## Death and Taxes May be Certain—But Taxes We Can Make Better

_IMF Blog, October 15, 2013_

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**Canonical URL:** [Death and Taxes May be Certain—But Taxes We Can Make Better](https://www.imf.org/en/blogs/articles/2013/10/15/death-and-taxes-may-be-certain-but-taxes-we-can-make-better)

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## Bibliographic details
- Authors: Michael Keen
- Published: October 15, 2013

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### A better way to tax
- IMF broad advice on the revenue side of consolidation:
  - Before raising rates, broaden bases by scaling back exemptions and special treatments, and thereby getting more people and entities to pay taxes;
  - Rely more on taxing consumption rather than labor;
  - Strengthen property taxes; and
  - Seize opportunities to raise revenue while correcting environmental and other distortions by, not least, carbon pricing (to address climate and other pollution challenges).
- How advanced countries have performed relative to this advice:
  - Increases in rates of value-added tax, or VAT, have been more evident than base broadening.
  - Many countries have increased social contribution rates (linked to the financing of pensions and the like, but often affecting workers much like a tax).
  - Effective carbon pricing remains largely unrealized.
- Exceptions and specific measures:
  - Portugal has managed significant VAT base broadening.
  - "Thirteen or so" countries have adopted bank levies of the kind the Fund recommended in 2010.
- Overall conclusion: countries have largely honored the advice "in the breach."

### Taxing times
- No single "right" size of government; revenue needs vary with country circumstances and social preferences.
- Fiscal Monitor concept: "tax effort" — how well a country is doing at raising tax revenue compared with other similar countries (per capita income and other characteristics).
- Interpretations from the Fiscal Monitor chart:
  - A score of "1.0" on the horizontal axis means a country is raising pretty much the most one could expect.
  - The vertical axis represents the additional effort needed in terms of garnering enough tax revenue to help meet half of their consolidation needs (as defined in the Fiscal Monitor).
  - Several countries, including notably the United States, whose "effort" is relatively low could meet a good part of their consolidation needs by fairly modest increases.
- Emerging markets and low-income countries:
  - Estimated effort (not shown in the chart) is, on average, not especially low.
  - Low-income countries with "effort" below their group median could raise "3.5 points of GDP" more by rising to that level.
- Sources of unexploited revenue potential:
  - In most advanced economies, flawed tax design is the predominant problem.
  - Elsewhere, improving compliance (reducing avoidance and evasion) is the key.

### The fairness factor
- Public acceptance of tax systems depends on perceived fairness.
- Trends:
  - Progressivity has fallen a lot over the last "three decades or so".
  - Inequality has increased.
- Analysis performed:
  - Calculated the top rate of tax that would maximize revenue in advanced economies, presented as a range of percentages.
  - Compared estimated revenue-maximizing top rates with current top marginal rates (see "Chart 2").
  - In many cases, current top rates are below, or at the lower end of, the estimated range of revenue-maximizing rates.
- Policy implication: Whether top rates should be raised depends on social judgments; the Fiscal Monitor clarifies considerations but leaves the decision to readers.

### Making good tax reform happen
- Experience shows hard economic times are generally not good for tax reform.
- Lessons from the Fiscal Monitor:
  - No silver bullet exists for tax reform.
  - Transparency is critical but may not be sufficient.
  - Effective communication is essential — public support requires persuasion that taxes are being raised fairly and will be put to good use.

*Source: Death and Taxes May be Certain—But Taxes We Can Make Better, Michael Keen, October 15, 2013.*

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## References

- [Fiscal Monitor](http://www.imf.org/external/pubs/ft/fm/2013/02/fmindex.htm)
- [https://www.imf.org/wp-content/uploads/2013/10/chart-1-updated.jpg](https://www.imf.org/wp-content/uploads/2013/10/chart-1-updated.jpg)
- [https://www.imf.org/wp-content/uploads/2013/10/chart-2-updated.jpg](https://www.imf.org/wp-content/uploads/2013/10/chart-2-updated.jpg)

_Source: https://www.imf.org/en/blogs/articles/2013/10/15/death-and-taxes-may-be-certain-but-taxes-we-can-make-better_