1. Economic policy instruments to ensure fiscal transition Jean-François Brun Gérard Chambas CERDI Module 7

2. Outline I - Direct taxation II - Local taxation III - Taxation of the “informal sector” EU Workshop Brussels 20142

3. I Direct taxation - households Traditionally applied with the objective of horizontal and vertical equity Public and private salaried employees (large and medium-sized enterprises, NGOs, etc.) Entrepreneurs (agricultural profits, business earnings,… ) Liberal professions (non-commercial profits) Owners of movable assets Owners of real estate assets EU Workshop Brussels 20143

4. I Direct taxation - households Long-established schedular system - specific tax applied to each component of income (schedule) General income tax (global tax on aggregate income) Dual tax: innovation or new presentation of an old idea?  “dual tax” applies a progressive scale to wages and a flat tax to capital incomes  “dual tax” different from the Scandinavian model EU Workshop Brussels 20144

5. I Direct taxation - enterprises Enterprises subject to direct taxes: Corporate tax, business earnings, business licences, property tax Tax on profit and minimum presumptive tax Tax on distribution of dividends Business licences Property tax Enterprises: major tax collectors (VAT, excise duties, tax instalments, tax on wages) EU Workshop Brussels 20145

6. 6 II Local taxation There have been significant advances in the improvement of central taxation systems in developing countries. Component in part neglected: mass direct taxation (not including direct taxation of wage-earners, investment income or the income of the largest companies) Little or no attention given to local taxation despite a certain inclination to decentralisation. EU Workshop Brussels 2014

7. 7 II Local taxation Should not be defined in isolation - risk of undermining achievements made at central level. Central taxation must remain the reference. Need for coherence of the overall taxation system (central and local taxation must form a coherent ensemble). Need for effective coordination between local taxation and central taxation - role of coordination performed by the central state Apply the same principle as those applied to central taxation: e.g. segmentation of the tax base (legislation and administration). EU Workshop Brussels 2014

8. 8 II Local taxation Theoretical criteria of the local tax base: fixed asset bases compared with mobile asset base (central taxation system), stabilizing role of revenue (central taxation system) or not State level best placed to access information on part the tax base (large companies, Avoid economic disincentives (objective of neutrality) Reduce the motivation for corruption (modernization of instruments, payment by electronic means, mobile) Adaptation for poor populations Avoid dispersal on a multitude of taxes EU Workshop Brussels 2014

9. II Local taxation The main categories of resources: Own local revenues Shared revenues Discretionary transfers Mass taxation: specific obstacles in developing countries but an asset for direct link with citizens - notion of accountability reinforced, whereas it is undermined with VAT and taxation on wages Context of large cities and other communities, rural in particular - inequality of tax potential EU Workshop Brussels 20149

10. II Local taxation Adapt the tax regime in accordance with the following principles: Segmentation of certain taxes in accordance with the characteristics of the tax base (Property tax - presumptive residency tax - flat-rate residency tax/traditional patent) Simplification in proportion to the challenges Pragmatism Optimization (fiscal space approach) Fiscal equalization on the basis of central resources EU Workshop Brussels 201410

11. II Local taxation Other components of local resources Tax on utilities (water, electricity) Basis: indicators of ability to pay and use of local public facilities Low collection costs Weakened accountability Handicap for distribution company Local tax on telephone communication, in particular for mobile phones EU Workshop Brussels 201411

12. Introduction  “Shadow economy” a major structural obstacle to the mobilization of public revenues: A major obstacle for tax mobilization: similar to the share of agriculture in the GDP A structural obstacle: few policy measures can be implemented to increase the tax mobilization  “Shadow Economy” a fuzzy concept Shadow economy measured by the tax gap (Tezcan and Ünlükaplan, 2010): a partial indicator Non recorded activities (Smith, 1994; Schneider, 2000 and 2010): a heterogeneous category (Morrison and Mead, 1996)  Failure of policies targeted at the taxation of “informal” activities III taxation of the “shadow economy” EU Workshop Brussels 201412

13.  “Shadow economy” often identified as total non registered activities (NRA) excluding criminal activities (Schneider, 2000)  Measurement of NRA  Proxies: electricity consumption, (Johnson et al., 1997) ; demand for cash, (Tanzi, 1983)  Micro-economic approach (De Paula and Scheinkman, 2008)  Schneider indicator uses an unobservable variable approach (MIMIC) III taxation of the “shadow economy” EU Workshop Brussels 201413

14. Stylised facts - Schneider indicator EU Workshop Brussels 201314

15. III Taxation of the “shadow economy” Schneider indicator - Correlation with public revenue ratio EU Workshop Brussels 201415

16. Micro-activities (MA) Central African country example  Large numbers: 1.9 million MA  Poorly identified: 40,000 MA in the files of the tax administration, 2.1% of the total  0.2% of tax revenue  Low additional tax revenue potential, scattered and barely attainable by central tax administrations (small-sized activities, no accounting, widespread poverty of micro- entrepreneurs)  Unsuitable tax legislation III taxation of the “shadow economy” EU Workshop Brussels 201416

17.  Small business (SB):  Large number in the same country, 77,000 SBs, only 11,226 in the files of the tax administration (14.5%). Still low tax revenue potential of SBs  Medium business (MB):  Not large numbers : 3,500 businesses in the Medium Tax Unit  Non sophisticated tax evasion (absence of tax returns, no payments of taxes, no invoices, etc.).  Tax evasion increases the profitability of SBs and MBs, introduces distortions, but the development of SBs and MBs is non contingent to the tax evasion III taxation of the “shadow economy” EU Workshop Brussels 201417

18.  Large scale Systemic TEA benefiting from political support (more than 400,000 second-hand vehicles shipped to Nigeria from Benin and Togo)  Exporting countries. Partial taxation. Bias favouring TEA activities to the detriment of other activities (agriculture, trading platforms, etc.)  Receiving countries. Vulnerability of tax revenue. Economic distortions favouring TEA. Small scale STEA: Many tax evaders but global volumes sometimes important.  E.g. trafficking in hydrocarbons in the Gulf of Benin  Development of STEA dependent on tax evasion  Tax potential is high III taxation of the “shadow economy” EU Workshop Brussels 201418

19. Micro-activities Small scale STEA Large scale STEA EU Workshop Brussels 201419

20.  Administration  Modernisation of tax administration (simplifying formalities, implementation of risk analysis)  Computerisation of tax administration, operation of single taxpayer identification number (TIN)  Cross-checking of data files and improved investigation  Defining strategy with priorities  Fraud: determining priorities in what is at stake, based on an analysis of fraud and the potential benefits of a reduction in fraud  Priority on the effectiveness of penalties/sanctions  Limits of lowering rates as an instrument to fight TEA (Dabla-Norris, Feltenstein)  Micro-activities: search for complementarity with local authorities (Chambas, 2010) III taxation of the “shadow economy” EU Workshop Brussels 201420

21. Conclusions VAT remains the key instrument for tax transition Direct taxation of households generally concerns exclusively wages (1% to 2% of the population) Local taxation has limited revenue potential but important in terms of accountability Taxation of the informal sector has a large potential from the point of view of fraud but a vey limited potential from the point of view of micro-activities (MA) For MA educational aspect and accountability effect EU Workshop Brussels 2014 21

22. Thank you for your attention EU Workshop Brussels 2014