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1、Tax Incentives as Crisis Response Georgi Angelov and Simeon Djankov Senior Economist at Open Society Institute, Bulgaria, and Chief Economist, Finance and Private Sector Vice-Presidency, The World Bank Group. Contacts: georgeosi.bg and sdjankovworldbank.org. We thank Caroline Freund for useful comme
2、nts.January 2009 Abstract Many countries are contemplating stimulus packages as a response to the deepening economic crisis. This paper discusses the benefits of tax reform as a crisis-response measure. It provides a calculation of the benefits of such reform, taking as example the reduction of payr
3、oll taxes in Bulgaria. We also estimate the costs in terms of foregone revenue. We find that a reform to reduce the payroll tax by 7.5 percentage points, from 31.3% to 23.8%, would result in 130,000 jobs been created or saved, and a 0.5% increase in annual GDP growth. Taking the static and dynamic e
4、ffects of such reform into account, the cost would amount to 0.63% of GDP. The reform has three additional benefits. First, it is not subject to corruption: the government is not in a position to distribute largesse as under a fiscal expansion program. Second, it works as a direct stimulus - every b
5、usiness and worker in the formal economy gets the benefit. Third, tax reform is quick to implement and can have immediate effects. Introduction Many countries are contemplating stimulus packages as a response to the deepening economic crisis. This has invigorated an old debate: should governments fo
6、cus on fiscal expansion or on tax incentives? Some proposals have both: for example in Germany See details here http:/news.bbc.co.uk/2/hi/business/7825513.stm. , the United Kingdom and the United States. Even in these countries, there is intense discussion on what the right mix between fiscal and ta
7、x stimulus is. Fiscal expansion makes sense as a crisis-response device: it can be narrowly targeted, for example at low-skill jobs. The most obvious fiscal expansion is for infrastructure projects - these can create jobs and are highly visible, thus generating a sense that the government is being r
8、esponsive. But what if the government doesnt have money - say it is running a budget deficit? Then the ability to spend yourself out of a crisis is limited, unless you borrow internationally. Some countries have already done that. A more problematic case is when the existing government infrastructur
9、e projects are considered inefficient and corrupt. Then there is considerably less faith in the ability of government to handle an even bigger burden of projects. This paper discusses the benefits of tax reform as a crisis-response measure. It provides a calculation of the benefits of such reform, f
10、ocused on the reduction of payroll taxes, using the example of Bulgaria. It also estimates the costs in terms of foregone revenue. Bulgaria is chosen for two reasons. First, the data necessary to calculate the effects of the tax reform were readily available as one of the authors has done previous w
11、ork in this area. Second, Bulgaria is one of two-dozen former transition economies which have yet to reform substantially their payroll tax system. We find that a reform to reduce the payroll tax by 7.5 percentage points, A 5 percentage point reduction for employers and a 2.5 percentage point reduct
12、ion for employees. from 31.3% to 23.8%, would result in 130,000 jobs been created or saved, and a 0.5% increase in annual GDP growth. Taking the static and dynamic effects of such reform into account, the cost would amount to 0.63% of GDP. This is one-sixth of the projected budget surplus for 2009.
13、The reform would encourage employers to keep more workers during the crisis (thus working as an employment policy). It would also put more money in the hands of consumers, thus boosting the economy overall. Such a reform has three additional benefits: it is not subject to corruption: the government
14、is not in a position to distribute largesse. The second benefit is that it works as a direct stimulus - every business and worker in the formal economy gets the benefit. Finally, it is quick to implement and can have immediate effects. This is in contrast to a fiscal stimulus package, which takes ti
15、me to implement. Some of the needed jobs may take months and even years to materialize. This reform has implications for other countries too. Candidates include Albania, Belarus, Kazakhstan, Azerbaijan, Slovakia, and most other East European economies which have gone through a period of rapid econom
16、ic growth and now face the prospect of a painful year or two of falling demand. It also applies to many Latin American and Asian countries, which see the demand for their exports dwindle, or the prices of their main commodities fall. In all these cases, payroll taxes are higher than the global avera
17、ge, as documented in the Doing Business database. The Doing Business database presents a breakdown of all taxes that businesses pay. For example, the tax burden for Albanian companies is available athttp:/www.doingbusiness.org/ExploreTopics/PayingTaxes/Details.aspx?economyid=3. The structure of this
18、 paper is as follows. Section 1 describes the payroll tax system in Bulgaria and gives some comparisons with other developing economies. Section 2 reports estimates of the job creating and economic growth effects of a tax incentive reform. Section 3 details the costs of such reform, and presents som
19、e robustness tests. Section 4 concludes. 1. What are Payroll Taxes? Payroll taxes cover health and pension benefits, maternity leave, unemployment insurance, and occupational accidents payments. Altogether, as of January 2009 these come to 31.3% of the gross salary of an average worker in Bulgaria.
