ferdi – cifd – cerdi – université d’auvergne 12 juin 2014 – clermont-ferrand

FERDI – CIFD – CERDI – Université d’Auvergne12 juin 2014 – Clermont-Ferrand

Integrating the pro-poor agenda into fiscal

performance measurement in LICs

A case study of Burundi

Jérôme SansonettiODI Fellow, Office Burundais des Recettes

IntroductionLinking revenue

and poverty reduction

2

IntroductionLinkages between tax and poverty

3

o In a country like Burundi, the pro-poor agenda is rarely included in fiscal monitoring schemes

o Poverty reduction remains a central policy objective• Fiscal performance should be measured and designed in a way that

monitors pro-poor impacto Surprising, as it is a challenge to mobilize revenues in LICs

IntroductionLinkages between tax and poverty

4

o The linkages between revenue reforms and poverty reduction are not appreciated at every echelon on the ground

o There is no direct link between revenue increase and poverty reduction

Increased revenues

Poverty reduction

Progressive taxes

Pro-poor spending

tax side spending side

Pro-poor impact

Worst-case scenario?

IntroductionIncreased risk of regressivity in LICs

5

o LICs feature of higher risk of regressivity, all other things equal• Narrow income tax bases• Large returns to capital (classical growth theory)

o Tax progressivity:• A tax is progressive if the tax payments of richer households

accounts for a larger proportion of their incomes than those of poorer households

o Consumption taxes with a flat rate can be regressive• Poorer households consume a larger fraction of their incomes

IntroductionResearch questions

6

1. Do revenue reforms in LICs incur regressivity?

o The nature of the linkages is not fully appreciated

o Raising revenues does incur a risk of regressivity

2. Are fiscal performance indicators fitted to monitor

pro-poor impact?o Indicators used in LICs

fall short

Introduction – the linkages between revenue mobilization and poverty reduction

1. Literature review2. Case of Burundi: tax side3. Case of Burundi: spending side4. Suggested indicators

Outline

7

Section 1Literature review

8

2. Burundi: tax side 3. Burundi: spending 4. Suggested indicators1. Literature review

9

Overall fiscal structure in LICs

Strengthen VAT revenues

Reduce trade taxes

Reduce corporate rate

IFI consensus


10

o IFI consensus (IMF FAD, 2011)• Broad-based: few exemptions• Single rate• High registration threshold

VAT

Regressivityo In South Africa, poorest

deciles feature higher VAT burden (Go et al., 2005)

o Average number of VAT rates (IMF FAD, 2011)• LICs: 1,28• Rich countries: 2,52

Progressivityo VAT less regressive

than former sales taxes (Zolt & Bird, 2005)

o More efficient to treat progressivity on spending side than by relaxing VAT• Case of Chile (Engel et

al. 1999)


11

o IFI consensus: reduce import duties and trade taxes (Marshall, 2009)• 1980s: 4% - 5% of GDP• Late 2000s: 3% of GDP

Trade taxes

Regressivityo Export taxes are

arguably progressive, so removal is regressive

o Replacement with VAT creates aforementioned issues

Progressivityo Removing import taxes

is progressive if poor households consume a larger fraction of imports

o In South Africa, trade liberalization was found to be progressive (Daniels & Edwards, 2006)


12

o IFI consensus (Marshall, 2009)• Decrease statutory rates to attract investors• Effect of Doing Business Indicators for “paying taxes”

Corporate income tax

Regressivityo Decrease in statutory

rates in SSA (Keen & Mansour, 2009)• 1990: 44%• 2005: 33%

o Increase in exemptions in SSA (Keen & Mansour, 2009)• 1980: 40%• 2005: 80%

Progressivityo General equilibrium

effect after tax shifting can be progressive (Harberger, 1962)

Section 2Burundi – tax side

13


14

Burundi’s tax reforms since 2009

Tax administrationo Creation of a Revenue

Authority in 2010 (OBR)• Compliance• Taxpayer services• IT systems

Tax policyo VAT created (2009)o VAT reform (2013)

