Why is it so difficult to implement a GST in Pakistan?

This paper is based on a presentation at the Sixth Annual Conference of the Lahore School of Economics, April 2010, and an International Growth Centre workshop at LUMS in June 2010

Should China revisit the 1994 fiscal reforms?

The 1994 reforms in China were remarkably successful in stabilizing the economy and raising revenues for the benefit of sustainable growth and permitting the central government to redistribute resources to poorer regions through an equalization framework. However, the rise of informal local borrowing in the absence of effective own-source revenues raises possible risks and imbalances in the future. There is thus a need to reconsider the fundamentals of intergovernmental fiscal relations, building on the basis laid in the 1994 reforms.Financial Economics, H2, H5, H6, H7,

Fiscal policy instruments and the political economy of designing programs to reach the poorest:

Poverty reduction, Hunger, Pro-poor policies, Government policy, Safety nets, information for development planning,

The distributional consequences of a tax reform on a VAT for Pakistan

To what extent do rich or poor lose or gain from different tax reform packages ? The authors compare the consequences of different options by analyzing actual patterns of consumption and production. Pakistan, which relies on a narrow tax base has difficulty ensuring that the tax system keeps pace with the growth in national income and activity, without frequent discretionary changes. These changes increase the distortions caused by cascading, with adverse effects on both exports and poor households. The authors'method of estimating the consequences of tax reform shows, for example, that a value added tax would make Pakistan's tax system more buoyant and reduce the production distortions.Environmental Economics&Policies,Public Sector Economics&Finance,Economic Theory&Research,Banks&Banking Reform,Municipal Financial Management

Multilevel financing of sustainable infrastructure in China— policy options for inclusive, resilient and green growth

COVID-19 has amplified existing imbalances, institutional and financing constraints associated with a development strategy that did not take sufficient account of challenges with emissions, environmental damage and health risks associated with climate change in a number of countries, including China. The recovery from the pandemic can be combined with appropriately designed investments that take into account human, social, natural and physical capital, as well as distributional objectives, that can also address commitments under the Paris agreement. An important criterion for sustainable development is that the tax regimes at the national and sub-national levels should reflect the same criteria as the investment strategy. Own-source revenues, are essential to be able to access private financing, including local government bonds and PPPs in a sustainable manner. Governance criteria are also important including information on the buildup of liabilities at all levels of government, to ensure transparent governance. Despite differences in political systems, the Chinese experiences are relevant in a wide range of emerging market countries as the measures utilize institutions and policies reflecting international best practices, including modern tax administrations for the VAT, and income taxes, and benefit-linked property taxes, as well as utilization of balance sheets information consistent with the IMF’s Government Financial Statistics Manual, 2014. The options have significant implications for policy advice and development cooperation for meeting global climate change goals while ensuring sustainable employment generation with transparency and accountability

Taxation reforms and changes in revenue assignments in China

The value-added tax (VAT) in China has the unusual feature that capital goods are included in the VAT base. In addition, most services are subject to the business tax, which is not creditable against VAT, but which accrues to local governments, and operates as a turnover tax. On grounds of economic efficiency, it would be desirable to eliminate these distortions so that domestic producers are not increasingly placed at a disadvantage as China dismantles tariff and nontariff barriers on competing goods. Reforming indirect taxation would however generate considerable revenue losses for local governments and, in the absence of any compensatory mechanisms, there would be significant impediments to the needed reforms. This paper focuses on the extent of revenue losses, their distribution across provinces, and possible options for compensation

Financing social policy in the presence of informality

We present a framework for the analysis of tax and benefit policy in countries with significant informality. Our framework allows us to jointly analyse the effects of various taxes and benefits on incentives for firms and workers to be informal and evade taxation. We find that payroll taxes and targeted minimum income guarantees targeted to households without formal employment are particularly harmful to labour formality and participation in the modern sector labour force. Conversely, Bismarkian benefits targeted to formal sector workers and basic benefits targeted to low income households represent the least distortionary way to redistribute. Attempts to use holes in the VAT to “protect” the poor are generally ineffective and open the avenues for rent seeking. We also find that a uniform value added tax and a corporate income tax represent the least distortionary way to raise revenues. The information generated from a simple VAT can be used, given the appropriately designed tax administration, to enhance the probability of detection of informal activities. Distributional issues are best handled by social policy measures and the personal income tax. Indeed, given the gainers and losers from tax reforms, social policies and intergovernmental transfers will be needed to ensure the political acceptance of the reforms. The precise mix of taxation and social policy will vary given different country characteristics and institutiona

Public investment for sustainable growth – managing subnational risks

The new global emphasis on public infrastructure for connectivity builds on the declarations of the UN Sustainable Development Agenda, and most recently the Belt and Road Initiative that seeks to connect global economies and recreate old trading links and generate new ones. Infrastructure also holds the key to addressing the Middle-Income Trap, along with education and innovation. Yet, there is considerable evidence from the EU, Latin America and China to show that while the advantages of connectivity investment are significant and necessary, in isolation these are far from sufficient in ensuring more inclusive and sustainable outcomes. Sustainable growth involves private investments that are channeled to the most promising and productive activities. Of course, firms respond to price signals, but with imperfect or incomplete information, tend to reinforce existing profit centers where the jobs tend to be concentrated (London, Barcelona, Milan, Shanghai, Guangzhou-Shenzhen, Santiago de Chile), typically resulting in increasing inequality, congestion and pollution. The resulting conurbations attract migrants, and in large metropolitan areas in Latin America and South Asia, there is a sharp increase in informality that leads to incentives for cheating that result in low productivity (see Levy, #ref1376#2008#/ref1376#). Regional connectivity may not always result in a more equal or level playing field and in the cases mentioned above may have exacerbated imbalances and inequalities. As seen in the UK, which has experienced a strong recovery since the 2008 crisis, the Brexit vote suggests that there may be a political backlash if employment and income generation, or adjustment costs, are not more evenly distributed. In this paper, we argue that a combination of instruments is likely to be needed at both national and local levels, including tax handles, and full information, particularly involving liabilities within an intertemporal framework, to ensure sustainable and inclusive development. Since most of the policies are implemented at the sub-national level, local financing, institutions and incentives affect the possibility of creating new “growth hubs” or clean and efficient cities that are needed for sustainable growth. We draw on evidence from the EU, China and Chile, which is considered by the IFIs as one of the leading countries as far as investment management is concerned. We also use empirical illustrations based on the theory of reform applied to the Chilean case to illustrate how to improve on the investment allocations that are already praised as arms-length by the Bretton Woods Institutions, to develop a sustainable growth strategy that also addresses the middle-income trap. This has wider applications in Europe, and China, and in the implementation of the Belt and Road Initiative