Tax Policy as Structural Reform
VITOR GASPARDIRECTOR, FISCAL AFFAIRS DEPARTMENT
INTERNATIONAL MONETARY FUND
CENTRE FOR STRATEGIC AND INTERNATIONAL STUDIES
JAKARTA, INDONESIA
JULY 14, 2017
Motivation
1
Note: Top-10 and bottom-10 countries in terms of changes in social welfare over 2003-15.
Source: Hellebrandt and Mauro (2016) and IMF staff calculations.
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
0 10,000 20,000 30,000 40,000
Equ
ally
dis
trib
ute
d e
qu
iva
len
t in
co
me
($
PP
P)
Mean income
Correlation coefficient=0.997
Note: Reported is the relationship for 2015. Inequality aversion parameter=0.5.
Source: Hellebrandt and Mauro (2016) and IMF staff calculations.
-50 0 50 100 150
Taiwan Province of ChinaJapan
SingaporePhilippines
New ZealandLaos
Korea, Republic ofSri LankaAustraliaMauritiusPakistan
IndonesiaTimor-Leste
ThailandHong Kong
NepalIndia
MongoliaChina
Viet NamMalaysia
Mean income Income equality
Outline
Motivation: need for revenue-enhancing reforms
Structural reform is needed to raise productivity and growth
Fiscal structural reform
Fiscal support for structural reform
2
Motivation: need for revenue-enhancing reforms
3
Revenues traditionally low: focus on Asia, ASEAN
44
Source: IMF World Revenue Longitudinal Dataset (WoRLD)
Tax Revenue as percent of GDP: income groups
and ASEAN
unweighted average
8
10
12
14
16
18
20
22
24
1990 1995 2000 2005 2010 2015
High income Low income ASEAN
ASEAN(+3) ASEAN-5
Source: IMF World Revenue Longitudinal Dataset (WoRLD)
Tax Revenue as percent of GDP: regions
unweighted average
10
12
14
16
18
20
22
24
26
28
1990 1995 2000 2005 2010 2015
Asia and Pacific Africa
Europe Americas and Caribbean
Positive relationship: tax and GDP per capita
55
Tax and GDP per capita, 2015Low and l middle income countries
Myanmar
Indonesia
Cambodia
Philippines
Lao
Vietnam
0
5
10
15
20
25
30
35
0 1000 2000 3000 4000 5000 6000
Reve
nu
e a
s p
erc
en
t o
f G
DP
GDP per capita
World Distribution of Tax to GDP ratio
2016
Source: IMF World Economic Outlook (WEO) and IMF Staff Source: IMF World Revenue Longitudinal Dataset (WoRLD)
Tax capacity and economic development
66
Source: Vitor Gaspar and others (2016)
Taxes and Real GDP per Capita,
2012
0
5
10
15
20
25
30
35
40
45
50
2.0 2.5 3.0 3.5 4.0 4.5 5.0
Ta
x t
o G
DP
Log Real GDP per capita
Advanced
Developing
0
5
10
15
20
25
30
35
40
45
50
2.5 3.0 3.5 4.0 4.5
Tax to G
DP
Log of 50 year averages of real GDP per capita
1850-1899
1900-1949
1950-1980
Taxes and Real GDP per Capita, by time period
Source: Vitor Gaspar and others (2016)
Tax capacity and economic development
77
Source: Vitor Gaspar and others (2016)
Fiscal policies are structural policies
8
Fiscal structural reform
Policies to help push out the
technology frontier
Policies to help narrow the
productivity gap between firms
Fiscal support for structural reform
Understanding productivity calls for
research based on microeconomics
and micro-datasets
Fiscal policies are structural policies
Source: Dabla-Norris and others (2015).
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
75
77
79
81
83
1983-93 1990-00 1997-07
TFP Frontier Growth Rate
(percent)
Average TFP Level
(percent of frontier)
Advanced economies: Stochastic Frontier
Analysis, by Country-Sector
9
Fiscal structural reforms: Policies to push out the technology
frontier through encouraging innovation
10
R&D tax incentives play an important role
11
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0.40
0.45Indirect government support through R&D tax incentives Direct government funding of Business Enterprise R&D
11
Direct Government Funding of business R&D and R&D tax incentives,
2014 (Percent of GDP)
Source: OECD
Fiscal Incentives to R&D Help Push Out the Frontier
12
≈ 0.4 percent of
GDP budgetary
cost
40 percent
cost reduction
of extra R&D
for firms
R&D Tax
credits
R&D Subsidies
40 percent
increase in
private R&D
investment
5 percent
higher GDP
over the
long-run
Effective Design
Critical
Note: Estimates are averages across OECD countries.
