Critical issues in taxation and development

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London, England

edited by Clemens Fuest and George R Zodrow

All rights reserved No part of this book may be reproduced in any form by any electronic

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Library of Congress Cataloging-in-Publication Data

Critical issues in taxation and development / edited by Clemens Fuest and George R Zodrow

p cm — (CESifo seminar series)

Includes bibliographical references and index

ISBN 978-0-262-01897-5 (hbk : alk paper) 1 Taxation — Developing countries 2 Tax evasion — Developing countries 3 Economic development — Developing countries I Fuest, Clemens, 1968 – II Zodrow, George R

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2012036427

10 9 8 7 6 5 4 3 2 1

Series Foreword vii

I

Clemens Fuest and George R Zodrow

Michael Keen

II

between Corporate Taxes and Corruption in the Location of

Timothy Goodspeed, Jorge Martinez-Vazquez, and Li Zhang

Clemens Fuest, Giorgia Maffini, and Nadine Riedel

7 International Profit Shifting and Multinational Firms in

Clemens Fuest, Shafik Hebous, and Nadine Riedel

Mirco Tonin

IV

Interjurisdictional Competition Increase the Effectiveness of

Christian Lessmann and Gunther Markwardt

Paola Profeta, Riccardo Puglisi, and Simona Scabrosetti

List of Contributors 239

Index 241

The CESifo Seminar Series aims to cover topical policy issues in nomics 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-Universit ä t 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

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 the income tax — are less important in a developing country, where issues such as dealing with widespread corruption, erosion of the tax base due to evasion and avoidance (including the pervasive phenomenon of income shifting by multinational corpora-tions), the importance of resource taxes (and their variability due to often dramatic fluctuations in the prices of resources), and ineffective political structures dominate discussions of tax reform This volume brings together nine studies in which leading researchers in the field investigate various aspects of the challenge of effectively raising tax revenue in developing countries, focusing on specific issues that are highly relevant to reforms of their tax structures Earlier versions of these studies were presented and discussed at the conference on Taxa-tion in Developing Countries held during the CESifo Venice Summer Institute at the Venice International University in July of 2010

In particular, this book takes a unique approach to the difficult issue

of raising revenue in developing countries The approach falls where between an overarching treatment of virtually all tax issues facing developing countries and all types of taxes (as in Bird and Oldman 1990 or Alm, Martinez-Vazquez, and Rider 2006) and the treat-ments found in volumes that are either tax-specific (e.g., Bird and

some-Gendron 2007 ; Ebrill, Keen, Bodin, and Summers 2001 ; Daniel, Keen, and McPherson 2010 ) or country-specific (e.g., Thirsk 1997; Gordon

2010 ) Instead, apart from Michael Keen ’ s comprehensive and ful overview of current issues in taxation and development in chapter

insight-2, each chapter in this book focuses on one fairly narrowly defined issue that is a critical element of a complete understanding of the effects

of taxes on development, and uses modern empirical methods to prehensively address that issue A wide variety of topics are covered

com-in this context, com-includcom-ing various ways com-in which buscom-iness taxation affects development; corruption, tax evasion, and tax avoidance; and how political structure bears on the effectiveness of aid and on the nature of the tax systems in developing countries Emphasis is also placed on issues that have received relatively little attention in the literature, rather than on often-examined topics such as value-added taxes and personal income taxes (see the references cited above) or consumption-based direct tax reforms (see, e.g., Zodrow and McLure

1991 ) Most of the chapters investigate empirical regularities across developing countries, although a few utilize a country-study approach

In our view, these highly focused and carefully executed studies provide a wealth of information that will be useful to experts in the academic and development communities, including the staffs of the various multilateral development organizations, policy makers in both developed and the developing countries, and indeed anyone with an interest in economic development

The chapters are grouped in four parts Part I, which gives an view of the issues, includes this introduction and chapter 2, in which Michael Keen observes that interest in taxation and domestic resource mobilization in developing countries has waxed and waned over the years and now appears to be resurgent Keen focuses on four issues that arise in evaluating the practical advice that developing countries are commonly given on tax matters, with the general theme that over-simplification should be avoided in dealing with issues involving taxa-tion and development The first issue is the importance of differences across developing countries and between them and the developed countries Keen notes that geographical characteristics, especially the presence of natural resources, colonial histories, and political struc-tures, vary considerably across developing countries Nevertheless, Keen argues, many general guiding tax principles are still applicable

over-in the developover-ing countries, and we should not assume that broad commonalities of tax design and advice are necessarily inappropriate

Second, Keen notes that the record of success of many “ big ideas ” that were originally seen as potentially critical to sustained improvement

of performance — including direct taxes, the value-added tax, independent revenue agencies, and large taxpayer offices — is mixed, with the VAT the most successful innovation He emphasizes that focusing on grand innovations risks distracting from less dramatic but important reforms that might yield significant progress Third, Keen observes that, although it is well known that informal or “ hard-to-tax ” sectors are prevalent in developing countries, it is necessary to consider more precisely how their existence affects tax design and implementa-tion Finally, Keen addresses the topical issue of the relationship between taxation and state building He notes the need for greater transparency in linking revenues and expenditures (raising the contro-versial issues of whether there should be a greater role for earmarked taxes) and the importance of the tax treatment of small and micro enterprises Keen ’ s conclusions emphasize the potential for microdata-based analyses (of which this volume provides several examples) to transform tax analysis for developing countries as it already has for advanced countries

The chapters in part II focus on the role of business taxation and other economic variables in investment in the developing countries They emphasize that factors such as corruption and the possibility

of government expropriation of private resources play a larger role

in determining the interaction between taxes and investment in the developing countries than in more developed countries In chapter 3, Timothy Goodspeed, Jorge Martinez-Vazquez, and Li Zhang note that, in contrast with the literature on taxes and investment in the developed countries, the results of existing studies are mixed as to whether high corporate taxes in host countries deter foreign direct investment (FDI) in developing countries Goodspeed et al investi-gate one possible reason for this difference: the presence of a tradeoff between taxes and good governance Their empirical analysis indi-cates that the effect of taxes on FDI is lessened when corruption is present They suggest that this is because taxes and corruption in the form of bribery to tax officials are substitutes, so that the presence of corruption should be expected to weaken the importance of formal taxation in determining the location of FDI Moreover, corruption is more likely in a high-tax environment, as it is a response to the desire

of multinationals to avoid excessive taxation Since corruption tends

to be more prevalent and tax administration weaker in developing

countries, this helps explain why in general corporate taxes are less relevant in explaining FDI location in the developing countries Goodspeed et al conclude by noting that, from the viewpoint of political economy, their results may help explain why the tax codes

of many developing countries are still characterized by high tory corporate tax rates: high rates may protect the interests of corrupt tax officials by allowing them to solicit bribes from foreign and domestic investors

