent of GDP in advanced economies; up to 3 percent in UK and Canada; in developing countries generally less than ½ percent of GDP.
  - Net wealth taxes (NWT) and recurrent taxes on net wealth vary; Switzerland NWT yields around 1 percent of GDP; the Netherlands “Box 3” yields around 0.6 percent of GDP.
  - Inheritance taxes average around 0.1 percent of GDP; Belgium and France raise 0.7 and 0.6 percent of GDP respectively from inheritance/gift taxes in examples.
- Policy recommendations and challenges:
  - Strengthen recurrent property taxes: update valuations, improve cadaster, consider area-based alternatives where market valuation is hard; shift from transfer taxes to recurrent taxation to reduce transaction distortions.
  - Net wealth tax challenges:
    - Equity: capital income tax may be more progressive if wealthy get higher returns.
    - Efficiency: NWT can distort investment and risk-taking; government does not share investment risk.
    - Administration: comprehensive NWT requires extensive third-party reporting and valuation rules; difficult valuation for closely-held businesses, defined-benefit pensions, art.
    - Evasion and behavioral responses can be large: estimated declines in reported wealth between 32 and 44 percent in Denmark, Spain and Switzerland in response to a 1 percent tax on wealth (Scheuer and Slemrod 2020); Panama Papers evidence suggests evasion concentrated among ultra-wealthy (Alstadsæter et al. 2019).
  - Inheritance and gift taxes: useful to limit intergenerational inequality; revenues around 0.1 percent of GDP on average but scope exists to raise more where enforcement and fewer exemptions are implemented.

### VI. Corporate income taxation — rationale and design
- CIT roles:
  - Tax economic rents (including resource rents); important in extractive industries and certain digitalized business debates.
  - Administrative role as withholding agent and backstop for taxing retained earnings and capital gains.
- Aggregate patterns:
  - CIT raises around 3 percent of GDP on average worldwide; proportionally larger share of revenue for low-income countries.
  - Combined statutory CIT rates fell from around 40 percent in 1990 to slightly more than 20 percent today.
- Design recommendations:
  - Design the CIT as a rent tax to eliminate distortions on investment and debt bias; options include cash-flow taxes (full expensing) or allowance for corporate capital (ACC).
    - Evidence: ACC-like systems associated with reduced corporate debt, higher investment; simulation: ACC in Europe reduces corporate debt-to-asset by 5 percent, boosts investment by around 6 percent and raises GDP by 2 percent (De Mooij and Devereux 2011).
  - Prefer cost-based investment incentives (investment tax credits, accelerated depreciation, expensing) over profit-based incentives (patent boxes) for efficiency and fiscal cost-effectiveness.
  - Adopt tailored anti-tax avoidance measures to limit profit shifting (BEPS, EU Anti-Tax Avoidance Directives, domestic minimum taxes); developing countries need tailored, simple measures (caps on deductions, alternative minimum taxes on assets/turnover/cash-flow).

### VII. Consumption taxation — VAT, excises, environmental taxes
- Conceptual notes:
  - Uniform consumption tax akin to taxing wages plus rents; progressive individualized income tax superior for redistribution.
  - Ramsey and Corlett-Hague rules guide differentiation: tax inelastic goods more; tax close complements to untaxed items more heavily.
- VAT design for inclusiveness and efficiency:
  - VAT in 160+ countries; often ~one-quarter or more of total tax revenue.
  - Design principles: high threshold, broad base, single rate.
    - High threshold reduces compliance costs for small traders and can strengthen progressivity.
    - Minimize exemptions to avoid cascading effects and reduce compliance incentives; limited exemptions for margin-based financial services, basic health care and education are common.
    - Single VAT rate preferred; reduced rates poorly targeted and complicate administration; in developing countries reduced rates may be justifiable given limited spending alternatives.
- Environmental taxes:
  - Pigouvian taxes to internalize externalities; unit taxation related to social cost (e.g., social cost of carbon).
  - Environmental taxes revenue:
    - Advanced economies around 1.5 percent of GDP on average; EU around 2.5 percent of GDP.
    - A carbon tax of $75 per ton estimated to yield more than 1.5 percent of GDP in G20 countries.
    - Metcalf and Stock (2020) find no evidence of negative growth effects of carbon taxes in Europe.
  - Compensating measures may be needed if regressive impacts occur.
- Excises:
  - Excises on alcohol, tobacco and unhealthy food motivated by health and revenue; administratively attractive in developing countries.
  - Revenue ranges from an average of 1 percent of GDP in low-income countries to around 2.5 percent in advanced economies.
  - Index specific rates to inflation; scope to raise more revenue without adverse distributional effects in many countries.
  - Luxury excises generally raise little revenue and add administrative complexity; motor vehicle excises can be significant and progressive.

### VIII. How to make it happen — managing tax reform for inclusive growth
- Country differentiation:
  - Advanced/emerging economies: options include more progressive PIT, neutral capital and corporate taxation, VAT improvements, carbon/property/inheritance taxes.
  - Developing countries: prioritize administrative capacity, simplify VAT/excise, protect income tax base, reduce discretionary incentives, improve extractive industry regimes, exploit property and pollution taxes.
- Political-economy and management recommendations (10 issues highlighted):
  - Ensure strong political commitment and whole-of-government leadership (Minister of Finance typically leads).
  - Build consensus and public support via extensive consultations across stakeholders, with attention to under-represented low-income groups.
  - Develop clear, broad communication strategy emphasizing inclusive growth objectives.
  - Emphasize joint tax-and-expenditure impact to demonstrate redistribution and public goods financing; avoid earmarking.
  - Quantify reform impacts on revenue, distribution and the economy to structure debate and build trust.
  - Use windows of opportunity:
    - Good times: employ rate reductions with base broadening to compensate losers.
    - Crises: be cautious of quick distortive fixes; crises can also open opportunities for structural reform (text truncated in source).

