1. Revenue Measures Regional Pension Policy Workshop Majuro, April 25-29, 2016
Thank you for providing me the opportunity here today to present the key findings of our recent study on fiscal policy and income inequality.
Income inequality has been rising in many parts of the world in recent decades. This, and the social tensions associated with fiscal consolidation that many countries have faced, have put the distributional impact of governments’ tax and spending policies at the heart of the public debate in many countries. Of course, the question of just how much redistribution the state should do is, at its core, a political one that economic analysis cannot answer. But I think that we can all agree that whatever is the desired level of redistribution, it should be done with fiscal instruments that achieve their distributional objectives at a minimum cost to economic efficiency.
The design of these growth-friendly, efficient redistributive fiscal policies is the focus of my presentation today. It may seem surprising that the Fund is entering into this debate on the design of redistributive policies. The truth of the matter is that we have been at this for a long time. Assessing the effect of tax and expenditure policies on efficiency, and any potential tradeoffs with distributional goals, has long been an important component of the IMF’s policy advice, particularly in the context of its technical assistance to member countries. Furthermore, the design of Fund-supported programs is inevitably influenced by the authorities’ distributional objectives.
Our concern for the poor in the design of Fund-supported programs has a longstanding history, going back to the 1980s. The 2011 Review of IMF programs—the “Conditionality Review”—indicated that an increasing number of Fund programs are taking into consideration social aspects, and that social spending has largely been safeguarded in programs. In some countries, such as Sierra Leone, and Togo, conditionality on subsidy reform was accompanied by an analysis of its distributional impact, and, in some cases, by conditionality on measures to protect the poor. Income distribution issues also surface during the Fund’s surveillance of member’s economic policies, especially during discussions of the potential effects of tax and expenditure reforms. I should also highlight the other reason why we are focusing on this issue, that is, the pressure on countries to redistribute, as reflected in public surveys. Our members would like to explore with us how they can pursue distributive policies in an efficient manner.
The key message that I want to convey today is that when it comes to fiscal redistribution, design matters. This is consistent with another recent IMF study, which finds that, on average, fiscal redistribution has been associated with higher growth. In our view, there is a diversity of experience across countries with redistributive policies. Some redistributive fiscal policies can help improve efficiency and support growth, such as those that enhance the human capital of low-income households. For other redistributive fiscal policies, a tradeoff between equality and efficiency may be involved. But even when these tradeoffs exist, the appropriate design of policies can help to minimize their adverse effects on incentives to work, save, and invest.
Csaba Feher
Disclaimer: The views expressed herein are those of the author, and should not be attributed to the IMF, its Executive Board, or its management

2. Revenue Measures
Reason: contribution revenues set below equilibrium level. Equilibrium level: revenues necessary for avoiding unfunded liabilities over a sufficiently long horizon. Implication: build-up of reserves over first decades of operation; reserves need to be protected. Issues: windfall to early cohorts, followed by falling returns (benefit per unit of contribution); need to increase labor costs at a time when productivity may start declining; compliance Preference: expenditure-side adjustments first

3. Contributions Policy Reforms Divergence from actual earnings
Expanding the contribution base
Definition of contribution liable income
Categorical exemption (occupations, income types)
Changing contribution rates
Total rate
Employer vs employee contributions (impact on compliance: reporting, accounting, perceptions)
Divergence from actual earnings
Minima and maxima
Presumptive taxes
Revenue measures must reflect overall pension and tax policy

4. Limits on Contribution Measures
Earnings-related social security taxes must result in earning-related benefits
> perceivable increases must result in somewhat higher benefits
> easy-to-understand benefit reductions must lead to lower contributions
Compliance is determined by subjective discount (trust) which is based on comparing contributions to current benefits
> limits to cutting current pensions
Competitiveness/tax competition
Impact on compliance
> contracting coverage (public sector and large enterprises)
> expansion of coverage?

5. Special Groups
Self-employed, agriculture and fishing, seasonal employment (tourism, construction, etc)
Problem:
Difficulties measuring and taxing income
Non-monetized income, incl. self-consumption
Seasonality of income
Solutions:
Rebuttable presumptive taxes
Less frequent payment schedule
Exemption – but only if poverty alleviation is addressed otherwise

6. Revenue Administration
Addressing leakages lessens the need for revenue policy reforms.
Control and enforcement
Incentives
Unified vs segregated collection
Mixed experience: theory argues for unification, practice does not
Emerging practice
Harmonized tax/contribution base
Presumption, in some cases
Reliance on concurrent benefits (access to health care, UB)
Treatment of contribution arrears as tax default
Benefits based on contributions paid and credited (> reconciliation of money and data flows)

7. Taxation of Benefits What are pensions? General tax policy principle:
Mandatory: Deferred compensation
Voluntary: Savings
General tax policy principle:
All income should be taxed once (not less, not more)
Application in practice:
Three phases: Pay-in, Accumulation, Pay-out
There should be one “T”: EET, ETE, EET.
Possibly: EE(t)T
Fiscal and welfare consequences to the choice tax scheme
Emerging practice: eliminating tax advantages

8. Thank you!
Thank you for providing me the opportunity here today to present the key findings of our recent study on fiscal policy and income inequality.
Income inequality has been rising in many parts of the world in recent decades. This, and the social tensions associated with fiscal consolidation that many countries have faced, have put the distributional impact of governments’ tax and spending policies at the heart of the public debate in many countries. Of course, the question of just how much redistribution the state should do is, at its core, a political one that economic analysis cannot answer. But I think that we can all agree that whatever is the desired level of redistribution, it should be done with fiscal instruments that achieve their distributional objectives at a minimum cost to economic efficiency.
The design of these growth-friendly, efficient redistributive fiscal policies is the focus of my presentation today. It may seem surprising that the Fund is entering into this debate on the design of redistributive policies. The truth of the matter is that we have been at this for a long time. Assessing the effect of tax and expenditure policies on efficiency, and any potential tradeoffs with distributional goals, has long been an important component of the IMF’s policy advice, particularly in the context of its technical assistance to member countries. Furthermore, the design of Fund-supported programs is inevitably influenced by the authorities’ distributional objectives.
Our concern for the poor in the design of Fund-supported programs has a longstanding history, going back to the 1980s. The 2011 Review of IMF programs—the “Conditionality Review”—indicated that an increasing number of Fund programs are taking into consideration social aspects, and that social spending has largely been safeguarded in programs. In some countries, such as Sierra Leone, and Togo, conditionality on subsidy reform was accompanied by an analysis of its distributional impact, and, in some cases, by conditionality on measures to protect the poor. Income distribution issues also surface during the Fund’s surveillance of member’s economic policies, especially during discussions of the potential effects of tax and expenditure reforms. I should also highlight the other reason why we are focusing on this issue, that is, the pressure on countries to redistribute, as reflected in public surveys. Our members would like to explore with us how they can pursue distributive policies in an efficient manner.
The key message that I want to convey today is that when it comes to fiscal redistribution, design matters. This is consistent with another recent IMF study, which finds that, on average, fiscal redistribution has been associated with higher growth. In our view, there is a diversity of experience across countries with redistributive policies. Some redistributive fiscal policies can help improve efficiency and support growth, such as those that enhance the human capital of low-income households. For other redistributive fiscal policies, a tradeoff between equality and efficiency may be involved. But even when these tradeoffs exist, the appropriate design of policies can help to minimize their adverse effects on incentives to work, save, and invest.
Disclaimer: The views expressed herein are those of the author, and should not be attributed to the IMF, its Executive Board, or its management