The interaction between corruption and corporate taxation in mining the level of business investment in developing countries is also investigated in chapter 4, in which Clemens Fuest, Nadine Riedel, and Giorgia Maffini investigate the effects of corruption and corporate taxation on business investment Their starting point is the debate about how corruption affects economic development While interna-tional development organizations and most governments undertake considerable efforts to limit corrupt practices, views on the economic effects of corruption are divided Clearly, corruption can be bad for economic development because it undermines state capacity, creates uncertainty and may be accompanied by extortion of firms and con-sumers However, corruption may also have other effects According

economic activity by allowing entrepreneurs and other economic agents to circumvent inefficient regulations and taxes Using panel data for firms in 16 developing countries, Fuest et al investigate how public-sector corruption and corporate taxation affect the capital stock

of firms operating in these countries Most of the specifications in chapter 4 suggest that corruption is linked to a lower capital stock

In the same direction, a high corporate tax burden tends to exert a negative effect on firms ’ total assets The findings thus support the view that high taxes may deter investment At the same time, they

et al also investigate whether the effects of corruption and taxation

on multinational firms differ from the effects on purely national firms They find that the negative effect of corruption on investment is larger for multinational firms but that the reaction to taxes is not signifi-cantly different This result suggests that corruption is a burden on economic activity and that multinational firms, possibly because of their higher mobility, find it easier to reduce the exposure of their assets to corrupt environments or to avoid doing business in corrupt countries Another possible interpretation is that smaller, national

firms have adapted or learned to deal with corruption while national firms have done so to a lesser degree In any case, the results

multi-of chapter 4 are compatible with the findings multi-of chapter 3, according

to which good governance seems to be a major factor in attracting international investment

A different angle on business taxation and economic development

is taken in chapter 5, in which Johannes Stroebel and Arthur van Benthem focus on the problem of resource taxation applied to indepen-dent oil companies (IOCs) — something that is crucially important for many developing countries Specifically, Stroebel and van Benthem examine how bilateral and multilateral investment treaties affect the structure of tax contracts between resource-rich host countries and IOCs Resource-rich countries typically derive a large fraction of their revenues from resource taxes, and need to insulate their revenue flows from the severe price fluctuations that often characterize resource markets They can obtain such price insurance by using tax structures that shift price risk to IOCs, taxing a larger share of IOC revenues when resource prices are low and a smaller share when prices are high However, because political pressures to enact windfall-profit taxes or

to expropriate resources are high in the latter case, it is difficult for governments to credibly commit to such tax structures Stroebel and van Benthem emphasize that bilateral and multilateral treaties can increase the avenues of recourse available to foreign investors in the case of a breach of contract by host governments; they can thus signifi-cantly increase the cost of expropriation, and enhance the ability of developing countries to make credible commitments to avoid windfall profits taxes and expropriation They first construct a theoretical tax contract model and show that the amount of price insurance in such contracts increases with the cost of expropriation to the host country They then use an extensive data set on the fiscal terms of 2,466 tax contracts with resource firms in 38 countries to analyze the degree of price risk borne by the government through the tax structure They show that the presence of bilateral and multilateral investment treaties

is associated with tax contracts that allow host countries to shift more price risk to foreign investors

Part III includes three studies of corruption, tax avoidance, and tax evasion, issues that again are more important in most developing and emerging economies than in the more developed countries The chap-ters in this part examine particular avenues for corruption, evasion, and avoidance that are specific to developing countries It is a

commonly held view that the widespread policy of cutting the rate income tax has a positive effect on taxable income through decreas-ing firms ’ incentive to hide profits A neglected side of this policy, however, is its potential to trigger more evasion in another tax base, namely the social security base, especially if the corporate income tax

corpo-is very low relative to the contribution rate In chapter 6, Boryana Madzharova develops a model in which employers and employees cooperate in declaring lower wages to the tax authorities in order to evade payroll contributions Since wages and payroll taxes are deduct-ible expenses, a lower reported wage translates into higher corporate profits on paper and, hence, a shifting of tax liability out of the social security tax base into the corporate tax base Using firm-level panel data for Bulgaria, where the problem of contribution evasion is espe-cially severe, Madzharova finds that a 10 percent increase in the differ-ence between the payroll rate and the corporate income tax will translate into a 0.86 percent decrease in reported wages and a 0.6 percent rise

in reported taxable income The reported wage bill of big taxpayers appears to be more responsive to changes in the difference between the payroll and the corporate income tax rates, but these firms do not tend

to overpay corporate profit taxes stemming from payroll evasion These results suggest that while wages paid by smaller taxable income firms are less sensitive to the tax gap, it is small businesses who mostly shift income between the bases

In chapter 7, Clemens Fuest, Nadine Riedel, and Shafik Hebous turn

to corporate income tax avoidance by large firms — an issue that is common to both developing and developed countries but is especially problematic in the former because of their limited administrative capa-bilities The analysis uses microdata on German multinational firms and their subsidiaries and branches in industrialized and developing countries These data include information on intra-company loans — that is, loans between different entities of the same multinational group,

as opposed to loans from third parties such as banks Intra-company loans are particularly suited for tax avoidance because, owing to the deductibility of interest payments, these loans allow multinational firms to shift profits from high-tax countries to low-tax countries Fuest

et al find a positive and significant relationship between the host try ’ s tax rate and the level of intra-firm debt financing This is in line with the hypothesis that firms use intra-group loans to reduce their tax burden This effect is stronger in developing countries, suggesting that developing countries are more vulnerable to profit shifting than devel-

coun-oped countries Fuest et al also investigate whether firms with affiliates

in tax havens react more sensitively to tax differences than firms with

no links to tax havens Perhaps surprisingly, the data do not support this hypothesis Overall, chapter 7 is consistent with the view that developing countries face greater difficulties than developed countries

