Politicaleconomyoftaxreforms:meetingtheSDGS

EhtishamAhmadG24AddisAbaba,February2017

FiscalobjectivesforSDGs….

• Whatrevenueenvelopeisneededforsustainablegrowth?• Minimizethecostsofdoingbusinessinincreasinglydifficulttradingenvironment,while

• Financingminimumpublicservicesandaddressinginequalities• Butvestedinterests,oftenwithostensiblygoodintentions,preventreforms:regional/provincialandclassesorgroupsofindividuals

• Successstories,amidlotsoffailures:onoffsettinggainersandlosers• Singapore• LessonsfromChina’s1993/4reformsindealingwithregionalinterests• Mexico,2007and2013inaddressing

• Agendaformultilevelfinance—importanceoftax-benefitlinkstoalignincentives

• Challengesforefficientenergy-use,cleancitiesandhealthcare

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Raisingrevenues,addressingincentivesandmanaginggainersandlosers

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Overalltaxrevenueenvelopeneeded…

• TheMDGsimplicitrequirementofaround18%tax/GDPratio• SDGs,inadditionincludeacomponentforsustainableinvestment

• Assignificantunmetneedsinallpartsoftheworld,includingG24countries,• Therealsohastobeaccesstoprivatefinancing,inafiscallysustainablemanner,especiallyatthesub-nationallevels

• Avoidgeneratingoraggravatingeconomiccrises,suchasinpost-2007Europe(seeAhmadBordignon andBrosio 2016)

• Multileveltaxhandlesarecritical• Publicinvestmentwithsignificantaccesstocreditatsub-nationallevels,includingborrowingandPPPs,hastobelinkedtoown-sourcerevenuegenerationovertime

• i.e.,overwhichasubnationaljurisdictionhascontrolatthemargin• Poorlydevelopedhandlesinmostemergingmarketeconomies

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Is18%tax/GDPenough?

5Source:IMF(2013),India2013ArticleIVConsultation,basedonWorldEconomicOutlook

GeneralGovernmentRevenueandGDPperCapita,2012(excludingoilexportersandmicrostates)

Butpoliticallyhardforcountriesstuckat10-12%tax/GDPratiotogetto18-20%...

• Thisisoftenduetosplitrevenuebasesbetweenlevelsofgovernmentduetoacolonialheritage

• CaseoftheGovernmentofIndiaAct1935affectingbothIndiaandPakistan• Veryhardtochangegivengainersandlosersasaresult

• IndiahasimplementedasubnationalVAT,togetto18%tax/GDP,butthesplitbaseaddstothecostofdoingbusiness,andincreasedcomplexityfortaxpayers

• Mexico,startedwithefficientVATin1980s,butgraduallyintroducedexemptions,preferencesandmultiplerates

• Tomeetdistributionalconcernsandalsoto“encourageinvestment”• Infact,openedupincentivesforrentseeking,andtheabilitytotakeadvantageoftheopportunities

• Becamedifficulttoplugtheholes,despiterepeatedattemptsfrom1999-2010• MostinterestingsequencingisthatofChina

• Initialfocusonefficiency,plusemploymentgeneration• Incomedistributionalissuesand“rebalancing”atthesecondstage

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Inefficienttaxesandrent-seeking:whysomecountriesseemtobestuckinquicksand?

• SimilaritiesbetweenPakistanandMexico(before2013)• Splitbases(goodsandservices)problematic

• Taxbreaksfordistributionalobjectives,orencouragingsectors,generatesrent-seekingbehaviourthatbecomesentrenchedovertime

• Harmscompetitiveness(e.g.,visaviscompetitorcountries)• Insufficientfinancingforbasicservices

• Incompleteinformationonvalueaddedchainleadstoincentivestocheatandinformality,compounding…

• Higheffectivecorporatetaxratesamajordisadvantage• ButfirstsomesuccessstoriesinAsia(SingaporeandChina)

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AsianexperienceswithfinancingSDGs--education

• Asiahassomeofthebestperformingcountries/regionsintheworld• PISA(OECD,December2016),7Asiancountriesinthetop10globalrankings

• (1)Singapore;(2)Japan;(4)ChinaTaipei;(6)ChinaMacau;(7)VietNam;(8)China_HongKong;(9)China_Beijing-Shanghai-Jiangsu-Guangdong

• China_Shanghai wastopofthepreviousPISArankings• Only2Europeancountriesintop10:(3)Estoniaand(5)Finland;

