Critical Issues in Taxation and Development

Critical Issues in Taxation and Development

Clemens Fuest
George R. Zodrow
Copyright Date: 2013
Published by: MIT Press
Pages: 256
https://www.jstor.org/stable/j.ctt5vjs40
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  • Book Info
    Critical Issues in Taxation and Development
    Book Description:

    Many developing countries find it difficult to raise the revenue required to provide such basic public services as education, health care, and infrastructure. Complicating the policy challenges of taxation in developing countries are issues that most developed countries do not face, including widespread corruption, tax evasion and tax avoidance, and ineffective political structures. In this volume, experts investigate crucial challenges confronted by developing countries in raising revenue. After a comprehensive and insightful overview, each chapter uses modern empirical methods to study a single critical issue essential to understanding the effects of taxes on development. Topics addressed include the effect of taxation on foreign direct investment; forms of corruption, tax evasion, and tax avoidance that are specific to developing countries; and issues related to political structure, including the negative effects of fiscal decentralization on the effectiveness of developmental aid and the relationship between democracy and taxation in Asian, Latin American, and European Union countries that have recently experienced both political and economic transitions.Contributors:Clemens Fuest, Timothy Goodspeed, Shafik Hebous, Michael Keen, Christian Lessmann, Boryana Madzharova, Giorgia Maffini, Gunther Markwardt, Jorge Martinez-Vazquez, Paola Profeta, Riccardo Puglisi, Nadine Riedel, Simona Scabrosetti, Johannes Stroebel, Mirco Tonin, Arthur van Benthem, Li Zhang, George Zodrow

    eISBN: 978-0-262-31418-3
    Subjects: Business

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Series Foreword
    (pp. vii-viii)

    The CESifo Seminar Series aims to cover topical policy issues in economics from a largely European perspective. The books in the series are products of papers and intensive debates that took place during the seminars hosted by CESifo, an international research network of renowned economists organized jointly by the Center for Economic Studies at the Ludwig-Maximilians-Universität and the Ifo Institute for Economic Research. The publications in this series have been carefully selected and refereed by members of the CESifo research network....

  4. I
    • 1 Introduction
      (pp. 3-12)
      Clemens Fuest and George R. Zodrow

      The ability of governments to raise taxes in order to finance public goods is essential to achieving economic development and growth. Many developing countries find it very difficult to raise the revenue required to provide basic public services such as infrastructure or schools. Improving the revenue-raising capacity of the public sector without crippling the growth prospects of a developing economy is a difficult policy challenge. Moreover, many of the central themes of ongoing debates regarding tax reform in developing countries—such as the mix of direct and indirect taxation and the details of the tax rates and tax base under...

    • 2 Taxation and Development—Again
      (pp. 13-42)
      Michael Keen

      Interest in issues of taxation and development comes and goes. This is true of policy makers (in developing countries and, especially, in donor countries) and among civil society and academics (with, it has to be said, a historically low level among the last of these). Now we are entering an “up” phase of interest, not least from the donor community. At their November 2010 summit, for instance, the G-20 leaders emphasized the importance of strengthening revenue mobilization in developing countries and asked involved organizations to report on how best they could help.¹ The explanation is perhaps not hard to find....

  5. II
    • 3 Do Companies View Bribes as a Tax? Evidence on the Tradeoff between Corporate Taxes and Corruption in the Location of FDI
      (pp. 45-64)
      Timothy Goodspeed, Jorge Martinez-Vazquez and Li Zhang

      A large literature has documented the fact that high corporate taxes in host countries deter foreign direct investment. In a series of meta-studies, de Mooij and Ederveen (2003, 2008) find that the average estimated tax semi-elasticity of FDI is −3.3 percent. Altshuler, Grubert, and Newlon (2001) find that the elasticity of investment with respect to after-tax host-country rates of return for US multinationals increased (in absolute value) from −1.5 in 1984 to −2.8 in 1992. Altshuler and Grubert (2004) find evidence of investment tax elasticities of about 3 over the years 1992, 1998, and 2000. Summarizing much of the research...

    • 4 Do Corruption and Taxation Affect Corporate Investment in Developing Countries?
      (pp. 65-82)
      Clemens Fuest, Giorgia Maffini and Nadine Riedel

      The purpose of this chapter is to assess whether public-sector corruption and corporate taxation affect corporate investment activity in developing countries. Corruption is an important topic for developing countries. The public sectors of many low-income and middle-income countries are plagued by this problem, and crowding back corrupt practices is widely seen as an important element of strategies for economic development.¹

      Views on the economic consequences of corruption are divided. Though several authors (e.g., Shleifer and Vishny) have argued that corruption is bad for economic development and growth, others challenge this view and argue that corruption may facilitate economic activity and...