…but “Patent Boxes” should be avoided
Ineffective – no effect at all in
two countries
Only effective where tax relief is large
and link with R&D strong
Inefficient – as relief depends
on income, not R&D
Negative international
spillovers – focus is on
attracting mobile IP income
(aggressive tax competition)
Synthetic Control Estimation Results: Intellectual Property
Box and Private R&D (Log of real R&D spending)
13
-0.6
-0.3
0.0
0.3
199
0
199
2
199
4
199
6
199
8
200
0
200
2
200
4
200
6
200
8
201
0
201
2
Reform
-0.6
-0.3
0.0
0.3
199
0
199
2
199
4
199
6
199
8
200
0
200
2
200
4
200
6
200
8
201
0
201
2
Reform
-0.2
-0.1
0.0
0.1
0.2
0.3
199
0
199
2
199
4
199
6
199
8
200
0
200
2
200
4
200
6
200
8
201
0
201
2
Reform
1. France
-1.6
-1.2
-0.8
-0.4
0.0
0.4
199
0
199
2
199
4
199
6
199
8
200
0
200
2
200
4
200
6
200
8
201
0
201
2
Reform
Actual Synthetic Control
2. Spain
4. Netherlands3. Belgium
IP box
ineffectiveIP box
ineffective
IP box effective, but
costly
IP box effective, but
costly
Fiscal structural reforms: Policies to help narrow the productivity
gap between firms
14
Productivity gaps between firms can be large
0
4
8
12
16
20
24
28
32
0 3 6 9 12 15 18 21 24
Pe
rce
nt o
f firm
s
Firm revenue productivity
More efficient country
Less efficient country
Distribution of Firm-Level Revenue Productivities
Sources: ORBIS; and IMF staff estimates.
Note: The figure shows the distribution for firms in the manufacturing sector for each country. More (less) efficient country is defined as a country at the
75th (25th) percentile of the distribution of resource allocation efficiency, based on the ORBIS sample.
0
5
10
15
20
25
30
35
40
-2.6 -1.8 -1.0 -0.2 0.6 1.4 2.2 3.0
Perc
ent of firm
s
Log of firm revenue productivity scaled by corresponding country-industry average
15
Eliminating distortions could improve productivity and lift growth
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
AEs EMEs LIDCs
Re
al G
DP
gro
wth
(p
erc
en
t)
Estimated Annual Real GDP Growth Effects from Reducing Resource Misallocation
Sources: ORBIS; World Bank, Enterprise Surveys; and IMF staff estimates.
Note: The figure shows medians across country groups. Estimates assume a 20 year transition period, that other sectors could achieve TFP gains similar to those estimated for
the manufacturing sector, and that there are no adjustment costs. AEs = advanced economies; EMEs = emerging market economies; LIDCs = low-income developing countries.
Adds
1% to
real
GDP
growth
16
Upgrading the tax system reduces misallocation
Selection of tax distortions that discriminate across:
1. Sources of financing
2. Small and large firms
3. Capital asset types
4. Formal and informal firms
17
Example 1: Corporate debt bias affects investment decisions that depend more on equity, such as R&D
18
0
5
10
15
20
25
30
0 10 20 30
Exte
rna
l e
qu
ity d
ep
en
den
ce
R&D Intensity
Sources: Brown and Martinsson (2016); and IMF staff estimates.
Note: R&D intensity is the average of industrial research and development
expenditures normalized by vale added across OECD countries). External
equity dependence is the net external equity issues to total assets ratio for the
median U.S firm in each industry.
Advanced Economies: R&D Intensity and External
Equity Dependence, by Industry
Effective Marginal Tax Rates for Debt and Equity
Financed Investment, for a PIT taxed investor
Source: IMF, 2016, “Tax Policy, Leverage and Macroeconomic Stability,” IMF Policy Paper.
AUT
BEL
BGR
DNK
EST
FINGRC
HUN
IRL
LVA
LUXMLT
NLD
POL
ROU
SVK
ESP
GBR
HRV
MKD
NOR
CHE
JPN
0
10
20
30
40
50
60
70
80
90
100
-20 0 20 40 60 80 100
Ne
w E
qu
ity
Debt
Tax reforms can reduce debt bias
BanksNon-financial corporations
20 pp
13.7
pp
ACE introduction ACE introduction
Source: IMF, 2016, “Tax Policy, Leverage and Macroeconomic Stability,” IMF Policy Paper.
