Center for Taxation and Public Governance
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| Tax Policy Coordinator: Dr. Bjorn Volkerink 2008-2009: September 8, 2008 – October 10, 2008 |
Course content
Governments need tax revenue in order to finance public spending. Various tax bases are generally
used to raise revenue yet the actual tax structures (measured in terms of, for example, the share of
indirect versus direct taxes) in most countries diverge significantly.
In recent years, developed and developing countries alike, have increasingly substituted income
taxation by consumption taxes. In addition, by now, most countries in the world use a VAT as one
of the major sources of domestic tax revenue. One of the main drivers for this is the supposed
neutrality and low costs of a VAT. Another trend is revenue neutral tax reforms in a large number of
countries aimed at lowering marginal tax rates by base broadening. Some countries, notably former
transition counties have gone even further by opting for a flat tax.
Increasing regional and international integration of economies has lead to a decrease in effective
import and export duties, which have an immediate impact on government revenues. Increasing
regional integration (e.g. regional free trade zones) also raises incentives for tax arbitrage and tax
competition, mostly in income taxation (and excises). The available options for maintaining a
sufficient level of domestic tax revenue thus appear to be limited.
This block discusses the relative merits of various tax interventions bases on a uniform set of
assessment criteria.
Topics that will be discussed include:
1) Rationales for government expenditures. Governments provide goods such as (basic) education,
health care, infrastructure, energy, etc. Not all of these services can be financed by benefit taxation;
2) Trends in taxation: a common theme in tax reform over the past two decades has been the
gradual increase in importance of consumption taxation. A main driver for this was the widespread
introduction of the VAT. Are there other similar worldwide trends?
3) Tax equivalences: As opposed to what most people think, the tax base of consumption taxes and
(labour) income taxes are quite alike. To a certain extent, these taxes can therefore be substitutes.
4) Assessment criteria for taxes / tax structures
a) Economic impact of taxation. It is obvious that taxes impact on employment levels, investment,
trade patterns and possibly even on growth levels. What are the relative (economic) disadvantages
of various taxes?
b) Equity effects of taxation: consumption taxes like the VAT are said to be regressive but the
impact on post-tax income distribution of wage taxes (and social security contributions) and excises
may not do much better. What is the effect of various taxes on the distribution of resources, and
who actually pays a tax (what is the economic incidence of taxes)?
c) Revenue estimation: tax reforms are often only politically feasible when revenue-neutral. The
effects in terms of revenue of tax reforms are much more difficult to estimate that next year’s
revenue at an unchanged tax regime. What are best practices in revenue forecasting? Does one
need to have a full-fledged model of the economy, or does the back of an envelope suffice?
d) Costs of raising revenue: it is clear that it is costly to raise revenue as a full fledged tax
administration is required. Taxpayer, however, also incur costs in order to fulfil their tax payments.
These costs can be quite high, but how high?
5) Tax competition: even increasing globalisation decreases the barriers that exist for the free
movement of production factors, mostly (financial) capital. This may erode the revenue potential for
governments all over the world. Tax competition may also result in order to attract capital. This is
likely to hurt the immobiles, low-skilled workers in particular. Is tax coordination warranted or does
tax competition eventually makes everyone better off?
Governments need tax revenue in order to finance public spending. Various tax bases are generally
used to raise revenue yet the actual tax structures (measured in terms of, for example, the share of
indirect versus direct taxes) in most countries diverge significantly.
In recent years, developed and developing countries alike, have increasingly substituted income
taxation by consumption taxes. In addition, by now, most countries in the world use a VAT as one
of the major sources of domestic tax revenue. One of the main drivers for this is the supposed
neutrality and low costs of a VAT. Another trend is revenue neutral tax reforms in a large number of
countries aimed at lowering marginal tax rates by base broadening. Some countries, notably former
transition counties have gone even further by opting for a flat tax.
Increasing regional and international integration of economies has lead to a decrease in effective
import and export duties, which have an immediate impact on government revenues. Increasing
regional integration (e.g. regional free trade zones) also raises incentives for tax arbitrage and tax
competition, mostly in income taxation (and excises). The available options for maintaining a
sufficient level of domestic tax revenue thus appear to be limited.
This block discusses the relative merits of various tax interventions bases on a uniform set of
assessment criteria.
Topics that will be discussed include:
1) Rationales for government expenditures. Governments provide goods such as (basic) education,
health care, infrastructure, energy, etc. Not all of these services can be financed by benefit taxation;
2) Trends in taxation: a common theme in tax reform over the past two decades has been the
gradual increase in importance of consumption taxation. A main driver for this was the widespread
introduction of the VAT. Are there other similar worldwide trends?
3) Tax equivalences: As opposed to what most people think, the tax base of consumption taxes and
(labour) income taxes are quite alike. To a certain extent, these taxes can therefore be substitutes.
4) Assessment criteria for taxes / tax structures
a) Economic impact of taxation. It is obvious that taxes impact on employment levels, investment,
trade patterns and possibly even on growth levels. What are the relative (economic) disadvantages
of various taxes?
b) Equity effects of taxation: consumption taxes like the VAT are said to be regressive but the
impact on post-tax income distribution of wage taxes (and social security contributions) and excises
may not do much better. What is the effect of various taxes on the distribution of resources, and
who actually pays a tax (what is the economic incidence of taxes)?
c) Revenue estimation: tax reforms are often only politically feasible when revenue-neutral. The
effects in terms of revenue of tax reforms are much more difficult to estimate that next year’s
revenue at an unchanged tax regime. What are best practices in revenue forecasting? Does one
need to have a full-fledged model of the economy, or does the back of an envelope suffice?
d) Costs of raising revenue: it is clear that it is costly to raise revenue as a full fledged tax
administration is required. Taxpayer, however, also incur costs in order to fulfil their tax payments.
These costs can be quite high, but how high?
5) Tax competition: even increasing globalisation decreases the barriers that exist for the free
movement of production factors, mostly (financial) capital. This may erode the revenue potential for
governments all over the world. Tax competition may also result in order to attract capital. This is
likely to hurt the immobiles, low-skilled workers in particular. Is tax coordination warranted or does
tax competition eventually makes everyone better off?