• More exemptions• Intermediary rate at

10%o Corporate income tax

(2013)• Statutory rate reduced

from 35% to 30%o Personal income tax

(2013)• Threshold increased• Statutory rates

decreased


15


301,21

362,76

471,71

526,64

559,51

13,66% 14,14%16,29%

15,08% 14,12%

0%

5%

10%

15%

20%

25%

30%

200

250

300

350

400

450

500

550

600

2009 2010 2011 2012 2013

Tax/

GDP

BIF

bn

Burundi's total tax revenues

OBR collection (A) Tax/GDP


16

Overall distributional impact

2010 2011 2012 2013 2010 2011 2012 2013

30,0% 26,6% 29,6% 25,7% 4,2% 4,3% 4,5% 3,6%

11,7% 10,7% 12,7% 7,7% 1,6% 1,7% 1,9% 1,1%14,3% 14,7% 15,7% 16,9% 2,0% 2,4% 2,4% 2,4%

53,4% 53,9% 54,3% 58,8% 7,6% 8,8% 8,2% 8,3%

36,5% 36,5% 36,5% 37,7% 5,2% 5,9% 5,5% 5,3%16,0% 14,5% 15,3% 19,6% 2,3% 2,4% 2,3% 2,8%

10,8% 12,5% 9,4% 9,0% 1,5% 2,0% 1,4% 1,3%

8,2% 8,4% 8,3% 7,5% 1,2% 1,4% 1,3% 1,1%0,0% 0,0% 0,0% 0,1% 0,0% 0,0% 0,0% 0,0%

5,8% 7,0% 6,6% 6,5% 0,8% 1,1% 1,0% 0,9%

100% 100% 100% 100% 14,1% 16,3% 15,1% 14,1%

Non-fiscal products

TOTAL REVENUES

Taxes on goods and servicesVAT (domestic + customs)Excise (domestic and customs)

Tax on international trade and transactions

Import dutiesExport taxes

As % of collection As % of GDP

Taxes on revenues, profits and capital gains

Total personal income taxesTotal corporate income taxes


17

o QUIBB 2006: expenditure survey, household levelo Construct a “total expenditure” variable

• 77 food and non-food expenses• Only health and education missing

o Quartiles of wealth based on syncretic wealth score

Data available to assess regressivity

Quartile 1 Quartile 2 Quartile 3 Quartile 4Weighted aver. total exp. (BIF/year) 178 946 231 798 293 304 898 268 Weighted aver. total exp. (USD/year) 119 155 196 599

Total observations 7832Well surveyed observations 7042Observations for total exp. (BIF/mois) 5812


VAT – exemptions Pre-2013 Post-2013

Financial operations Yes Yes RegressiveInsurance operations Yes Yes RegressiveInternational transportation Yes Yes RegressivePiped water and electricity private consumption No Yes RegressivePost stamps Yes Yes RegressiveRental of unfurnished private housing Yes Yes RegressiveMinibus transportation (14+ seats) No Yes RegressiveHealth care Yes Yes RegressiveSchool and higher education material Yes Yes ProgressiveUntransformed agricultural goods Yes Yes Progressive

Exempted? Impact of exemption

Quartile 1 Quartile 2 Quartile 3 Quartile 4Piped water consumed by HH 0,03% 0,06% 0,07% 0,23%Electricity consumed by HH 0,02% 0,004% 0,04% 0,16%Housing rental 0,07% 0,09% 0,16% 0,97%Travels and transportation 0,40% 0,70% 1,13% 2,12%Post services 0,01% 0,02% 0,01% 0,04%


19

VAT – intermediary rateo A 10% intermediary rate was implemented on 12 staple

foods• Cassava, maize, wheat, etc…

o Direct effect is progressiveo Indirect effect is unclear, as retailers may not have shifted

the VAT decrease• Inflation for 10%-taxed staples (Jul.-Dec. 2013): 1.75%• Inflation for other food items (Jul.-Dec. 2013): -1.69%

Quartile 1 Quartile 2 Quartile 3 Quartile 4Products taxed at 10% 52,02% 44,84% 42,34% 33,83%