• Butalsosomelaggards• Pakistan,continuestostrugglewithliteracy,basicservices

• spendingoneducationhasdeclinedoverthepastdecadedespiteavigorousattempttoeliminateoverlappingresponsibilities(18th AmendmenttotheConstitution,2011)

• AdditionalsharegiventoprovincesinDecember2010NationalFinanceCommissionAward

• Largelylinkedtofailureinthedomesticresourcemobilizationagenda

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Asianexperiences….revenueenvelopes

• ChinaandIndiahavedonewelltoraiseoveralltax/GDPratioforgeneralgovernmenttoaround18%(Chinafrom10%in1992/3)

• Butnotenoughasspendingandinvestmentneedsaregreat,• SplitVATbasecausesdistortionsandaddstocostofdoingbusiness

• ChinacompletedintegrationofVATongoodsandservicesinMay2015• India:ConstitutionalAmendmentforintegrationoftheVATbase

• Pakistanlagging(around10%)provisionsandgaps/exemptionsandsplitbasesinvirtuallyallmajortaxes

• NationalFinanceCommissionAward(December30,2009)expectedtax/GDPratiotogoto15%byDecember2015from9.3%

• Majortaxreformsdidnothappen,insteadVATbasewassplitbetweengoodsandservices (latterassignedtoprovincesrevenues)

• Majorrevenueeffortatprovinciallevel,largelyfocussedontransactionandnuisancetaxesthatdidnotstemrevenuehaemorrhage

• Threenationaltaxamnestiesinthisperiod• Tax/GDPratiostoodat9.5%inDecember2016((NFCreporttoParliament)• Turnedthespendingassignmentsintounfundedmandates

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Pakistan:IneffectiveTax-benefitlinkages?

• ForIMFSBAin2008,theauthoritiespromisedtorevamptheVATandeliminateloopholes,alongwithenergypricereformstoclosetherevenue-gaps

• ConditionalCashTransfer(CCT)theBenazirIncomeSupportProgram,modelledonMexicanOportunidades tobeintroduced(withWBandbilateralfinancing)

• Tocompensate“losers”andgainpoliticalacceptability• However:

• CCTcorrectlywenttopoorestruralhouseholds,whilemostofthe“losers”werefixedandlowincomepeopleinurbanareas

• CCTwasimplemented,butthetaxreformwasnot• Tax/GDPratioremainsbelow10%,despitenewWBloanof$300mfornewtaxadministrations

• Repeatedamnestieswithoutcrediblesanctionsorimprovedpluggingofholeineffectiveinraisingrevenues

• Createincentivestowaituntilthenextamnesty

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Singapore—lessthan18%tax/GDPfortopPISArankingPISAleader,withlow,butefficientandeffectivetax/spendingsystem

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Singapore:taxontaxreformstoencourageinvestmentandtrade

• VATintroducedin1994,asamechanismtoreducetaxesthataddedtothecostofdoingbusiness

• theCorporateIncomeTaxof40%,aswellas• taxesonassetsVATdesign

• UncomplicatedVATinkeepingwithTanzi principle:“keepitsimple”(Quaid-e-Azam Lecture2010)

• Noexemptions• Nocompensation,ideaistocreateinvestmentandfullemployment

• Overtime,CITreducedto17%,whileVATraisedto7%• Relativelylowtax/GDPratio(lessthan15%)

• Butmostefficienttaxadministration,andwell-prioritizedpublicspending(education22%ofthebudget)

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Costsoftaxadministration

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China:1993/4reforms:balancinggainersandlosers,whilegeneratingrapidgrowthwithfullemploymentFrom1993/4to2016

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China:Politicaleconomyofsustainedgrowthwith1993/4reforms

• FiscalresponsibilitysystementailedreducingthetaxonSOEs• Tax/GDPratiodroppedsharplyfrom25%to10%by1992• Andcentralsharefrom50%to25%,aslocalgovernmentsprioritizedtheirownspendingbeforesharingrevenuesupward

• By1992/3centralgovernmentabilitytoconductmacroeconomicpolicy,redistributionorinvestmentseverelycurtailed

• 1993/4reforms:basedoncreatingacentraltaxfunction(SAT)fromscratchandanewtax VAT—tax-transferlinkageimportantingettingprovincialbuyin

• VATongoodstobesharedwithlocalgovernments• Lumpsumguaranteedtransfertoensurenoprovincelost(stop-lossprovision,usedinMexico’s2007reform)