19
Introduction of an Allowance for Corporate Equity System in Belgium
20
1
2
3
4
5
<10
11
―2
0
21―
30
31―
40
40+
Ave
rag
e n
um
ber
of e
mp
loye
es
(re
sca
led
so
firm
s le
ss th
an
fiv
e
ye
ars
old
= 1
)
Firm age (years)
Countries with lower tax rate for small firms
Sources: KPMG; World Bank, Enterprise Surveys; and IMF staff estimates.
Note: Lines represent the median for each group.
Developing Countries: Employment by Firm Age
Example 2: Lower taxes for small firms creates a small business trap
Mozambique: Distribution of ISPC Taxpayers, 2015
Compared with 2010
Source: Swistak, Liu, and Varsano 2017.
Note: The horizontal axis shows the distribution of imposto simplificado para
pequenos contribuintes (ISPC) taxpayers by turnover bins of Mt$100,000.
0
20
40
60
80
100
120
10 15 20 25 30 35 40
Nu
mb
er
of IS
PC
ta
xp
aye
rs
Turnover (MT$100,000)
2010
2015
Small firms face high tax compliance costs
21
156
117
88
60
133 3 2
0
25
50
75
100
125
150
175Tax c
om
plia
nce c
osts
as s
hare
of sale
s
(ra
tio
of S
ME
s to
la
rge
firm
s)
Source: Dabla-Norris and others, 2017
Note: Average tax compliance costs as a share of sales of SMEs divided by tax compliance as a share of sales of large firms. Data from different years, and definition of SMEs
differs across countries.
Developing Countries: Tax compliance burden of small firms
(as a percent of total sales)
Lower tax compliance costs help small and young firms
22
20
40
60
80
100
Countries with lowTAQI score
Countries withhigh TAQI score
La
bo
r p
rod
uctivity o
f sm
all
firm
s
(ave
rag
e p
rod
uctivity o
f m
ed
ium
-siz
ed
a
nd
la
rge
firm
s =
10
0)
Developing Countries: Tax Administration Quality Index
and Labor Productivity of Small and Young Firms
Source: Dabla-Norris and others, 2017.
Note: Labor productivity refers to sales divided by the number of employees. Small firms have fewer than 20 employees; young firms are less than seven years old. A higher score
on the TAQI implies lower tax compliance costs. Countries with a low (high) TAQI score are those at the 25th (75th) percentile of the sample distribution. The TAQI uses country-
specific information on different dimensions of tax administration that are likely to matter for tax compliance costs faced by firms, from the IMF’s Tax Administration Diagnostic
Assessment Tool (TADAT). Medium-sized and large firms are those with 20 or more employees. Mature firms are those seven or more years old.
Small firms
20
40
60
80
100
Countries with lowTAQI score
Countries with highTAQI score
La
bo
r p
rod
uctivity o
f yo
un
g f
irm
s
(ave
rag
e p
rod
uctivity o
f m
atu
re firm
s =
10
0)
Young firms
Example 3. Differentiated tax treatment across assets
23
Developing Countries: Machinery as a Share of Total Assets,
by Industry (Percent of total assets)
Sources: Oxford University Center for Business Taxation; World Bank, Enterprise Surveys; and IMF staff
estimates.
Note: Tax disparity is the effective marginal tax rate (EMTR) on machinery minus the EMTR on buildings.
Countries with high (low) EMTR disparity are those with EMTR differences above (below) the median across
countries. Total assets are measured as the sum of machinery and buildings.