in dealing with sophisticated tax planning strategies of multinational firms

In chapter 8, Mirko Tonin focuses on the role of the administrative instrument of minimum thresholds for fighting the tax evasion and tax avoidance that are the topics of the previous two chapters Such “ pre-sumptive ” rules for taxation are common in developing countries that are administratively unable to effectively enforce taxes on business and personal income Tonin looks at minimum thresholds that prevent taxpayers from declaring an income below a certain amount or, alter-natively, make them subject to a higher probability of an audit if they decide to do so First, he models the effect of minimum thresholds by explicitly taking into account low administrative capacity The model shows that introducing a threshold creates a spike and a “ missing middle ” in the distribution of declared incomes and highlights under which conditions a threshold is likely to increase net revenues Tonin then analyzes two policies used to fight underreporting: the Italian “ Business Sector Analysis ” and the Bulgarian “ Minimum Social Insur-ance Thresholds ” The Italian tax authority infers “ normal ” revenues and compensations by small and medium enterprises, self-employed individuals, and professionals from indicators that are difficult to conceal or manipulate If the taxpayer decides to declare less than the “ normal ” level, the probability of an audit increases and the burden of proof is reversed Bulgaria has established a system of differentiated minimum social insurance thresholds depending on sector and profes-sion, which put differing floors under social security contributions In conclusion, Tonin appraises the applicability of these two systems in other countries

The chapters in part IV address issues related to political structure and economic development In chapter 9, Christian Lessmann and

G ü nther Markwardt examine the importance of the extent of fiscal decentralization and interjurisdictional tax competition for the effec-tiveness of development aid Using measures of expenditure decentral-ization and tax decentralization, they analyze a panel data set that includes 41 developing countries to investigate how decentralization and interjurisdictional competition affect effectiveness of aid The

analysis shows that the degree of expenditure decentralization has

a negative effect on foreign aid ’ s effectiveness Aid may contribute

to economic growth in centralized countries, but it significantly harms growth in decentralized ones Interjurisdictional competition, as reflected by the degree of tax-revenue decentralization, has a negative effect on foreign aid effectiveness in general Lessmann and Mark-wardt ’ s study has important implications for the design of anti-poverty programs Since decentralization and interjurisdictional competition undermine foreign aid ’ s effectiveness, they conclude that aid should

be allocated to more centralized countries At least, development aid

to decentralized countries should take into account the limited tiveness of aid observed in the past and develop strategies to improve the outcomes

Finally, in chapter 10, Paola Profeta, Ricardo Puglisi, and Simona Scabrosetti consider the relationship between political structure and the nature of taxation in developing countries Their empirical analysis focuses on the relationship between democracy and taxation in three areas of the world — Asia, Latin America, and the new members of the European Union — that have recently experienced democratic as well

as economic transitions Profeta et al focus on two aspects of cratic political regimes that may be present to different degrees and may play independent roles in determining the level and the composi-tion of taxation: existence of democratic institutions and guarantees of civil liberties To examine these issues empirically, Profeta et al con-struct a new data set of fiscal, socio-economic, and political variables for 39 low-income developing countries over the period 1990 – 2005 They find some correlations between political variables and tax factors when using standard cross-country pooled ordinary least-squares regressions with region fixed effects However, once they control for country fixed effects, tax revenues and tax composition in general are not significantly correlated with indices of the strength of democratic institutions and of the protection of civil liberties The only exceptions are (1) a positive and significant relationship between the democracy index and the share of trade taxes and (2) a negative correlation between protection of civil liberties and property taxation Profeta et al provide some plausible explanations for these two results, but note that the links between democracy and the level and composition of taxation are complex phenomena that require careful investigation They conclude

demo-by suggesting that further research is needed to determine through what channels political institutions affect economic outcomes

Recent years have seen increasing interest in the need to improve economic conditions in developing countries Although the problems

of developing countries are multi-faceted, the existence of an effective revenue system to finance the provision of essential public services

is essential to fostering development The studies presented in this volume examine numerous issues in taxation and development from

a wide variety of theoretical, applied, and empirical perspectives Together they provide a wealth of knowledge on how tax policies should be reformed to foster economic development and thus help solve one of the most critical issues of our time

References

Alm , James , Jorge Martinez-Vazquez , and Mark Rider 2006 The Challenges of Tax Reform

in a Global Economy Springer

Bird , Richard M , and Pierre-Pascal Gendron 2007 The VAT in Developing and Transitional

Countries Cambridge University Press

Bird , Richard M , and Oliver Oldman 1990 Taxation in Developing Countries Johns

Hopkins University Press

Daniel , Philip , Michael Keen , and Charles McPherson , eds 2010 The Taxation of Petroleum

and Minerals Routledge

Ebrill , Liam , Michael Keen , Jean-Paul Bodin , and Victoria Summers 2001 The Modern

VAT International Monetary Fund

Gordon , Roger H 2010 Taxation in Developing Countries: Six Case Studies and Policy

Impli-cations Columbia University Press

Thirsk , Wayne 1997 Tax Reform in Developing Countries World Bank

Zodrow , George R , and Charles E McLure Jr 1991 Implementing direct consumption

taxes in developing countries Tax Law Review 46 ( 4 ): 405 – 487

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 sized the importance of strengthening revenue mobilization in devel-oping countries and asked involved organizations to report on how

Many developing countries need substantial additional revenue to

needed in many low-income countries if they are to have a good chance

of meeting the UN ’ s Millennium Development Goals — as well as

same time, the dire post-crisis fiscal position of many advanced mies is naturally focusing attention on the extent and effectiveness

econo-of the aid they provide to developing countries, and on ensuring that

it supports rather than discourages the latter ’ s own revenue-raising efforts Hence the renewed focus on, in the jargon, “ domestic resource mobilization ”

This welcome resurgence of interest makes it timely to take stock of experience and lessons in the area, and to assess newer challenges to resource mobilization in developing countries, such as those from glo-balization But that is not the purpose here; this chapter does not aim

to provide a sweeping review of technical issues, largely because there

is no shortage of surveys and there are quite a few books on resource

areas for research or methodological improvement, though there will

be some of that (This volume itself is evidence of the importance and

value of strengthening empirical work in the area.) Instead the purpose

of this essay is to reflect, no doubt idiosyncratically, on some wider issues in the practical advice that developing countries are commonly given on tax matters The theme, perhaps, is to caution against the over-simplification (at best) to which this area has been, and remains, prone

