Designed for Growth: Taxation and Productivity
IMF Blog, April 13, 2017
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Bibliographic details
- Authors: Vitor Gaspar, Laura Jaramillo
- Published: April 13, 2017
Overview
- Publication: Fiscal Monitor (April 2017)
- Authors: Vitor Gaspar, Laura Jaramillo
- Date: April 13, 2017
- Languages available: عربي (Arabic), 中文(Chinese), Français (French), Русский (Russian), Español (Spanish)
- Central thesis: Improving the design of tax systems—including tax policy and tax administration—can raise productivity so that business reasons, not tax reasons, drive firms’ investment and employment decisions.
Productivity gains from eliminating barriers
- Eliminating barriers that hold more productive firms back would, on average across countries, lift annual real GDP growth rates by roughly 1 percentage point over 20 years.
- Emerging market and low-income countries can achieve one quarter of these gains by improving the design of their tax policies and revenue administrations.
- All countries can gain from removing policies and practices that prevent resources from flowing to their most productive uses.
Resource misallocation and its effects
- Resource misallocation occurs when barriers prevent productive firms from expanding and allow unproductive firms to survive.
- The less efficient country example: it has several highly productive firms, but many more unproductive firms compared with a country closer to the world’s productivity frontier.
- Misallocation reduces aggregate output because capital and labor remain with lower-return firms instead of moving to higher-return firms.
How taxation influences allocation across firms
- Tax design and administration affect the user cost of capital and thus investment choices across firms.
- Example (software firms): one firm evades taxes (lower user cost of capital) and can invest in lower-return projects; a tax-compliant firm faces a higher user cost and can only invest in higher-return projects. Aggregate output would be higher if capital moved toward the higher-return (tax-compliant) firm.
- Sources of misallocation include: tax incentives that depend on firm size or type of investment, weak tax enforcement, tariffs applied to particular goods, product market regulations that limit market access, preferential loans to specific firms, and underdeveloped financial markets.
Tax evasion, “cheats,” and productivity (focused example)
- Definition used: “cheats” are firms registered with the tax authority but that underreport their sales for tax purposes.
- Through tax evasion, cheats obtain an implicit subsidy that allows low-productivity firms to remain in business and gain market share at the expense of more productive, tax-compliant firms.
- A stronger tax administration reduces the prevalence of cheats; removing the implicit subsidy forces less productive cheats out of business, allowing productive, tax-compliant firms to gain market share and absorb more labor and capital, raising aggregate productivity.
Empirical findings
- In emerging market and low income developing countries, closing the productivity gap between tax-compliant firms and cheats would add ½ to 1 percentage points to aggregate productivity.
Policy implications and priorities
- Upgrade tax systems focusing on both policy design and revenue administration to reduce distortions and misallocation.
- Strengthen tax administration and enforcement to reduce tax evasion and the implicit subsidy that sustains low-productivity firms.
- Review and reform tax incentives, tariffs, product market regulations, and preferential financial practices that favor certain firms and perpetuate misallocation.
Source: Designed for Growth: Taxation and Productivity (Vitor Gaspar, Laura Jaramillo, April 13, 2017).
Content in this bundle
- 促进增长：税收和生产率; IMF博客; 2017年4月13日
- Проектирование роста: налогообложение и производительность; Витор Гаспар и Лаура Харамильо