0.20 General introduction to savings mobilization  (Page 9/9)

Difference in tax structure

We will see that countries that rely on Value Added Taxes tend to have higher tax ratios (this not from econometric evidence, but from an intensive review of African experience we will do.

Actual collection of taxes is not easy. Even in much of Western Europe outside of Scandinavia, evasion of income taxes is a fairly easy matter; and avoidance of income taxes may be the second or third most favorite outdoor sport in France, Italy, Spain or Greece.

Evasion is distinguished from avoidance of income taxes in the sense that evasion encompasses activities to conceal net income, or falsify tax deduction, whereas avoidance is merely the rearrangement of one’s affairs, often with expert legal help, to minimize tax obligations. Evasion is illegal, a punishable offense; avoidance is not.

In any case a higher share of foreign trade in the economy does enhance a country’s taxable capacity , or the potential yield of the tax system. But even more significant than the degree of “openness” is the relative importance of natural resources in GDP and in exports . Virtually every study on the determinants of tax ratios that poorer countries with relatively large production of oil and minerals, and consequently a high share of resources in exports , have substantially greater taxable capacity than countries at the same level of per capita income and the same degree of “openness,” but with relatively small natural resource production and exports.

Countries with the highest tax ratios tend strongly to be those where natural resource exports are a large share of total exports.

Why? Two reasons

1. Large rents in natural resource extraction
2. In most countries, up to 21st century, natural resource extraction dominated by large mines – internal need for good books easy to xxx.

The poorest developing countries encounter the greatest difficulties in trying to raise share of T in GDP.

Poorest – those with T less than $800 in per capita Y (about 75 nations).

Let us look at systematic approaches that try to shed some light on the tax dilemma facing the poorest nations. What determines taxable capacity ?

Dozens of formulations have been tried, using numerous exploratory variables. One of most illuminating is by Roy Bahl, who used cross section data for 63 nations and estimating equation of the following form:

In effect: Bahl’s approach allows you to find out what you should expect the tax system of any LDC to yield if average rates for all countries applied to that countries tax base.

The results appear to confirm first, the relatively limited significance of per capita income by itself, and second the great importance of “openness” and natural resources in determining taxable capacity.

Results of Regression (cross section data)

What do results mean?

(Vertical) Intercept – Sort of a minimal tax ratio

1. Per capita Income outside the export sector NOT statistically significant in explaining why some countries collect higher share of T/Y. regression says: Increase of $1.00 in non-export income per capita leads to a rise of only 0.0024 cents on preXXX tax ratio .
2. Confirms importance of natural resources sector. (N _g ) in taxable capacity.

An increase of 1% of the share of mining in GNP would be expected to lead to a large increase in taxable capacity: about 0.57percentage points.

Why? The “Tax Handle Argument,” which we mentioned earlier. If the mining share in GDP is 10% in one country and only 1% in another the equation suggests we would expect ceterus parabus difference in their tax ratios of nearly almost a five percentage points.

What about variable X’y?

An increase of 1% in the share of non-mineral exports in GNP would be expected to increase a country’s tax ratio by 0.22% points. So, if Brazil has (X ¹ _y ) of 15% and Tanzania has (X ¹ _y ) of 5%, we would on that account alone expect tax ratio in Brazil to be 2.2% higher (0.22 x 10 percentage points) than Tanzania.

Why would we expect such a difference? Why would countries with a higher ratio of exports or imports to GDP have higher tax ratios than those where foreign trade was relatively less important? The reason as noted earlier, is that foreign trade, whether exports or imports , must normally pass through a bottleneck (port) where it can be more easily observed and quantified.

Therefore, taxes imposed upon foreign trade (import duties, export taxes) are imposed on tax bases that are relatively more accessible then income to the tax administration. Taxes on income , wealth , and even domestic consumption, are imposed on bases that are much more easily concealed from tax officials than is the case with import or export taxes. This is particularly true for income taxes. In Ghana in 70s, we found that almost 100% of personal income tax collection came from income taxes paid by civil servants. In Indonesia we reviewed all the income tax returns in the major city of Surabaya in 1982 and found that 90% of income taxes were paid by the minority Chinese community. Administration of these taxes requires administrative resources and skill levels that are in chronic short supply in developing nations.