Key Issues and Challenges
in
Fiscal Restructuring in Asia
Ngee-Choon Chia
1
Fiscal Restructuring
• Integration into world economy
• External environment
- Fiscal
- Global economic slowdown
• Domestic social and economic structure
- Demographic landscape
- Asian Financial crisis
2
Principles of Fiscal
Restructuring
1 Neutrality
- change in relative price incentive effects
2. Equity
- vertical equity: “unlike treatments for unlike
situation”
- Horizontal equity: “like treatments for like
situation” more impt in an integrated world.
3
Principles of Fiscal
Restructuring
[Link]: enforce tax rules and curb
corruptions
- legal framework
- institutional support
- investment in information technology
- costs of compliance
4
External Environment
Market Orientation
- restructuring of state-owned enterprises (SOEs)
- Fall in reliance from profit tax on SOE.
Eg Vietnam
1987 80%
1993 30%
Tax reform CIT, PIT, VAT (Chart 1)
Financing of merit goods
5
External Environment
Free Trade Areas
ASEAN
Common Effective Preferential Tariff
(CEPT)
- tariffs of goods (40% Asean content) to
be reduced to 0 - 5% by 2003
- Vietnam by 2006; Myanmar by 2008
6
External Environment
Free Trade Area
Importance of trade taxes in developing countries (as % of
GDP):
– Trade taxes 5.5%
– Domestic taxes on goods and service 4.6%
– Income taxes 4.5%
Broaden domestic tax base
Eg: Cambodia :
- reduced tariff from 30% to 14% by 2002
- introduce VAT in 1999
7
Global Integration as
Development Strategy
East Asian miracles
Asian developing countries to:
- lower separation fences
- open to trade, investment and factor movements
Massive capital flows
Double edged sword
- Ingredient for growth
- Recipe for crisis
Contagion in financial crisis, stock prices, real sector effects on
employment….
8
Opportunity Costs of
Integration
Abide by international rules of propriety
- East Asian tigers avoided costs
- Implementation of WTO obligations
cost: US$150 (Finger, 2000)
= basic education for women and girls, with higher return
- Rodik (2000): international codes and standards targeting
at legal and financial systems in Asia
uncosted?
9
Integration and
Macroeconomic Instability
Tax competition
Tax design – financial capital allotted tax
advantage
- No thin capitation rule debt-equity ratio
- Asymmetric treatment of interest receipts and
interest payments.
Increase in short term capital flows
10
Globalization and
Domestic Tax Structure
• Tax environment of developed countries impact
fiscal sustainability of developing countries
• Leader – follower model
• Fiscal termites (Tanzi)
– Globalization and technological changes
impact domestic tax mix, base, structure and
redistribute impacts
11
Globalization and
Domestic Tax Structure
Personal income tax becomes less progressive
tax competition + mobility of highly skilled
individuals
Lowering of top marginal tax rates
Voting by feet?
Table 2: PIT still more attractive than in developed
countries
Brain drain? Bhagwati’s brain drain tax?
12
Globalization and
Domestic Tax Structure
Unequal distribution of tax burden
- unskilled labour
- small and unsophisticated savers
- immobile assets
13
Globalization and
Domestic Tax Structure
Corporate income tax
• Lower effective tax lower because of fiscal
incentives
• Cost? Revenue foregone
• Tax havens (termites nests)
- portfolio short term capital (fiscal termites)
- siphoning tax base
(IMF, US$5 tn to US $7 tn deposited in tax havens
14
Globalization and
Domestic Tax Structure
Harmful tax competition?
developing countries losing $50 bn a year to
tax havens
= half of the aid budget to developing
countries
15
Internet Technology
• Tax base erosion?
• International indirect tax avoidance
agreement?
16
Social environment:
Ageing Population
Fiscal sustainability
Falling tax revenue from slower economic growth
- dissaving by pensioners, equity prices? level of savings?
Investments?
- lower dependency ratio, support ratio, shrinking tax base
- lower labour productivity
Eg: Singapore
- average GDP growth fall to 5% in the next 10 years, compared to
7.18% over the past 20 yrs.
consumption-based taxes?
17
Ageing Population
Heathcare Delivery and Financing
- medical advances and epidemiological shift
- long-term care?
- alternative means of financing
- public private partnerships?
- private insurance to replace welfare model?
- tax concessions issues
18
Ageing Population
Pension
- covers only limited share of labor force
- civil servants
- larger enterprises in formal sector
- enterprise-based to contributing schemes
19
Ageing Population
Pension
• pension reform: PAYG vs provident fund
• provident fund
- equity issue from upside down subsidy
- tax shelter
• alternative system: private system
20
Conclusion
Expenditure Policy
- cost recovery? Private sector partnership?
Revenue
– Improve tax administration
– New sources of revenue ? Carbon taxes?
21
Conclusion
• Short term objective
- Tech crash, falling world trade volume
- New engine of growth? New markets?
- Expansionary policy
• Long term objective
- ageing population and social goods and
services
22