• Revenue-sharefromVATandincometaxesbenefittedrichprovinces• Equalizationsystem,providedaninducementforthepoorprovinces• Revenuereturned:createdspaceforinvestmentforcoastal“hubs”,criticalforsustainedgrowthoverthenexttwodecades

• Effects:• Noindividualcompensation—butmaintenanceoffullemployment• Majorreductioninpoverty(over700m;as150mmigratedtocoastalhubs)

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China:Thesuccessofthe1993/4reforms

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1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

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Localgov'trevenue(%ofGDP) Taxrevenue(%ofGDP) Centralgov'trevenue(%oftotalrevenue)

Source:Ahmad,Rydge andStern,2013,ChinaDevelopmentForum

China:Needforadditionaltaxesforsustainable“rebalancing”

• IntegrationoftheVATongoodsandservices—replacinglocalbusinesstax(onservices)completedinMay2016

• Reducecostofdoingbusiness• Butremoveslasttaxhandleinthehandsoflocalgovernments

• Sub-nationaltaxagendatoaddressproblemsofsuccess:• Increasinginequalities

• Needtoexpandpersonalincometaxbeyondwithholdingonwages;e.g.,piggybackoncentralbase,withlocalinformation(e.g.,fromthirdparties,includingonassets)

• Addressfailureofpropertytax—neededforaccountability• Ownership/valuationmodelnoteasytoimplement

• Climatechange/carbontax—local“piggy-back”withflexibilityforLGswithgreaterpollution/congestiontochargehigherrates,whileavoidingracetothebottom

• Own-sourcerevenuesatlocallevelasbasisforaccesstocredit• Rationalizationoflocalgovernmentborrowingand• Laybasisfornewinternalhubs:

• tosupplementnationalinvestmentsincross-borderconnectivity(OneBeltOneRoad),linkswithSEAsia(Indonesia),CentralandSouthAsia,Europe

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TheMexicanreformsin2007and2010—partialsuccessandsomelessonsMixedsuccessandpoliticaleconomylessonsfromfailure

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CreepingerosionoftaxbasesinMexico…

• AsinPakistan,anon-competitivetradingregimeinMexicowasthecauseforpreferencesandexemptionsbothfortheincometaxesandtheVAT

• AndpriortoNAFTA,therewasconsiderableemphasisonthecreationofSEZs(themaquiladorasintheborderzonewiththeUS)

• DesignedtoattractUSinvestmentandprovidecheaplabour• AndfortheUSfirmstomakehigherprofits,andkeepMexicanworkersinMexico• FirmsexemptfromincometaxandVAT

• LowerVATratesintheborderregionsadjacenttothemaquiladora• SubsequenttoNAFTA,Mexicoliftedtraderestrictions,andtheexchangeratewasmarket-determined

• Butthepreferencesremained—veryhardtoremoveoncebestowed• SuccessiveFinanceMinisters(sincethelate1990s)triedtoinitiatereformstofixtheincometax,orotherstofixtheVAT

• Becauseofstrongvestedinterests,noneofthereformattemptsworked• Thenon-oiltax/GDPratiostagnatedataround10%,VATefficiencyof25%,• CloseparallelswithPakistan

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2007—IETUto“partially”closeloopholesintheCIT

• Carstens,asFinanceMinister,in2007,didnothavethepoliticalsupporttofixtheVAT

• ButtriedtoclosetheholesintheCITusingtheIETU(VAT-likeminimumtax)• AGrossAssetsTax(GAT,popularizedinLatinAmericabytheIMF)wasdistortiveandhadalsonotworked,wasreplacedby:

• AuniqueenterprisebasedminimumVAT-liketax,IETUcreditedtowardstheCIT,thatwaslessdistortivethantheGAT

• TheintroductionoftheIETUwasbasedonprinciplesusedinthe1993/4Chinesereforms

• Rationalizationofthetransfersystem,withgreaterclarityintheuntiedrevenue-sharingarrangements,andalsointhespecialpurposetransfers

• Astop-lossprovisionsothatnostatewouldloseasaresultofthereform

• Butrevenueimpactwassmall,halfpercentofGDP,andbegantoerodeaspoliticalpressurewasapplied

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Lessonsfromfailedreformattemptin2010

• In2010therewasanattempttofixtheVATbyaddingadditionalamountspaidtorecipientsoftheCCT(Oportunidades),asinPakistan