Four topics are selected for discussion (perhaps more accurately, a bit of a rant), each with a view to informing the renewed focus on resource mobilization issues — or at least avoiding past mistakes

1 Developing Countries Differ — Yes, and ?

The literature in this area is rich in papers and policy documents with variants of “ Taxation and Development ” in their titles There is no harm

in that, of course, and many of the more recent contributions — not least, those in this volume — go beyond generic information and advice to provide detailed case studies of the effects of taxation in various devel-oping countries But the recurrence of “ Taxation and Development ” in the titles does reflect a search for generalization that, after decades of work in the area, one might have hoped to have moved beyond By comparison, specialists in public finance rarely set out to provide similarly generic treatments of taxation in advanced economies The point is not simply that developing countries differ greatly from one another No one would say otherwise Even if one separates out the newer group of emerging market countries (itself ill-defined, and overlapping with the category of those still regarded as “ developing ” ) and the transition economies (yes, there still are some), considerable differences in physical characteristics, political structure, and institu-tional history remain Development economists have become increas-ingly sensitive to these differences, with a lively and sometimes heated debate on the importance and relative roles of institutions — shaped in large part by colonial histories and legal traditions — and geography,

whether such differences really matter for thinking about taxation Some aspects of geography clearly matter a good deal Probably the single most important tax-relevant difference across developing countries — indeed, perhaps across all countries — is in natural resource

of exploration for resources is an outcome of economic decision

1980s and 2005, resource-rich countries in sub-Saharan Africa increased their tax-to-GDP ratios by about 7 percentage points; non-resource-related tax revenue in the region, on the other hand, was essentially

to secure an acceptable share of the resource rents in a way that ensures

Lestes of the world — the question is, in effect, whether to have a tic tax system at all Even in more moderate circumstances, the role of the non-resource tax system can be quite different from what it is in resource-poor countries: largely a means of diversifying the revenue base and, perhaps, of increasing government accountability, rather than primarily a matter of raising revenue Tax design for such countries becomes, in large part, an aspect of the wider issue of resource manage-ment Transparency, macroeconomic management, and savings deci-sions have wider implications for the political and economic future of the country Resource taxation in low-income countries (including the treatment of such exhaustible resources as fisheries and forests) has been left to sectoral specialists much too long

domes-Other aspects of geography also matter for tax design Smaller

their borders much more easily than can large landlocked countries, so

it is not surprising that smaller countries tend to have more efficient

given the relative ease of raising substantial amounts by customs

struc-ture has contributed to extensive re-export activities and hence — with tax not being remitted on exports, some of which are presumably con-trolled at the border — to unusually strong revenue from a single-point sales tax

Nor is there any doubt that politics, in the broad sense, are tant This is not simply a matter, as we tend to think of it in advanced economies, of building some minimal consensus for tax changes Polit-ical instability, for instance, lowers incentives for the incumbent gov-ernment to invest in developing administrative capacity; Acemoglu (2005) and Besley and Persson (2009) explore these incentives more generally (as discussed further below), and, in a fascinating example, Aizenman and Jinjarak (2008) show that political instability is associ-

some national governments simply do not have full control over all their territory When that is the case, the standard prescription for the

revenue-desperate of relying on customs revenue and aiming to move

to a VAT (most of the revenue from which is collected at borders) is

of limited use More generally, tax policy is in such cases likely to be constrained by the need to avoid worsening internal conflict; levels of mistrust and frank dislike, for instance, can make reallocating tax powers across levels of government effectively impossible even when

it is demonstrable (insofar as these things ever can be demonstrated) that all could gain by doing so In this and many other ways, tax reform can get very personal Not least, its momentum and effective-ness can depend on the presence of one or two “ champions, ” the risk then being of backsliding once they have departed the scene

Less immediately evident, and under-studied, is the question of whether colonial histories continue to make a difference to the nature

of, and possibilities for, domestic revenue mobilization Certainly there are particular instances in which this seems to be the case In both India and Pakistan, for instance, a major obstacle to arriving at coherent VATs has been a constitutional restriction originating in the 1935 Govern-ment of India Act, which allocates the powers to tax goods and services

counter to the appeal and logic of the VAT, which must apply on an integrated basis to both goods and services There are also clear differ-ences in tax design between Francophone and Anglophone countries

in sub-Saharan Africa The former, for instance, have traditionally used

a “ complementary ” income tax (a progressive tax levied on the sum of net incomes after application of a series of schedular taxes), seem to

and have been inclined to use a territorial approach to the taxation of foreign income These features (with the possible, and possibly telling, exception of withholding, discussed later in this chapter) are all echoes

of tax practice in France — or, rather, of the France of many years ago Similarly, Lusophone African countries have tended to follow pecu-liarities of tax rules inherited from Portugal

The distinction between the experiences of Francophone and phone countries in sub-Saharan Africa is potentially a particularly interesting one In the wider development debate, it has been argued that the Anglophone countries (or, somewhat different, those with the British common law tradition) have fared significantly better in the post-colonial period A natural question is whether that is true in the area of taxation Table 2.1 suggests that it might be The first column reports the results of a standard, very parsimonious “ tax effort ” panel

Anglo-regression, relating the ratio of tax revenue (other than from natural

resources) to GDP ( NONRES ) in 39 sub-Saharan African countries to

the usual suspects in such equations — (the natural log of) GDP per

capita ( lnYPC ) and openness ( OPEN ) — and to a dummy (in level and interacted) indicating the presence or absence of a VAT ( VAT ) The

broad results are in line with previous work and need not detain us

(also both in level and interacted with the VAT dummy) in column 2 a

dummy, ANGLO , taking the value 1 for Anglophone countries and 0

otherwise There emerges a strongly significant difference between revenue performance in the two countries: non-resource revenue is higher, all else equal, in Anglophone countries, and the VAT has per-formed better This result is more of a question than an answer The challenge is to identify precisely what it is picking up, potentially including immutable differences of geography; detailed aspects of tax design that are in principle easily changed; deep differences in legal and other aspects of economic arrangements, that translate (how?) into tax performance; or something else There is surprisingly little work on

help us resolve these issues (in part, no doubt, because, with very rare exceptions, those working in the area tend to know well only countries

in one or two language groups) The issues range from the very broad

to the quite specific VAT withholding is an example of the latter Does

it have a substantial revenue impact (not just directly, but also through its impact on the wider VAT system)? And since it is not a tradition in France itself, why is it far more common in Francophone countries? Perhaps there is a post-colonial transmission mechanism in fiscal matters not from the colonizing country but between countries with

a common colonial heritage; in this case, regional integration, often grouping countries with similar colonial pasts, will preserve or amplify these differences across the wider set of developing countries Better understanding of such issues will not resolve all the problems of framing good tax advice But it can surely help — not least, perhaps, in coming to terms with the lesson of experience that change can be much harder to bring about than many have often liked to believe

