Fiscal Restructuring

8/9/2019 Fiscal Restructuring

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Key Issues and Challengesin

Fiscal Restructuring in Asia

Ngee-Choon Chia


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Fiscal Restructuring

Integration into world economy

External environment- Fiscal

- Global economic slowdown

Domestic social and economic structure- Demographic landscape

- Asian Financial crisis


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Principles of Fiscal

Restructuring

1 Neutrality

- change in relative price incentive effects

2. Equity

- vertical equity: unlike treatments for unlike

situation- Horizontal equity: like treatments for like

situation more impt in an integrated world.


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External EnvironmentMarket Orientation

- restructuring of state-owned enterprises (SOEs)

- Fall in reliance from profit tax on SOE.

Eg Vietnam

1987 80%

1993 30% Tax reform CIT, PIT, VAT (Chart 1)

Financing of merit goods


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External Environment

Free Trade Areas

ASEANCommon Effective Preferential Tariff

(CEPT)

- tariffs of goods (40% Asean content) tobe reduced to 0 - 5% by 2003

- Vietnam by 2006; Myanmar by 2008


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External EnvironmentFree Trade Area

Importance of trade taxes in developing countries

(as % of GDP): Trade taxes 5.5%

Domestic taxes on goods and service 4.6%

Income taxes 4.5%

Broaden domestic tax baseEg: Cambodia :- reduced tariff from 30% to 14% by 2002- introduce VAT in 1999


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Global Integration as

Development StrategyEast Asian miracles

Asian developing countries to:

- lower separation fences- open to trade, investment and factor movements

Massive capital flows

Double edged sword- Ingredient for growth

- Recipe for crisis

Contagion in financial crisis, stock prices, real sectoreffects on employment.


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Opportunity Costs of

Integration

Abide by international rules of propriety

- East Asian tigers avoided costs

- Implementation of WTO obligations

cost: US$150 (Finger, 2000)

= basic education for women and girls, with higher return- Rodik (2000): international codes and standards targeting

at legal and financial systems in Asia

uncosted?


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Integration and

Macroeconomic Instability

Tax competition

Tax design financial capital allotted tax advantage- No thin capitation rule debt-equity ratio

- Asymmetric treatment of interest receipts and

interest payments. Increase in short term capital flows


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Globalization and

Domestic Tax Structure

Tax environment of developed countries impact

fiscal sustainability of developing countries Leader follower model

Fiscal termites (Tanzi)

Globalization and technological changesimpact domestic tax mix, base, structure and

redistribute impacts


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Globalization and


Personal income tax becomes less progressive

tax competition + mobility of highly skilledindividuals

Lowering of top marginal tax rates

Voting by feet?

Table 2: PIT still more attractive than in developed

countries

Brain drain? Bhagwatis brain drain tax?


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Globalization and


Unequal distribution of tax burden

- unskilled labour

- small and unsophisticated savers

- immobile assets


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Globalization and

Domestic Tax StructureCorporate income tax

Lower effective tax lower because of fiscal

incentives

Cost? Revenue foregone

Tax havens (termites nests)

- portfolio short term capital (fiscal termites)- siphoning tax base

(IMF, US$5 tn to US $7 tn deposited in tax havens


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Globalization and


Harmful tax competition?

developing countries losing $50 bn a year to

tax havens

= half of the aid budget to developing

countries


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Internet Technology Tax base erosion?

International indirect tax avoidance

agreement?


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Social environment:

Ageing PopulationFiscal sustainability

Falling tax revenue from slower economic growth

- dissaving by pensioners, equity prices? level of savings?Investments?

- lower dependency ratio, support ratio, shrinking tax base

- lower labour productivity

Eg: Singapore- average GDP growth fall to 5% in the next 10 years,

compared to 7.18% over the past 20 yrs.

consumption-based taxes?


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Ageing PopulationHeathcare Delivery and Financing

- medical advances and epidemiological shift

- long-term care?

- alternative means of financing

- public private partnerships?

- private insurance to replace welfare model?

- tax concessions issues


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Ageing Population

Pension

- covers only limited share of labor force

- civil servants

- larger enterprises in formal sector- enterprise-based to contributing schemes


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Ageing PopulationPension

pension reform: PAYG vs provident fund

provident fund

- equity issue from upside down subsidy

- tax shelter

alternative system: private system


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Conclusion

Expenditure Policy

- cost recovery? Private sector partnership?

Revenue

Improve tax administration New sources of revenue ? Carbon taxes?


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Conclusion Short term objective

- Tech crash, falling world trade volume

- New engine of growth? New markets?

- Expansionary policy

Long term objective

- ageing population and social goods and services

Fiscal Restructuring

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