• CCThadbeenintroduced,successfully,inMexicointhelate1990stophaseoutthegeneralizedtortillasubsidy,andhadcaughttheimaginationoftheIFIs

• AsinPakistan,theVATreformfailed—theCCTdidnotaddressthemainlosersfromtheVATreform

• Atthesametime,thevehicletax,tenencía,wasfullydevolvedtotheStates• Theystoppedcollectingit—ostensiblybecauseofcompetitionacrossstates,butmainlybecause

• StateshadaccesstoMOFtransfersattheendoftheyear,incaseofdeficits• Sotheentiretransfersystemhadbecome“gap-filling”• Andstateshadnoincentivestoraiseown-sourcerevenuesorevenmanagetheirspendingefficiently

• Statesalsorefusedtoavailofapiggy-backonthePITthatwasavailabletothem

• Themainsourceoffinancingforstatesremainedthenomina,orpayrolltax,

• FederalGovernmentcarriedthepoliticalburden,asitalsocoveredsocialbenefitsatthenationallevel

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Goodintentions,badoutcomes(Levy,2008)

• Universalbenefitsfinancedby“payrolltaxesonformalsector”SantiagoLevy(2008)argued:

• Addtothecostofdoingbusinessleadingtoinformality,but• Notallinformalityisbadorillegal(Kanbur andKeen),e.g.,inruralareas

• “Informality”asevadingthepaymentortaxesorsocialcontributions• Appliestofirmsofallsizes,astheyhideoutput(inputs),employment,andprofits;andworkershidewagesbyacceptingshort-termcontractsandavoidpayingcontributions

• leadstolessefficientuseofresources,andlowergrowthpotential

• Levy’sRecommendation:reducehighsocialcontributionsandshifttoVATthatdoesnotaddtothecostofdoingbusiness

• SameissuearisesinS.Europe,postcrisis,whereexchangerateadjustmentsarenotpossible—shiftfromhighsocialcontributiontoVATis“fiscaldevaluation”

• Butnotpossibletorelyon“Swisscheese”VATorCITinMexico

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Incentivestocheat,plusabilitytogetawaywithit

• SplitbasesforVATandIncometaxes• REPECOS (smalltaxpayersregime(below~US$250kadministeredbystates)providedaconvenientshelterfromSATaudit

• Noincentiveforstatestochasetaxpayers,giventransferdesign(yearendgap-fillingexercise);

• Evidence:bunchingatlowerend—minimumrequiredtokeepSATatbay• 90%+evasion(SATassessment)

• convenientmechanismevenforlargerfirmsto“hide”production• MadeworsebyMaquiladoras(Specialeconomiczones);andlowerborderrates

• Progressivedeductionsandexemptionscontinuetonibbleawayatthe“Swisscheese”oftaxbase:1. Temptationeffect(generatesincentivestocheat)2. Informationgaps(limitspossibilitiesofoffsettingcheating?)

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Mechanismstocheat…

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SpecialEconomicZonesaddtocheating---Maquiladorasink-hole

• Firmsshiftedincometaxliabilitytomaquiladorasubsidiary• Carouselfraud• Importfraud

• VATfreegoodssmuggledintoMexicocreatingproblemsfordomesticmanufacturers

• Onlylostrevenuesandcreatedistortions

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SEZ’s(Maquiladoras)playaroleinthis

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The2013“package”ofreforms:meanttoaffectstructuralchange,notrevenues

• Taxpolicy,allthemaintaxesthatwereimpossibletotouchpreviously• EliminatedthespecialprovisionsintheVAT• RationalizedtheCIT• Minimumassettax(IETU)abolished• Carbontax,aboveapetroleumpricesetatworldprices• Exciseson“bads”

• Administration:Blockedtheabilitytocheatbyintegrationthesmalltaxpayerregime(RIF)

• Simplecash-basedaccountingpackagesissuedbySATtotaxpayers• Mustissueelectronicinvoices• Reversesthesegmentationofthetaxbase,allfirmssubjecttoSATaudit

• Compensationaspartof“packge”:• Relianceonlyonbasic(social)pension(65ymas)forthosewithoutoccupationalpension

• CCT:Oportunidad notused,replacedin2014byProspera,aprogramtoencouragesmallbusinessesandencourageemployment

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Initialprojectionsoftheexpectedrevenues(2014)

28Source: SHCP

Excisesandcarbontax:initialbenefitsduring2014(0.3%ofGDP)