That geographic and institutional differences matter for tax design does not mean that no general principles can apply It is sometimes said, for instance, that the tax advice given by the International Mon-

all: we generally think that the decimal system works pretty well, for

0.824 0.827 The dependent variable is non-resource-related tax revenue (so far as it can be identified) relative to GDP The data set is described in Keen and Mansour 2010a ; 17 of the 39 coun- tries are classified as Anglophone The dependent variable is revenue other than from natural resources Estimation is by ordinary least squares, with country dummies Robust standard errors are in parentheses Asterisks indicate significance at the 1% (***) and 5% (**) levels

instance, as does dividing the day into 24 hours Those examples are flippant, but — without claiming for them the same universality — they prompt the thought that some considerations in tax design also apply rather generally These might include the importance of effective with-holding, on wages and at least some forms of capital income, for effec-tive income taxation; the recognition that differences in statutory tax rates (whether across individuals, commodities, or countries) invite evasion and avoidance; that import tariffs can protect inefficient pro-ducers; and the fact that turnover taxes create distortions that a well-functioning VAT can avoid We do have powerful guiding principles, perhaps most notably the Diamond-Mirrlees theorem on the desirabil-ity of production efficiency, that provide guidelines for tax design We could do with better, more practicable ones, especially in the develop-ing country context But we should not pretend that we lack guiding

principles, or that broad commonalities of tax design and advice are necessarily inappropriate

2 The Checkered History of Big Ideas

Fashion and fads are part of life in many areas of economic policy, but advice on revenue mobilization and development over the last 60 years

or so has been especially strongly marked by the focus on a succession

of big ideas, each seen in turn as potentially critical to a sustained improvement of performance In practice, the records of those big ideas

Direct Taxation

Starting with the Shoup mission to Japan in 1949 — the birth (at least

advice to developing countries — the early focus was on the ment of some more or less comprehensive income tax as the centerpiece

India and Ceylon retained the focus on progressive taxation at vidual level, but aimed at progressive taxation of consumption rather than income

There can be little doubt that progressive personal taxation has not made the contribution to resource mobilization in lower-income countries that had been hoped (as has also been true, incidentally, in Japan, where its yield remains low, both absolutely and as a share

of all tax revenue) The personal income tax commonly accounts for less that 10 percent of all tax revenue in low-income countries (the average is more than 25 percent in OECD countries) and is widely recognized as essentially a tax on the labor income of those working

in the public sector or for large private enterprises This point is nicely put by Bird and Zolt (2005 , p 1694): “ [I]n most developing countries, the global progressive personal income tax long advocated

by experts is in fact neither global or progressive, nor personal, not often even on income ”

The reasons for this limited success (at best) of the personal income tax are less well understood than they should be, but no doubt they reflect both political and technical failures Entrenched power struc-tures and corruption are powerful obstacles to taxing elites and many high income/wealth individuals — perhaps more so than in the early days of income taxation in current high-income countries, in view of

greater opportunities (from resource wealth, for instance) for seeking and the concealment of income by placing it offshore But the limited success of the personal income tax also reflects administrative weaknesses and errors of design, importing inappropriately from the experience of developed countries Thresholds may have been set far too low, for instance, forgetting that many developed countries initially began with a very narrow set of taxpayers; and the comprehensive income tax has proved overly ambitious even in many developed coun-tries More fundamentally, effective progressive personal taxation of non-wage income requires some form of self-assessment (perhaps bolstered by withholding and third-party reporting) that continues to elude many tax authorities, which remain wedded to more direct methods of assessment Whatever the reason, however, the fact is that direct personal taxation has not proved a route to either a sustained

rent-or a particularly fair enhancement of tax capacity in lower-income countries Current advice tends to be much more modest, building on what are currently, in effect, schedular tax systems toward something approaching a dual income tax, with a progressive tax on labor income and a flat (or at least simple, more uniform, and fairly low) tax on capital income; indeed, the dual income tax is arguably better suited for many developing economies than for more advanced ones, in that its traditional Achilles ’ heel — the difficulty of disentangling the labor and capital income of the self-employed and close companies — is com-monly less problematic given the much larger difficulties in levying any kind of sensible tax on them at all

The Value-Added Tax

Sometime around the late 1970s, practitioners — notably in the Fiscal Affairs Department of the International Monetary Fund — made the great intellectual leap to a belief that the value-added tax, then firmly established in Europe and in a handful of other countries, could, if kept sufficiently simple, be an effective and (by dint of judicious exclusions and a fairly high threshold) reasonably fair source of revenue even in countries with limited administrative capacity Adding to this direct revenue appeal was the thought that, by catalyzing changes in ways of doing tax business, the VAT — which can work effectively only if imple-mented by self-assessment — could pave the way to the elusive strength-ening of income taxation Built on such reasoning, adoption of the VAT became the centerpiece of tax reform in the developing world — by

about 80 percent of the countries in sub-Saharan Africa, for instance The VAT has become the norm, typically raising about one-quarter of all tax revenue

Clearly the VAT remains controversial, but the only systematic dence that we have suggests that in broad efficiency terms it has: all else equal, countries with a VAT raise more revenue — a sign of having

always large, however, and are less apparent in sub-Saharan Africa than elsewhere In equity terms, although the VAT is often thought of

as a regressive tax, most studies show it to be more or less

to be less regressive than the trade and excise taxes it has replaced Furthermore, in at least some developing countries, the VAT may be about as progressive as the income tax ” ( Bird and Zolt 2005 , p 1639) What ultimately matters, of course, is the distributional effect of the full tax-and-spending system This has been little studied in develop-ing countries — an important exception being the work of Mu ñ oz and

uniform rate VAT with proceeds allocated to education and (especially) health can have a strongly progressive effect