*Source: wpiea2020271-print-pdf - References*

### introduction of long-lasting structural reforms that support inclusive growth. Indeed, crisis

### wpiea2020271-print-pdf - introduction of long-lasting structural reforms that support inclusive growth. Indeed, crisis

### Crisis as an opportunity for reform
- Crisis times may offer an opportunity for reform as the urgency facilitates political agreement among different actors.
- Examples of special temporary levies:
  - Introduced in Germany to cover the costs of unification.
  - Introduced in Japan to finance the reconstruction efforts after the 2012 earthquake.
- COVID crisis triggered debate on using such levies to cover the increased debt—perhaps as a structural measure to increase tax progression.

### Sequence reforms well
- Tax reforms can be either incremental or comprehensive.
- Advantages of incremental reforms:
  - Avoid large shocks in incomes or asset prices.
  - Allow people to anticipate changes (example: taxation of housing often incremental to avoid large disruptions in house prices).
- Risks of incremental reforms:
  - Might not be credible if their time span is too long because interest groups can mobilize opposition and block reforms.
- Advantages of comprehensive reforms:
  - Appeal of creating package deals whereby the income effects of some tax measures can be offset against others.
  - When there is space for tax relief, structural improvements might be achieved.
- Recommendation:
  - Even under a comprehensive reform, some sequencing may be desirable to avoid too many simultaneous changes for taxpayers and tax administrations, which can impose a large burden.

### Recognize institutional constraints
- Revenue agencies responsible for implementation should participate in the reform process, e.g. as core members of the tax reform committee.
- Reasons to involve enforcement and legal experts:
  - Ensure concerns about enforcement are recognized and accounted for.
  - Prevent introduction of excessive complexity, undue compliance costs, or requirements for (third-party) information that is not yet available.
  - Legal drafting experts ensure tax laws are clear, unambiguous, and provide tax certainty.
- Decentralized fiscal powers (States, provinces or municipalities) can create obstacles to reform or its implementation; their interests should be integrated into reform management.

### Build effective administrative capacity
- Capacity constraints in tax and custom administrations are often major obstacles to revenue mobilization in developing countries.
- Revenue administrations should have:
  - Sound management and governance arrangements.
  - Modern process/systems to manage core tax functions.
- Enforcement benefits from:
  - Simple, clear, and transparent legislation (including procedural and administrative regulations).
  - Remittance and withholding regimes at adequate point of collections.
  - Taxpayer segmentation strategies.
  - Large scale information cross-matching based on extensive use of third party information.
- Administrative design principles for tax reform:
  - Major focus on simplicity, voluntary compliance mechanisms, and easy collection by use of withholding.
- Timing consideration:
  - Reforming the tax administration to deal with new or modified tax laws usually takes time to bear fruit; revenue effects of tax reform often occur with a time lag.

### Key references and citations (selected entries as presented)
- Acosta-Ormaechea, S. and A. Morozumi. 2019. “The Value Added Tax and Growth: Design Matters.” IMF Working Paper No. 19/96, International Monetary Fund, Washington DC.
- Acosta-Ormachea, S., and J. Yoo. 2012. “Tax Composition and Economic Growth.” IMF Working Paper No. 12/257, International Monetary Fund, Washington DC.
- Akcigit, U., J. Grigsby, T. Nicholas and S. Stantcheva. 2019. “Taxation and Innovation in the Twentieth Century”, NBER Working Paper No. 24982.
- Alstadsæter, A., N. Johannesen, and G. Zucman. 2019. “Tax Evasion and Inequality.” American Economic Review 109, pp. 2073–2103.
- Beer, S., M. Coelho, and S. Leduc. 2019. “Hidden Treasures: The Impact of Automatic Exchange of Information on Cross-Border Tax Evasion.” IMF Working Paper 19/286, International Monetary Fund, Washington, DC.
- International Monetary Fund. 2013. Fiscal Monitor: Taxing Times. Washington DC.
- International Monetary Fund. 2016a. “Taxation, leverage and macroeconomic stability,” IMF Policy Paper. Washington DC.
- International Monetary Fund. 2019b. Corporate Taxation in the Global Economy, IMF Policy Paper. Washington DC.
- Metcalf, G.E. and J.H. Stock. 2020. “Measuring the Macroeconomic Impact of Carbon Taxes.” American Economic Association Papers and Proceedings, pp. 101-106.
- Saez, E., 2001. “Using Elasticities to Derive Optimal Income Tax Rates.” Review of Economic Studies Vol. 68 (1), pp. 205–29.
- Zucman, G. 2013. “The Missing Wealth of Nations: Are Europe and the U.S. Net Debtors or Net Creditors?” Quarterly Journal of Economics 128 (3). pp. 1321–1364.

*Source: wpiea2020271-print-pdf - introduction of long-lasting structural reforms that support inclusive growth. Indeed, crisis*

---


_Source: https://www.imf.org/-/media/files/publications/wp/2020/english/wpiea2020271-print-pdf.pdf_