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Butthereformsquicklybegantoraiserevenues…

• Additionalrevenuespushednon-oiltax/GDPratiotoaround14%in2015(+3.5%ofGDPabove2012level)

• AlthoughVATrevenueincreasewassmallinitially(+0.5%ofGDPtoatotalVATof4%ofGDPin2014)

• MainimpactwasontheIncomeTax:+1.7%ofGDPin2015relativeto2012

• Carbontax:+1.4%ofGDP,• althoughpoliticalpressuretofurtherincreasescouldbediffusedby

• adoptingthepiggy-backapproach,togetherwith• anequalizationframework

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Actualrevenueperformancefarexceedsprojections…

31IMF, December 2016, Mexico Article IV staff report

TurningthewholeofMexicointoaFreeTradeZone….althoughFordcancelledtheCruzeplantinJanuary2017underUSpressure....

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Creationofnewclean“hubs”forsustainabledevelopment

• PublicinvestmentbyFederalGovernment:newCapitalairportatQuerétaro

• Smalluniversitytown,attractiveenvironment• AttractedAerospace($1.5bn)andBMW($1.3bn)• Goodlocalinfrastructure

• ThenationaltaxreformsleaveMexicomuchbetterpreparedtotakeonthechallengesininternationaltradethatitisfacing

• Butadditionalurbanhubsrequirestateandlocalinvestmentinservicesandsmallerinvestmentstolinktonationalgrids

• Stateandlocalincentivesremainaproblem

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Sub-nationaltaxagendaMorethanrevenues—accountability,incentivesanddistributionaleffects

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Sub-nationalissues

• Own-sourcerevenuesatsubnationallevelmaybesmallrelativetonation-widetaxinstruments

• But:affectincentivesandaccountability• Attheprovincial/statelevel:butoftenfocuson“maximizingshareofnationalpie”

• Municipallevel—evenmorerelevantforservicedelivery,investmentandSDGs

• Sharedrevenues(oftenonasymmetricbasis,e.g.,Acheh inIndonesia)

• Importantforpoliticaleconomyperspective,but• donotrepresent“own-source”revenues

• Taxadministrationdoesnothavetobesub-national—setting“ratesatmargin”does

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Note: enforcement would include both (1) the maintenance of a common data base on transactions and assets, using tax and third party information, and (2) audit.

Revenue-sharingisnotsubnationalown-sourcerevenue

• Veryhardtoagreeon“sharingproportions”• Politicaleconomyconsiderationsoftenleadtoasymmetricsolutions,includinginIndonesia

• TheasymmetricsolutionsinSpainhaveintensifiedinequalityandseparatisttendencies(e.g..,forCatalunya),ratherthanreducingthem

• Exclusiverelianceonrevenue-sharing, thus• Enhancesfightoverresources• Asymmetricsolutionsmaybeneeded(e.g.,Indonesia),butopensuppressureselsewhereasthepoorerregionsfallbehind

• Enhanceslocalresistancetochange:shiftingoutofpetroleum/coal(thelatterisimportantinChina)

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Own-sourcerevenuesandtransferdesign

• Oftenlocalrevenuebasesareunevenlydistributed,andown-sourcerevenuescanenhanceinequalities

• Needtobecomplementedbyequalizationtransferstocreatelevelplayingfieldand

• Permitlocalgovernmentstoprovidesimilarlevelsofserviceatsimilarlevelsoftaxeffort

• But,badlydesignedequalizationistantamountto“gapfilling”fordeficits:

• completelynegatesincentivestouseown-sourcerevenues

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• Standardizedfactorsforequalization(asinAustraliaandoriginallyinIndonesia)areconsistentwithhard-budgetconstraintsandefficientuseofresources

• Unfortunately,veryfewcountriesusestandardizedfactors—noneinLatinAmerica

• Dilemmathatnaturalresourcesharingishardtoequalize:

• if“favored”regionleftoutofequalization,intensifiestheresultinginequalities, andpossiblyincreasespressurestosecede(AhmadandBrosio,2016,LisbonLawSchool)

• Ifincludedinthe“equalization”withtheuseofactualrevenuesanddeficits(tooffsettherevenue-sharinginequality)convertstheequalizationtransferintodistortive‘gapfilling"

• Negativeconsequencesforincentivesforallsub-nationalentities

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Howto“equalize”canbetricky

Piggy-backonPersonalIncomeTaxes

• Muchoftheprogressivitycomesfromtheexemptionlimit,(AhmadandStern,1991)and

• thewelfaresystemsneedstobeintegratedtoavoida“povertytrap”