Why the VAT nevertheless has such a bad name among many observers of tax policy in low-income countries thus remains a bit of a mystery No doubt it has sometimes been oversold, and those who have been doing the selling may be too defensive Clearly, too, the VAT

its record, as we understand it so far, it is hard to see the VAT as a failure The question, surely, is not whether to remove it (and replace

it with what?), but how to improve it

Revenue Authorities

As a way of addressing the corruption and political interference seen

as fundamental obstacles to effective and fair taxation in many income countries, considerable effort has been put into the creation of quasi-independent revenue authorities Spurred in part by encourag-ing experiences in Latin America — starting in 1991 in Peru, where non-compliance fell dramatically over the next 15 years or so — the thought was to reform tax administration by placing it in the hands of well-paid officials working in a well-financed institution protected against

low-pressure from the highly placed Revenue authorities possessing such features (to varying degrees) are now in place in more than forty coun-tries, including nearly all of Anglophone Africa

Though there have been no formal evaluations, there seems to be a consensus that experiences with revenue authorities have been mixed —

Perhaps there never was much prospect of discouraging corruption by means of salary increases that were dwarfed by the proceeds of collu-sion or extortion; turning a blind eye to a container of cigarettes, for instance, might save tax of around $500,000 Still more fundamentally, perhaps, there are often few obstacles to carrying out many of the reforms associated with revenue authorities within existing organiza-tional structures and public service rules And, although easy on paper,

in practice the formation of revenue authorities can be a painful and even paralyzing process (involving the exhausting and occasionally litigious process, for instance, of having employees reapply for their own positions) Though there have been more encouraging signs in the last few years (the Uganda Revenue Authority is now often held up as

a model), revenue authorities have not always lived up to the high expectations held by some

Large-Taxpayer Offices

Securing the remittance of tax by the largest enterprises is critical where, but likely even more so in lower-income countries, given both the weakness of self-assessment by individuals and, perhaps, a missing

To ensure proper control of such enterprises (which will generally include banks, large foreign investors, telecoms, and resource compa-nies), the creation within revenue administrations of offices dedicated

to large taxpayers has been another focus over the last 15 years or so

No systematic count is kept, but most Anglophone Africa countries, for instance, now have a “ large-taxpayer office ” (LTO)

on LTOs has been relatively uncontroversial Any sensible allocation of administrative resources, when revenue collections are weighed against administrative and compliance costs, would seem to call for a particu-lar focus on the largest payers: the gain from having the banks or the main telecom and resource companies not delay remitting tax by a few days, for example, can dwarf that from expanding the net to catch more

small taxpayers If there is one recommendation in tax matters for which one size pretty much does fit all, it would perhaps be the creation

of some form of LTO

This is not to say, however, that the focus on LTOs creates no ties There can be an incentive, for instance, for enterprises to find some way to remain outside the LTO, by avoidance or evasion or by genu-inely limiting the scale of their activities Moreover, governments can have an incentive to adopt anti-competitive and other measures that shift the tax base (not just profit, but also payroll and domestic sales)

these effects, focusing on any subset of taxpayers risks creating tion inefficiencies — an important reminder that the size distribution of firms should not be taken as exogenous In particular, insofar as there

produc-is a mproduc-issing middle of firms in lower-income countries, thproduc-is may reflect the inverse-U-shaped pattern of effective rates of both taxation (large

profitabil-ity — bribes (more profitable firms may be less vulnerable to extortion

in the form of having their tax liability credibly over-stated; less

practical significance of these concerns But it appears that, although controlling large taxpayers is a prerequisite for effective tax administra-tion, it is, at best, a first step toward that goal

Lessons

One conclusion to draw from all this is surely that there is a need for more effective evaluation of initiatives in this area The lack of careful studies is no doubt due largely to severe data limitations, of availability and quality; and perhaps too a lack of interest and/or awareness in the academic community Controlled experiments have been little used, partly because they are intrinsically difficult to design for many major reforms (it is hard to introduce a value-added tax in only part of a country, for instance, and impossible to do it only for a few sectors) but also because evaluation has not been given great weight relative to the potential benefits (and perhaps the limited downside) of acting quickly: donors naturally want to get things visibly done Evaluation is now being given more importance by donors, but as yet perhaps without full recognition that doing this to the same standards increasingly expected in other areas of public policy will require building it more purposively into project design There are now instructive examples of feasible and useful experimentation in tax issues for developing (or at

least emerging) economies; those of Pomeranz (2011) in collaboration with the Chilean tax authority, for instance, cast new light on how enhanced auditing at one point in a VAT chain affects compliance else-where in the chain More immediately encouraging is the increased use

of microdata to address issues of tax design and compliance in

impact of discontinuities in Pakistan ’ s income tax, Goyette 2012 on the structure of VAT audit probabilities in Uganda, and, not least, several

of the chapters in the present volume

A second lesson is that there are no quick fixes But while the slow progress of tax reform in many countries over the last decades has been

a disappointment, the wider considerations discussed above suggest that this should not, in retrospect, come as too great a surprise One of the risks in focusing on big new ideas is that it can detract from the dull but critical job of moving beyond the moment of innovation to the hard work of implementation The task of moving toward an effective VAT is not done, for example, simply by introducing it and surviving the political fallout Years of further work can be needed to put in place the registration, auditing, and other administrative capacities needed

remains far from complete It can be easier to move on to more dramatic initiatives More generally, focusing on grand innovations risks dis-tracting from the less dramatic but important areas in which progress has been made; for example, the role of simple excise taxes has argu-ably received too little attention in many countries

All this suggests that, exciting as it is to come up with new big ideas,

balance with less dramatic efforts at improvement — is appropriate

of offices devoted to the needs of medium-size taxpayers, with taxpayer offices following on; this builds on the perceived success of the LTO Another is the notion that large sums can be recovered by addressing evasion by the rich though tax havens and by stemming profit shifting by abusive transfer pricing, financial structuring, and other devices; here the issue is less the precise magnitudes of the sums

the extent to which lower-income countries can effectively address problems that even the most sophisticated administrations struggle with The third idea is an emphasis on the links between taxation and

the building of accountable, transparent, and efficient governments; this is discussed in section 4