20

Exciseo A 10% intermediary rate was implemented on 12 staple foods

2010 2011 2012 2013 Impact?Bottled water 0 10% 10% ProgressiveImport of old vehicle (BIF) 0 1 500 000 1 500 000 ProgressiveSodas (BIF/hL) 18 000 18 000 30 000 30 000 ProgressiveBeer (BIF/hL) 17 820 19 049 36 000 36 000 ProgressiveSugar (BIF/Kg) 400 400 600 ProgressiveWine and liquors 50% 70% 70% ProgressiveTobacco 83% 120% 200% RegressiveFuel (BIF/L) NA 165 24 21 Regressive

Quartile 1 Quartile 2 Quartile 3 Quartile 4Sodas 0,22% 0,23% 0,31% 0,73%Beer & alcoholic drinks 0,30% 0,55% 0,96% 2,21%Sugar 0,49% 0,71% 0,69% 1,63%Tobacco 1,21% 1,31% 1,12% 0,64%Fuel 0,01% 0,04% 0,04% 0,26%


21

Personal income tax – generalo The reform triggered a dip in the contribution of PIT to total

revenues• 2010 to 2013 : 11.7% to 7.7% of total revenues• Higher taxable threshold• Lower statutory rates

Lower Upper Lower Upper- 40 000 0,0% - - 150 000 0,0%

40 001 48 350 27,0% - 150 001 300 000 20,0%48 351 56 650 31,0% 329 300 001 30,0%56 651 65 000 35,0% 1 002 65 001 73 350 40,0% 2 259 73 351 81 650 41,0% 2 579 81 651 164 950 43,0% 3 398

164 951 248 250 47,0% 8 381 248 251 331 550 55,0% 26 023 331 551 60,0% 40 602

Before reform After reformBracket

Tax rate Amount to deduct

BracketTax rate


22

Personal income tax – scenarioso Distributional impact mostly regressive

• From 40 001 to 150 000, impact is unclear• From 150 001 upwards, impact is clearly regressive

Taxed amount

Effective tax rate

Taxed amount

Effective tax rate

(i) 20 000 - 0,0% - 0,0%(ii) 50 000 2 771 5,5% - 0,0%(iii) 100 000 22 402 22,4% - 0,0%(iv) 200 000 66 819 33,4% 10 000 5,0%(v) 350 000 145 398 41,5% 45 000 12,9%(vi) 950 000 505 398 53,2% 225 000 23,7%

ScenarioMonthly taxable income

Before 2013 As of 2013


23

Corporate income taxo Two tax breaks for corporations, assumed to be regressive

• Statutory rate decreased from 35% to 30%• Minimal 1% tax on sales in case of negative profits

o Exemptions on corporate income tax are regressive loopholes

2009 2010 2011 2012 2013Fiscal losses (BIF bn) 1,94 3,27 11,21 18,49 9,19 % total revenues 0,64% 0,90% 2,38% 3,51% 1,64%% GDP 0,09% 0,13% 0,39% 0,53% 0,23%


24


Regressive (assumed)o Corporate income taxo Personal income taxo VAT exemptions

Progressive (assumed)o VAT intermediary rateo Most excise fees

Section 3Burundi –

spending side

25


26

2010 2011 2012 2013 Fiscal revenues 362,8 471,7 526,6 559,5 Pro-poor spending 323,8 371,5 353,7 369,2

Absolute figures (BIF bn)

2010 2011 2012 2013 2010 2011 2012 2013 Fiscal revenues 100% 100% 100% 100% 14,1% 16,3% 15,1% 14,1% Pro-poor spending 89,3% 78,8% 67,2% 66,0% 12,6% 12,8% 10,1% 9,3%

As % of total revenues As % of GDP

Pro-poor spendingo Pro-poor spending growing much slower than tax revenues

o Pro-poor spending in Burundi:• All expenditures by social ministries (i.e. education, health, etc.)• “social projects” in other ministries

Section 4Fiscal

performance indicators

27


28

Indicators currently used in Burundio Very few fiscal indicators are fitted to capture the pro-poor

impact• Government: pro-poor aspect entirely absent• IFIs: mostly capture the spending side