    • 5 Investment Treaties and Hydrocarbon Taxation in Developing Countries
      (pp. 83-106)
      Johannes Stroebel and Arthur van Benthem

      For many developing countries, tax revenues from hydrocarbon production generate the majority of government income. For example, from 2000 to 2007 the percentage of total government revenues from hydrocarbon and minerals tax revenues was 77 percent for Equatorial Guinea, 76 percent for Angola, 78 percent for Nigeria, 72 percent for Yemen, and 59 percent for Azerbaijan (Boadway and Keen 2009). These revenues vary directly with the world market price for oil, and swings in oil prices often have a large effect on government budgets (IMF 2007). In a response to falling oil prices, Gabon’s government had to cut its 2009...

  6. III
    • 6 The Effect of a Low Corporate Tax Rate on Payroll Tax Evasion
      (pp. 109-144)
      Boryana Madzharova

      The evasion of social security contributions has been a long-standing problem in Latin America and in Central and Eastern Europe (CEE). Crude estimates for some Latin American countries in the early 1990s indicate that 50–60 percent of the contribution liability remained uncollected, Brazil heading the list. In the mid 1990s, according to an estimate by the International Labour Office (Gillion et al. 2000), 20–30 percent of total contribution income in CEE was evaded.

      In 2002, according to a number of surveys, approximately 34 percent of all employed people in Bulgaria understated their true wages, and 25 percent worked...

    • 7 International Profit Shifting and Multinational Firms in Developing Countries
      (pp. 145-166)
      Clemens Fuest, Shafik Hebous and Nadine Riedel

      Developing countries are well known to have difficulty raising tax revenues. Whereas the tax-to-GDP ratios of industrialized countries are usually above 30 percent, developing countries often observe tax-to-GDP ratios of 15 percent or lower. This limits the capacity of the state to fulfill its tasks, especially to provide public goods and services that reduce poverty and foster economic development. One major challenge of raising taxes in developing countries is that many businesses—particularly small domestic businesses—are not registered with the tax authorities and operate in the shadow economy. Since multinational firms typically operate within the official sector, the taxation...

    • 8 Too Low to Be True: The Use of Minimum Thresholds to Fight Tax Evasion
      (pp. 167-186)
      Mirco Tonin

      Enforcing compliance with tax regulation is a complex task.¹ This is particularly the case when the administrative capacity of the tax authority is low, as it is in many developing and transition countries (Bahl and Bird 2008). This chapter draws on some international experiences in fighting tax evasion to identify tools that can be used to reduce underreporting by employed labor, by small and medium-size enterprises, by the self-employed, and by professionals.

      I will analyze in some detail two policies: the Italian “Business Sector Analysis” (which focuses on small and medium-size enterprises, the self-employed, and professionals) and the Bulgarian “Minimum...

  7. IV
    • 9 Fiscal Federalism and Foreign Transfers: Does Interjurisdictional Competition Increase the Effectiveness of Foreign Aid?
      (pp. 189-216)
      Christian Lessmann and Gunther Markwardt

      In September 2000, the 55th General Assembly of the United Nations passed the Millennium Development Goals (MDGs). The MDGs include eight goals with 21 targets and a series of measurable indicators for each target. Among the targets are overcoming extreme poverty, reducing child mortality rates, fighting disease epidemics, and developing a global partnership for development. All 192 UN member states have agreed to achieve the development goals up to the year 2015. Although the goals are based on consensus, there are disagreements among the member countries regarding adequate instruments for their achievement. In particular, there is a controversy about the...

    • 10 Taxation and Democracy in Developing Countries
      (pp. 217-238)
      Paola Profeta, Riccardo Puglisi and Simona Scabrosetti

      As a growing literature (e.g., Giavazzi and Tabellini 2005; Persson and Tabellini 2007; Papaioannou and Siourounis 2008) emphasizes, democracy and economic growth have a two-way relationship. On one side, democracy may contribute to the economic growth of a given country; on the other side, the process of economic development may increase the chance of a democratic transition.

      However, little is known about the mechanisms that link democracy and specific economic outcomes. In this chapter we focus on the relationship between democracy and taxation.¹ More precisely, we ask whether there exists a relationship between the political regime in a country and...

  8. List of Contributors
    (pp. 239-240)
  9. Index
    (pp. 241-244)