3 Informality Is Not the Issue

Discussions of tax challenges in developing countries conventionally emphasize, early on, a massive extent of informality, often around half

or more of measured GDP As Bird and Zolt (2005 ) emphasize, the effect

on measured GDP itself probably is smaller, in that estimates of mality are typically of gross activity rather than of value added But the more fundamental limitation of this focus on “ informality ” is con-ceptual: What exactly does it mean?

infor-The wider development literature does not provide much help Kanbur (2009 , p 2) concludes that the term “ informality ” has “ the dubious distinction of combining maximum policy importance and political salience with minimal conceptual clarity and coherence, and that “ the literature as a whole is in a mess ” Much the same is surely true of the use of the term in discussions of taxation and development

It simply fails to evoke with much accuracy the issues of compliance that are the real challenge For instance:

infor-mal ” in some vague sense of operating essentially untouched by ernment restrictions But in tax terms it is far from clear that they pose any particular problem: a balancing of traditional concerns, weighing the revenue forgone by excluding them from tax against the adminis-trative and compliance costs (and the gain in production efficiency) from including them, would almost certainly imply that they should not be taxed (except indirectly through taxes, such as the VAT on their purchases, that are remitted by others — and perhaps by small fees that, many would quietly say, are there for show rather than as an attempt

gov-to raise serious revenue) That is, the optimal tax gov-to be remitted by such operators themselves may very well be zero

other hand — in terms of both revenue loss and damage to the fairness

of the overall tax system — are by professionals: doctors, lawyers,

profes-sional restrictions, these are not the type of business operators one would naturally call “ informal ”

The real issue, then, is not in any very useful sense “ informality ”

may carry an excessive air of inevitability and, insofar as it the term has come to be taken as largely synonymous with small businesses, risks abstracting from the question of whether some of the very small-est and perhaps hardest to tax among them should receive any very serious attention from the tax authorities at all The point, in any case,

is not to try to change usage — no doubt the term “ informality ” is here

to stay — but rather to emphasize that the real issue is non-compliance and its endogeneity to both tax design and implementation It is neces-sary to go beyond the comfort of broad labels and to probe deeper into the anatomy of non-compliance, and how tax design and implementa-tion should reflect and address it These are complex issues, but facing them head on at least points to potentially fruitful areas of inquiry and action

It makes a good deal of difference, for instance, whether pliance is in the form of “ ghosts ” (operators who should register for tax purposes but do not, and so remain unknown to the authorities) or “ icebergs ” (registered but under-paying taxpayers) In the former case, identification and registration of taxpayers is a crucial first step; in the latter, audit and enforcement are key Such information as we have suggests that, though ghosts are by no means unknown in advanced countries (non-filers may be 7 percent of all potential taxpayers in the

both Gauthier and Gersovitz (1997 , for Cameroon) and Gauthier and Reinnika (2001 , for Uganda) found that about 50 percent of firms were failing to pay anything at all for at least one tax for which they were legally liable The term “ ghosts, ” however, may suggest an invisibility that is far from reality: a substantial number of the evaders identified

in Cameroon had had contact with the tax administration in the ous year Finding potential taxpayers, it seems, is only part of what has

a real tradeoff, in view of the very different skill requirements? In many countries, the large number of low-skilled employees working on

small-business taxation is perhaps best interpreted as a workfare scheme — which may make sense, but casts quite a different light on the exercise

Importantly, strengthening compliance is not a matter only of tax administration In a telling and justly famous remark, Casanegra de Jantscher (1990) claimed that “ in developing countries, tax administra-

tion is tax policy ” But the opposite, of course, is equally true: “

Ques-tionable options in tax policy sometimes lead to equally quesQues-tionable administrative practices ” ( Bodin and Koukpaizan 2008 ) Exemptions, for instance, not only pose control problems; they also create opportu-nities for corruption And setting too low a VAT threshold can face tax administrations with essentially insuperable implementation difficul-ties Indeed, it is in the proper partitioning of enterprises for different forms of taxation, reflecting their bookkeeping ability in a way that is

combine policy and administrative considerations is most inescapably evident, and that remains one of the most challenging issues in the whole field

Tax design also can affect compliance through the use of ing taxes and advanced collection schemes of various kinds — not just

withhold-to collect, indirectly, at least some tax from those who may not be fully compliant with their own legal responsibilities, but also (to the extent that amounts withheld are creditable against taxes they are failing to remit) to tilt the balance of their calculation toward becoming more fully compliant This is part of the logic of the value-added tax: retailers

sales tax, but escape only the tax on their own value added, so long as tax is charged by their suppliers, under a VAT Much the same argu-ment applies to other forms of withholding: on imports, for example,

as additional charges (by the buyer or seller, sometimes sector-specific) under the VAT, or even on some consumption items (such as mobile phones in Pakistan) The argument is far from watertight, of course: the same considerations can imply pressure on the withholder to be less than fully compliant, with the possibility of ‘ bad ’ chains forming under the VAT for this reason emphasized by de Paula and Scheinkman (2007) Securing the first step in the withholding chain is, thus, likely

to be critical — and so too is the effectiveness with which crediting is implemented

Views on withholding and advanced collection schemes differ widely Some see them as useful tools to encourage compliance, others

as pernicious distractions from the task of improving administration Importantly, they are to a large degree “ home-grown ” innovations, and

more careful thought and analysis than they have often received holding is a front-line tool in addressing not some imprecise notion of informality but very specific issues of non-compliance

A refocus from the defeatism of ill-defined impressions of ity also leads to simple but important insights in relation to agriculture, which still accounts for 20 percent or more of GDP in lower-income

“ hard-to-tax ” Historically, however, it has in fact proved surprisingly easy to tax The Mughal Empire, for instance, may have collected about one-sixth of its income through the land tax; more recently, the agricul-tural sector accounted for about 40 percent of total tax revenue in Argentina, but only 15 percent of GDP ( Skinner 1991 ) In much of the post-colonial era, indeed, the concern has been that the agricultural

sector was over -taxed through a combination of export taxes, controlled

now much less widespread, and liberalization has largely eroded implicit taxes on the sector (The most important exception is probably the taxation implied by agricultural subsidies in the advanced econo-mies.) The focus thus shifts to other measures of explicit taxation, addressing the conclusion of Skinner (1991 , p 143) that “ the problem with the land tax ” — and the same is true of agricultural taxation more generally — “ is not so much its ability to collect revenue [as] its ability

to do so fairly ”