Tax sideSpending

sidePRSP Total revenues (% PIB) No No

Ratio of yearly revenues to yearly target No NoRatio of yearly revenues to state spending No NoTax payments for a manufacturing company No NoTime required to comply with 3 major taxes No NoTotal tax rate (% of profit before tax) No NoFiscal Policy No YesEffi ciency of Revenue Mobilization No NoQuality of Budgetary and Financial Management No NoEquity of Public Resource Use Yes YesBusiness Regulatory Environment No NoIMF chapter 4 (2012) No Yes4th review under credit facility Feb. 2014 No Yes

Pro-poor agenda

Government indicators

Doing Business

'Paying Taxes'

CPIA

IMF publications


29

Suggested indicatorso Suggested indicators with two views:

• Follow up on pro-poor impact of tax reforms (tax side and spending side)

• Be available subject to data scarcity in a country like Burundi2010 2011 2012 2013

1.1 VAT revenue as a share of total revenue 36,5% 36,5% 36,5% 37,7%

1.2 VAT revenue levied on lower rate as % of tota l VAT revenue N/A N/A N/A N/A

1.3 Excise levied on progress ive products as % tota l excise revenue 72,7% 73,1% 86,5% 82,9%

2.1 CI tax revenue as a share of tota l revenue 14,3% 14,7% 15,7% 16,9%

2.2 Fisca l losses on CI exemptions as a share of tota l revenue 0,9% 2,4% 3,5% 1,6%

3.1 PI tax revenue as a share of tota l revenue 11,7% 10,7% 12,7% 7,7%

3.2 Effecti ve tax rate for monthly taxable income of BIF 350 000 41,5% 41,5% 41,5% 23,7%

4.1 Pro-poor s tate spending as % revenue 89,3% 78,8% 67,2% 66,0%

Set 1 -- Indirect taxes: VAT, excise

Set 2 -- Direct taxes: corporate income (CI) tax

Set 3 -- Direct taxes: personal income (PI) tax

Set 4 -- Pro-poor state spending

30

Conclusion

Conclusiono In an LIC like Burundi, there is a partial disconnect between

revenue reforms and poverty reductiono Tax side: the risk of regressivity is relatively higher

• Narrow income tax baseso Spending side: impractical to compensate for tax

regressivity with increased pro-poor spending• Revenue reforms are not precisely coupled with allocation reforms• The case of Burundi illustrates this difficulty

o Measurement indicators are not fitted to take into account the pro-poor impact of revenue reforms• Neither tax side, nor spending side

Thank you!

32

Bibliographyo Bastagli, F., Coady, D., & Gupta, S. (2012). Income Inequality and Fiscal Policy. IMF.o Daniels, R., & Edwards, L. (2006). The Benefit-Incidence of Tariff Liberalisation in

South Africa. o Engel, E., Galetovic, A., & Raddatz, C. (1999). Taxes and income distribution in Chile:

some unpleasant redistributive arithmetic. Journal of Development Economics, 155-192.

o Go, D., Kearney, M., Robinson, S., & Thierfelder, K. (2005). An Analysis of South Africa’s Value Added Tax. World Bank.

o Harberger, A. (1962). The Incidence of Corporation Income Tax. The Journal of Political Economy, 215-240.

o IMF. (2012). Article IV Consultation and First Review Under the Extended Credit Facility.

o IMF. (2014). Fourth Review Under The Extended Credit Facility Arrangement. o IMF Fiscal Affairs Department. (2011). Revenue Mobilization in Developing Countries.o Keen, M., & Mansour, M. (2009). Revenue Mobilization in Sub-Saharan Africa:

Challenges from Globalization. IMF Working Paper.o Marshall, J. (2009). One size fits all? IMF tax policy in Sub Saharan Africa. Christian

Aid.o World Bank. (2011). CPIA 2011 Criteria. o Zolt, E., & Bird, R. (2005). Redistribution via Taxation: The Limited Role of the

Personal Income Tax in Developing Countries. UCLA Law Review, 1627–95.

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Appendix 1 – Total expenditure

ferdi – cifd – cerdi – université d’auvergne 12 juin 2014 – clermont-ferrand

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