40 45 50 55 60 65 70 75 80
Paper
Electronics
Nonmetallic and plastic materials
Textiles
Metals and machinery
Other manufacturing
Garments
Auto and auto components
Chemicals and pharmaceutics
Other transport equipment
Leather
Food and beverage
Wood and furniture
Countries with low tax disparity Countries with high tax disparity
Tax disparities across
capital asset types steer
investors toward lower-
return, tax-favored,
investments
Example 4. International spillovers
24
Singapore
Singapore
Indonesia
IndonesiaThailand
ThailandMalaysia
Malaysia
Vietnam Philippines
Myanmar Myanmar0.0%
1.0%
2.0%
3.0%
GDP FDI stock
Share of world's FDI stock relative to share of GDP,
ASEAN
20
25
30
35
40
45
50
1990 1995 2000 2005 2010 2015
High income Middle income Low income
Asia ASEAN ASEAN(+3)
ASEAN-5
Statutory corporate income tax rates, historic trend
Sources: IMF Coordinated Direct Investment Survey (CDIS), IMF World Economic
Outlook (WEO) and IMF Staff
Sources: IMF historic corporate tax database
Fiscal policies to address inadequacy of current international tax framework
25
Current international tax
architecture
Inadequate compromise
on taxing rights
Vulnerable to tax
avoidance and evasion
Distortive; propagates
economic inefficiencies
Highly susceptible to tax
competition
G20/OECD BEPS project
Inclusive Framework: 100 countries committed to implement 4 minimum standards
Brunei Darussalam, Indonesia, Malaysia, Singapore, Thailand, Vietnam
Automatic Exchange of Information (AEOI)
Toolkits for LICs developed under the Platform for Collaboration on Tax
Regional cooperation and coordination
Initiatives to address
shortfalls
Fiscal support for structural reforms
26
Most labor and product market reforms strengthen medium-
term public finances indirectly by raising output
Impact of labor market reforms on fiscal outcomes depends on
cyclical conditions
Package combining reforms with well-designed fiscal support
can yield net medium-term fiscal gain
Fiscal and non-fiscal incentives can facilitate reforms by
alleviating transition and political costs
Fiscal support for labor and product market reforms
27
Background slides
28
29
-50 0 50 100 150
CroatiaCentral African Republic
MadagascarBurkina Faso
GreeceGuinea-Bissau
ZambiaItaly
JamaicaLiberia
UzbekistanIndia
GeorgiaIran
TanzaniaMongolia
ChinaViet NamMalaysiaBelarus
Change in equally distributed equivalent income over 2003-15 (%)
Mean income Income equality
Note: Top-10 and bottom-10 countries in terms of changes in social welfare over 2003-15.
Source: Hellebrandt and Mauro (2016) and IMF staff calculations.
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
0 10,000 20,000 30,000 40,000
Equ
ally
dis
trib
ute
d e
qu
iva
len
t in
co
me
($
PP
P)
Mean income
Correlation coefficient=0.997
Note: Reported is the relationship for 2015. Inequality aversion parameter=0.5.
Source: Hellebrandt and Mauro (2016) and IMF staff calculations.
gamma=2.0
Correlation coefficient=0.953
0
5000
10000
15000
20000
25000
30000
35000
40000
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000
Equ
ally
dis
trib
ute
d e
qu
iva
len
t in
co
me
($
PP
P)
Mean income
gamma=0.5
Correlation coefficient=0.997
gamma=1.5
Correlation coefficient=0.976
30
Note: Reported is the relationship for 2015. Inequality aversion parameters=0.5, 1.5, and 2.0.
Source: Hellebrandt and Mauro (2016) and IMF staff calculations.
-100 -50 0 50 100 150
Central African Republic
Croatia
Zambia
Guinea-Bissau
Madagascar
Burkina Faso
Greece
Italy
Macedonia, FYR
Jamaica
Iran
Uruguay
Tanzania
Georgia
Peru
Mongolia
China
Viet Nam
Malaysia
Belarus
Changes in social welfare over 2003-15 (%)
Mean income Income equality
gamma=1.5
-100 -50 0 50 100 150
Central African Republic
Zambia
Guinea-Bissau
Croatia
Madagascar
Italy
Greece
Burkina Faso
Macedonia, FYR
Benin
Uruguay
Tanzania
Russian Federation
Mongolia
Georgia
China
Peru
Viet Nam
Malaysia
Belarus
Changes in social welfare over 2003-15 (%)
Mean income Income equality
gamma=2.0
-100 -50 0 50 100 150
Croatia
Central African Republic
Madagascar
Burkina Faso
Greece
Guinea-Bissau
Zambia
Italy
Jamaica
Liberia
Uzbekistan
India
Georgia
Iran
Tanzania
Mongolia
China
Viet Nam
Malaysia
Belarus
Changes in social welfare over 2003-15 (%)
Mean income Income equality
gamma=0.5
31
Note: Top-10 and bottom-10 countries in terms of changes in social welfare over 2003-15.
Source: Hellebrandt and Mauro (2016) and IMF staff calculations.
Interplay between reforms and fiscal policy
32
Labor and Product
Market ReformsFiscal Policy
Can bring forward benefits of certain
reforms and enhance likelihood of
their implementation
Can yield medium-term fiscal gains by increasing output (positive indirect effect, reform-specific
direct effect)
Fiscal gains from product market reforms
33
Note: Based on empirical analysis where t=0 is the year of the major reform shock. Solid red lines denote the average estimated response to the shock;
dashed yellow lines denote 90 percent confidence intervals.