It is important to remember that most small farmers will fall into the category of those who on standard criteria would not be brought into taxation at all, whether for personal income tax or the VAT But land holdings remain highly concentrated in many developing countries,

Unfortu-nate though that is in many respects (the evidence being that greater land inequality is associated with slower growth), it is a reminder that there are, in most countries, large farmers and agricultural enterprises, which should be just as capable of complying with tax requirements as

(2004) points out, is pretty easy to tax If it has proved hard to tax agriculture in a way that is fair and productive of significant revenue, this is often not because the sector is intrinsically hard to tax but because of its political clout The failure of the agricultural income tax

in Pakistan, for instance, surely has more to do with the power of elites than with intrinsic technical difficulty The politics of agricultural taxa-

allocating taxing rights to lower level jurisdictions gains more in improved local information than it may lose through increased corrupt-ibility, for instance, will depend on the context It is important, too, to

potentially constructive role in the agricultural sector, as they do for small enterprises in general But the first order of business, as for large enterprises in general, is to ensure that the core of the tax base is prop-erly taxed

4 State Building and Taxation — What ’ s New?

One currently popular big idea — mentioned earlier, in several of the

OECD Development Assistance Committee ( OECD 2008 ) — is that fuller account needs to be taken of the importance of the links between taxa-tion and state building

Here there are two strands of recent literature, both taking a broad view of revenue mobilization within the historical sweep of state devel-opment One strand emphasizes that the capacity to collect tax revenue reflects prior investment decisions, and explores the way in which those decisions are shaped by such considerations as political stability, the extent of common interests (warfare being a leading instance), and the degree of political consensus ( Acemoglu 2005 ; Besley and Persson

2009 , 2010 ) More evident in recent policy documents, however, has been the second strand of literature: the “ new fiscal sociology ” This has many similarities to the first, but differs not only in methodology but also in focusing more directly on the idea that taxation is critical to developing good governance more widely, in the sense of building

Expressions of this idea vary, but a common theme is that taxation fosters state building both by providing a focal point for bargaining between the state and citizenry and through the development of high-quality institutions for tax collection ( Br ä utigam 2008 ) The argument draws on a range of historical examples, ranging from ancient China, through (somewhat ad nauseam) the taming of the Stuarts and the emergence of a well-financed powerful state in Britain over the latter seventeenth century, to the experience of tax revolts in post-colonial

Africa These provide often compelling and always fascinating trations of the general and surely non-controversial point But practi-

difference does this perspective make to what we should be doing or advising? ”

Views differ even among advocates of the state-building tive Referring to the orthodoxy of the IMF and others, the OECD (2008 ,

perspec-p 22) concludes that “ this agenda broadly serves state-building as well

as economic policy objectives ” To Br ä utigam (2008 , p 33), however, “ [a] reform agenda focused on issues of state building in the poorer countries would look substantially different ”

Some of the factors that we know have figured in developing and shaping the tax bargain between rulers and the ruled — among them external threats (or ambitions) and the balance between presidential and parliamentary powers — are effectively off limits for detailed tax advice The special governance challenges for resource-rich countries, which the literature on state building particularly highlights, have been recognized for many years, with a focus on the use of funds to avoid squandering of resource wealth now widespread, initiatives underway

to foster transparency in the design and implementation of resource

wealth directly to citizens The problems are far from solved, of course, but few new tools seem to have emerged

In relation to non-resource taxation too, much of what is now dard seems relevant to wider state-building issues, and indeed is often motivated by similar concerns The standard advice includes reducing exemptions (often as much on the grounds of the abuse and non-trans-parency they invite as in terms of the distortions they create), publish-ing tax expenditure budgets, eliminating discretionary powers, moving

stan-to self-assessment and other devices stan-to separate the assessment and collection functions (minimizing opportunities for corruption), devel-oping taxpayer services, consulting with the private sector, and build-ing tax policy units capable of informing, proposing, and taking ownership of major reforms The possibility of improving accountabil-ity by decentralization of tax powers, which the literature on state build-ing appears to favor, has also been a feature of advice for many years, though views continue to differ as to whether or not this favors account-

There is thus much overlap between the emerging state-building agenda and current day-to-day advice In two areas, however, one can

First, a major theme of the state-building literature is the importance

of taxpayers ’ seeing their money going to some worthwhile use, and whether there might consequently be a case for more purposive use of earmarking (a thought carefully kept alive for many years by Richard Bird) Earmarking, generally decried by public finance economists, is in fact relatively uncontroversial in some areas, including social contribu-tions, resource funds, and even the allocation of particular revenues to particular levels of government The issue is whether its use should become more widespread There are examples of reforms that might have proved difficult without earmarking (Ghana raised the standard VAT rate from 10 to 15 percent in recent years by dedicating the addi-tional revenue to education and health), and certainly a theoretical case can be made for earmarking funds in the face of untrustworthy politi-cians ( Brett and Keen 2000 ) The difficulties remain, however Earmark-ing creates pots of money that can invite corruption, and if not checked it can lead to a plethora of small nuisance taxes — as indeed seems to have been the experience in some developing countries If it acts as genuine constraint on spending on particular, it can lead to harmful inflexibility;

if it does not, it is “ an exercise in misleading taxpayers rather than expanding democracy ” ( Institute for Fiscal Studies 1993 , pp 64 – 65) The need to establish better links between the pain of paying taxes and the enjoyment of public spending remains, nonetheless Much of the answer surely lies in improving public financial management and transparency But it is also a fair criticism that advice on (say) broaden-ing the VAT base has often been accompanied by generic references to dealing with any adverse distributional consequences on the spending side rather than by recommendations in terms of specific instruments, actual or potential

A second area in which the state-building perspective can lead to a differing perspective is in the taxation of small and micro enterprises, and it is here that the differences could prove most profound In broad terms, the contrast is between an emphasis on the limited revenue potential and high administration and compliance costs associated with such traders and an emphasis on the potential benefit from pur-posively including them in the tax system so as to foster their inclusion

in the wider tax bargain by, for instance, demanding accountability from those taxing them Of course, even the most vehement advocates

of focusing on larger taxpayers usually see a role for some simple tax, perhaps a license fee, for smaller traders And the gain in production efficiency from imposing some tax on such traders — who would oth-erwise be able to survive at lower levels of efficiency than the fully