• But,withsplitbases,PITlargelyappliedtoformalsectorwages—becomesanadditionalburdenwiththepayrolltax

• inequalityenhancingmeasure,ifnon-wageincomeslargelyexcluded• Couldgeneratefurtherinformalityandbaseerosion

• But,informationonassets(e.g.,propertyregisters,cars)fromsub-nationaladministrationscouldbeusedtoverifynonwageincomeflows

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Carbontax—withaprovincial/municipalpiggyback

• Nationalcarbontaxwithalocalpiggy-back (AhmadandStern,2012)• topermitahighermarginalrateinmorepolluted/congestedarea,but• withanationalminimumtopreventaracetothebottom

• Issueofgainersandlosersbecomesimportant• Howtocompensateisanempiricalissue—mostofthepeopleaffectedarelikelytobeurbanmiddleandupperincomegroups

• Fixedandlowerincomeurbanworkers• Canthecreationofjobsbesufficient?

• Also“gap-filling”transfers,oruseof“actual”factorsinequalizingsystems,islikelytooverridetheincentivestouselocaltaxhandles,evenifoneexisted

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Containinghealthexpendituresthroughlocaltaxation

• Manyofthekeybasicfunctionsareatthelocallevel,includinginteralia

• Sanitation• Publichealthandeducation,includingnutritionaladvice-–thismayhavetobesupplementedbyspecificexcises,whichcouldbeatcentralorlocallevels

• Motherandinfant/childclinicsforpreventivecare,nutritionandvaccinations

• Giventheimportanceofthepreventivefunctions,itisofteninnationalinterest,and“Specialpurposetransfers”maybeinuse

• Butwithimperfectinformationonspendingandbudgets,• nocertaintythatthefundswillbeusedeffectivelyandnotdiverted(aswithOportunidades insomeMexicanstates)

• Keyroleofown-sourcelocaltaxestoalignincentives

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Propertytaxestoanchorlocalaccesstocredit,newcleancitiesand“hubs”

• Typicalfailureswithpropertytaxesinemergingmarketcountries,LatinAmericaincludingMexico,manyAsiancountries

• US-typemodelbasedonownershipandvaluationhardtoimplement—abandonedintheUK

• Selfassessmentoption:Bogotá,maybesubjecttoabuse• Presumptiveapproach,didnotworkinDelhiorPune,andisprovingproblematicinBangalore

• Linkagewithservicedelivery(Marshallianprinciples)Ahmad,Brosio,Pöschl (2015)and(2017onMexico)toovercomeresistance

• Focusesalsoonservicedelivery,enhancesaccountability• Maximumandminimum“bands”legislatedinunitarycountries,• Localratesettingforaccountabilitybutavoidracetothebottom

• Scopeforelectronicpropertyregistersandsatelliteimagery(arms’lengthadministrationtoreducescopeforcorruption)

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Generallessonsforemergingmarketeconomies

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Politicaleconomyandinstitutionscritical

• Non-standardrecommendationsmaybeneededinthepresenceofinformality

• Lowereffectivethresholdmaybeneeded,byintegratingsmalltaxpayers,whilekeepingfocusonthelargest

• Fullvalue-addedchainessentialtogenerateinformation,stopcheatingandbaseshifting

• Chineseapproachtoadministration:matchallinvoices(GoldenTaxProject)toblockcheatingandalsofacilitateefficientandaccurateVATrefundsforexporters

• Reducedcostofbusiness,enhancedcompetitiveposition• Politicaleconomyofoffsettingoppositiontoeachmaintaxbyputtingthemtogether,minimumcompensationneeded

• Butsignificantworkonsub-nationaltaxesandtransfersremainsinmanyEmergingMarketEconomies

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Keylessons

1. Raiserevenuesefficientlyforsustainablegrowthandjobcreation

• Taxesthatdonotaddtothecostofdoingbusiness• Basisforaddressinginequalitiesandfinancingcleancitiesorsustainable“hubs”

2. Appropriatelydesignmultileveltaxandsocialpoliciesthatgeneratesustainablegrowth

• Avoiddistortingbenefitsthatcreatea“povertytrap”• Addresstheissuesofgainersandlosersinasustainablemanner

3. Attentiontoinstitutionsandincentivestocheatateachlevelofadministration

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