Taxation and Economic Development (Routledge Revivals)

Twelve Critical Studies

John F. J. Toye

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781135051297
• Edition: 1
• Topic: Negocios y empresa
• Subtopic: Fiscalidad

The tax system is one of the instruments said to be available to translate development policy objectives into practice. The wide-ranging papers collected together in this volume, first published in 1978, explore different aspects of the link between national development objectives and the tax system. Attention is particularly focused on traditional aims such as growth, fair distribution and economic stabilisation and development. Articles written by distinguished experts in the fields of public finance and economic development clarify the concepts of taxable capacity and tax effort, and examine the connections between growth and changes within the tax system.

PART ONE

TAX CAPACITY AND TAX EFFORT

An earlier vfersion of Chapter 1 was published in the Greek periodical Spoudai.

Chapter 2 is based on a seminar originally delivered at the University of Puerto Rico in October 1974. Although helpful comments on an earlier draft were received from Fuat Andic, Roy Bahl, Luc De Wulf, Daryl Dixon, Ved Gandhi, Richard Goode, Gerald Helleiner, Carl Shoup, Roger Smith and Vito Tanzi, it is important to emphasise that none of these necessarily agree with the author’s analysis or conclusions. This essay was first published in Finanzarchiv, Band 34, Heft 2, March 1976, pp. 244–65 and is reprinted here with permission.

Chapter 1

The Taxable Capacity of a Country

A. R. PREST*

The topic of taxable capacity is an ancient one in public finance literature.¹ After being dormant for a number of years, it has recently come to the fore again in a variety of different contexts.² In this paper the different strands of thought embedded in the idea are set out to show how they relate to one another.

Section I will be concerned with the estimation of actual tax yields as proportions of national aggregates. Although no one would claim that such data in their unvarnished form tell one anything about taxable capacity, it is nevertheless necessary to know, before proceeding further, something about the snags in such calculations. Section II examines one historical strand in the literature about taxable capacity: the notion that it is connected with justice or fairness in tax assessment. Section III turns to what seems at first sight to be another theme, and one which has received a lot of attention in recent years, i.e., the notion of reasonableness as judged by the standards of tax-raising in other countries with similar characteristics. In Section IV we come to the proposition that taxable capacity relates to an upper limit beyond which tax ratios cannot be raised. Finally, we shall draw a few conclusions.

It can quickly be seen from this very brief description of the content of this paper that it is much more concerned with pulling together a number of threads from the literature and examining their implications than in developing brand new ideas. It is only right that this point should be made explicit at the beginning.

I THE RATIO OF TAX YIELD TO A NATIONAL AGGREGATE

Obviously, no calculations or estimates of ratios of tax yield to a national aggregate are going to tell us anything directly about the notion of taxable capacity. The latter conveys some idea of potential yield, as distinct from actual yield, and therefore the former is not likely to enlighten us more than minimally. As we shall see, the concept of taxable capacity is extremely elusive. But our concern at the moment is simply to clear the ground by sorting out what is commonly measured by these calculations so as to produce a foundation for later discussion.

I propose to refer to two sets of recent calculations. The earlier one³ covers a large number of countries, but inevitably relates to data which are now older than one would like. The later one⁴ refers to a smaller number of countries, but has a more recent coverage.

The conventional conclusion is that the ratios of tax yield to GNP in developing countries are quite substantially lower than in the developed countries. If one takes the Chelliah data one finds that for 47 developing countries the ratio of taxation to GNP in 1966–68 was 13.6 per cent; and in 1969–71 the average was 151 per cent. On the other hand, the corresponding figure for sixteen developed countries in Europe and North America in 1969–71 was 26.2 per cent. If one wishes to amplify the data for developed countries one can see from the paper by Messère that the ratio for fifteen OECD countries in the year 1974 was 36 per cent (including social security taxes).

Two obvious conclusions follow. One is that there is a wide gap between developed and developing countries. Indeed this is greater still if social security revenues are included, because these tend to be proportionately greater in developed countries. A second conclusion is that the Chelliah figures show that the ratio in developing countries is tending to increase over time.

The conclusions drawn from these data differ sharply between developing and developed countries. The usual inferences drawn for the former are that the ratio of taxation to GNP is some sort of national virility symbol, and that they should try to emulate the ratios of developed countries, or, at any rate, that those developing countries occupying low positions in their own league table should try to mend their ways and increase their ratios, so that they are closer to those of the leaders. On the other hand, in developed countries in recent years it has become much more a matter for national despondency or complaint if the tax/GNP ratio is seen to be higher than in comparable countries. The fact that such opposing conclusions are drawn should put one on one’s guard against the tendentious use of this ratio.

In interpreting data of this sort there are three major points to make. As I have dealt with the subject elsewhere at some length,⁵ I propose not to go into extensive discussion, but simply to list the major problem areas. The first is what one is not concerned with in measures of this sort. The second is the consideration of the right principles for these sorts of measures. The third is the way in which the conventional calculations depart from these principles. Let us now look at each of these subjects in turn.

If we are trying to establish what we are not concerned with in this area it is easy enough to compile a very long list. Putting it into a nutshell, one is clearly not going to establish from measurements of the ratio of tax to GNP either the proportion of real resources which is absorbed by the public sector, or the proportion of value added in the economy as a whole which comes from the public sector. Still less shall we obtain any indication of the degree of government intervention, or any such complicated concept.

In principle, one could start by saying that one is trying to measure the cost of the payments which the communtiy has decided to make on a collective or non-market basis. In other words we are concerned with what Shoup⁶ has called the proportion of expenditure about which individuals and corporations are not allowed to please themselves. At least this is an approach to the correct principle. But it is clearly not sufficient, in that it is essentially concerned with the proportion of public expenditure to the national aggregate, rather than public revenue. If, as here, we want to concentrate on public revenue, the appropriate concept is the flow of income which is compulsorily diverted from individuals, corporations and the like, and so is not at their direct disposal.

We now come to the ways in which the standard calculations depart from this concept. Let us look first of all at the measurement of tax revenue and then, secondly, the national aggregate.

As far as tax revenue goes there are a number of major issues. One is how the profits of public corporations should be treated; another is social security contributions; another is capital taxes; and another is the inflation tax, a concept which has been made familiar in recent years by the writings of Professor Friedman⁷ and others.

One can hope to set up an appropriate measure only if one can establish a set of general principles. Those which seem to be relevant are, first of all, to know whether any particular payment to the government is compulsory or not; and, secondly, to have some method of deciding whether the profits of state corporations should be treated as part of total revenue. For reasons which I have set out in detail elsewhere,⁸ it seems to me that the appropriate measure in the second case is a concept relating to the excess profits of public corporations, i.e., those profits in excess of a ‘normal’ return, however defined. Obviously, there are plenty of difficulties in defining a normal return. But if we do not follow such a rule, we are likely to find that comparisons between countries of ratios of tax to the national aggregate are completely distorted because one country happens to have profits from, say, a nationalised steel industry, whereas another does not. This argument also ties up with the notion of that part of spending power which is compulsorily diverted to collective provision. People are not normally compelled to buy specific amounts of those goods or services which are sold by State organisations.

If we follow these concepts through, we find that the standard data are affected in various ways. I do not propose to refer to these in detail but obvious examples are the treatment of social security contributions, capital taxes and, in an age of inflation, the inflation tax. All these various contributions to the State fit in ...