-1
-0.5
0
0.5
1
1.5
2
2.5
3
3.5
4
-1 0 1 2 3 4 5 6
Pe
rce
nt
Years
-10
-8
-6
-4
-2
0
2
4
-1 0 1 2 3 4 5 6
Pe
rce
nt o
f G
DP
Years
Panel 1. Output Panel 2. Public Debt-to-GDP
Fiscal gains from unemployment benefit reforms
34
-2
-1
0
1
2
3
4
5
6
7
8
-1 0 1 2 3 4 5 6
Pe
rce
nt
Years
-16
-14
-12
-10
-8
-6
-4
-2
0
2
-1 0 1 2 3 4 5 6
Pe
rce
nt o
f G
DP
Years
Panel 1. Output Panel 2. Public Debt-to-GDP
Note: Based on empirical analysis where t=0 is the year of the major reform shock . Solid red lines denote the average estimated response to the shock;
dashed yellow lines denote 90 percent confidence intervals.
Fiscal effects of employment protection reforms depend on cyclical conditions
35
Panel 1. In periods of slack Panel 2. In periods of expansion
Note: Based on empirical analysis where t=0 is the year of the major reform shock. Solid yellow lines denote the estimated response to the reform shock; dashed yellow lines
denote 90 percent confidence intervals. The solid red line shows the unconditional result, i.e., the average estimated impact across different growth regimes. The growth regime
(expansion vs. slack) is defined using a smooth transition function as in Auerbach and Gorodnichenko (2012), which takes values between 0 and 1 depending on the extent to
which the economy is in recession. The charts show estimated impulse responses for large and low values of the smooth transition function, that is, assuming F(z)=0.75 and
F(z)=0.25
-6
-4
-2
0
2
4
6
8
10
12
14
-1 0 1 2 3 4 5 6
Pe
rce
nt o
f G
DP
Years
-16
-14
-12
-10
-8
-6
-4
-2
0
2
-1 0 1 2 3 4 5 6
Pe
rce
nt o
f G
DP
Years
Impact on Public Debt-to-GDP Ratio
Fiscal gain from combining employment protection legislation reform with fiscal support
36
Effect of employment protection legislation reform on public debt-to-GDP
ratio under weak business cycle conditions
(deviation from no reform scenario, in percentage points)
Note: t=0 is the year of the shock. The solid blue (red) lines represent the average results under fiscal contractions (expansions). The fiscal policy regime (expansion vs.
contraction) is defined using a smooth transition function as in Auerbach and Gorodnichenko (2012), which takes values between 0 and 1 depending on the extent to which the
economy is experimenting fiscal contraction. See supplementary slides for details. The charts show estimated impulse responses for large and low values of the smooth transition
function, that is, assuming F(z)=0.75 and F(z)=0.25. F(z)=0.75 (0.25) typically corresponds in the sample to an unanticipated government consumption shocks of about -
0.85(+0.85) percent of GDP. See SDN Appendix for details.
-6
-4
-2
0
2
-1 0 1 2 3 4 5 6
under fiscal expansion
under fiscal contraction
Political economy case: net fiscal gain of product market reform remain even with upfront fiscal support
37
Note: Based on numerical simulations including estimated output effects of reforms and current country-specific parameters for marginal tax rates, the real interest rate and the
trend growth rate of the economy, the bars represent the net fiscal gains associated with product market reform, as measured by the improvement in the overall fiscal balance
relative to the no-reform scenario over the medium term. The red bar represents the average net medium-term fiscal gain without an upfront fiscal support. The yellow bar
captures the average gains associated with reforms supported by 1% of GDP fiscal support. The error bars show minimum and maximum values in OECD countries. The medium-
term multiplier for the fiscal support is conservatively assumed to be zero in this exercise. See SDN Appendix for details.
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
No Fiscal Support Fiscal Support
Pu
blic
De
bt to
GD
P
Net Fiscal Benefit of Product Market Reforms under Weak Business
Cycle Conditions (Positive Values Denote Improvement)
Raising productivity is a top challenge
-3
-2
-1
0
1
2
3
1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015
Growth in Total Factor Productivity, 1990―2016
(Five-year average growth rate, percent)
1. Advanced Economies 2. Emerging Market Economies 3. Low-Income Developing Countries
Source: Adler and others 2017.
Note: Group averages are weighted using GDP at purchasing power parity.
38
39
b=1-(y1/y2)^gamma
y2/y1 2 3 4 5 10 25
gamma
0.2 0.13 0.20 0.24 0.28 0.37 0.47
0.5 0.29 0.42 0.50 0.55 0.68 0.80
1.5 0.65 0.81 0.88 0.91 0.97 0.99
2.0 0.75 0.89 0.94 0.96 0.99 0.998