1 Tax Base and Revenue Forecasting Tuan Minh Le Presented at Workshop on Public Finance Management in Bhutan Washington D.C., August 16-20

2 Purpose For budgeting. For automated establishment of tasks for collection of taxes.

3 Tax Base and Revenue Forecasting Models Macro-based modeling Micro simulation Monthly tax receipts modeling Input-output approach Aggregate national account approach

4 Macro-based modeling Basic data requirements Tax collection. GDP. GDP deflator. Relied on basic regression specifications. E.g., LnT = a + bLnGDP + e

5 Micro simulation To forecast tax revenue, and To assess impact of policy changes. An example (personal income tax) Basic data requirements: Individual or family-based annual income tax returns. Household surveys to cover non-filers. CPI, growth rates of population, GDP, and investment. PIT codes.

6 Micro Simulation--Steps Step 1: Sample design and database construction Sampling (e.g., stratified: Strata established on basis of income sources, place of residence, income level etc.) Data cleaning and sample weight (idea: distribution of samples compared with the one for whole population). Data aging. Forecasting of growth factors; e.g., population, GDP, investment etc.

7 Micro Simulation--Steps Step 2: Construction of typical taxpayer tax calculator model Typically three components: Personal income tax parameters. Taxpayer personal information. Tax calculator module. Step 3. Construction of aggregate tax calculator model and impact distribution analysis

8 Monthly tax receipts modeling Basic data requirements: actual monthly receipts. projected GDP growth or other tax base proxies. Where,

9 Input-output modeling (typical for VAT model) Basic data requirements: Input – Output Table. Household Expenditure Survey. Government expenditure. VAT code. Step 1: Construct and estimate VAT base Step 2: Estimate VAT collection taking into account compliance rate

10 Aggregate national account modeling Data requirements: GDP at market price and its components; e.g., private cons., government cons. (wage and non-wage government expenditures), investment, and trade balance. VAT code. Foreign expenditures in domestic market and expenditures abroad by residents Value added of exempt sector. Output purchased by taxed sector from exempt sectors. Input purchased by exempt sectors. Values of goods and services provided by zero-rated sectors.

11 Aggregate national account modeling VAT base (prior to further adjustments): * For framework of estimation, see Zee, “Value-Added Tax,” in Tax Policy Handbook, Shome, ed., IMF 1995.