20、Of this amount, 18% goes to pensions (for workers born after 1959, 5% goes to private pension funds), 3.5% to sickness and maternity leave, 8% goes to health coverage, 1% to unemployment insurance, 0.7% to occupational accidents insurance, and 0.1% to wage insurance, in case the business goes bankru
21、pt. The employer pays about 60% of payroll taxes, 18.3%, with the employee contributing the rest. The payroll tax has fallen significantly in the last decade, from about 45 percent in 2000 to 31.3% as of January 2009. The payroll tax now represents the bulk of what workers pay in taxes. For this rea
22、son, in some sectors of the economy there is widespread practice of under-reporting wages, so that the payroll tax can be recorded on a lower base. To reduce the incentives for such under-reporting, the government has introduced minimum wages in certain sectors, upon which the payroll tax is calcula
23、ted. There is also a maximum level, currently at 2,000 leva (4 times the national minimum wage), after which income is not taxed for the purposes of social contributions. The payroll taxes are used to finance the various parts of the social security system, the main part being the pension system. Ho
24、wever, due to the high ration of retired people to working people, the governments budget provides the bulk of the financing. In particular, only 46% of social security funds came from direct taxation in 2006. This ratio has likely declined in the last two years, as the government has increased pens
25、ions the budget subsidies for the social security system. The remaining contributions came as follows: 37% as a central budget transfer; 15% as the states contribution; and 2% indirect state contributions. See Mladenova (2007). There have already been some reductions in payroll taxes in this decade.
26、 In 2006, payroll taxes were cut by 6 percentage points; in 2007, an additional 3 percentage points; and in 2009, 2.4 percentage points. Bulgaria is only one example of a country with relatively high payroll taxes. Businesses in Belarus, for example, pay 35% of the gross salaries of workers in payro
27、ll taxes. Businesses in Romania pay about 30% of gross salaries. In Poland, 28.1%. Countries in Asia and Latin America have generally high taxes on business, although not specifically linked to workers wages. Colombia, for example, taxes nearly 78% of profits away from the business, in various types
28、 on national and municipal taxes. India taxes nearly 71% of profits. Brazil 69%. Tax reforms as a crisis response is possible in any of these countries. 2. Employment and Growth Effects of Tax Incentives To gauge the effect of a change in the tax burden on the real economy, we use cross-country anal
29、ysis based on Djankov et al (2008). The authors have collected data on payroll taxes (or more generally, payroll taxes and social security contributions), as well as all other taxes that a business has to pay in a given year. These taxes are expressed as a percentage of the gross profit. The data ar
30、e collected for 85 countries, including Bulgaria. The data are constructed using a standardized case study of a business called “TaxpayerCo.” TaxpayerCo is a taxable corporation operating in the most populous city in the country. It is liable for taxes charged at the local, state/provincial, and nat
31、ional levels. It is 100% domestically and privately owned and has 5 owners, none of whom is a legal entity. TaxpayerCo performs general industrial/commercial activities. Under these assumptions, Djankov et al (2008) calculate the taxes that TaxpayerCo must pay in its first year of operation. Respond
32、ents provide the full tax schedules for corporate income taxes, payroll taxes for which the statutory incidence is on the employer, property tax, asset and capital tax, turnover tax, business license tax, financial transactions tax, but also VAT and sales taxes. Taxes at all levels of government are
33、 considered. The data are available at www.doingbusiness.org. We use these data and regress the employment rate and the GDP growth rate on the level of taxes. We first look at payroll taxes (columns 1 and 2, table 1) and then, for robustness purposes, all business taxes (columns 3 and 4). The two sh
34、ould give similar comparative static results. The idea is to see how a change in taxes affects the real economic variables. In particular, we see that a 10 percentage points decrease in payroll taxes is associated with a 3.5 percentage points increase in the employment rate. In the case of Bulgaria,
35、 this amounts to 260,000 jobs. The result is robust whether one looks at a change in payroll taxes or overall business taxes. Also, a 10 percentage points decrease in taxes is associated with about 1 percentage point increase in annual GDP growth. All specifications account for the initial level of
36、income (using logGDP per capita). We also test for robustness controlling for inflation, and regional dummies (Africa, East Asia, and Latin America). The economic magnitude remains unchanged. The results here focus on a reduction of the taxes paid by businesses (the employer). If part of the payroll
37、 reduction goes to the worker (the employee), this effect is not captured here and in subsequent analyses. It will clearly have additional beneficial effects, most obviously on the purchasing power of workers, but also on the government budget (as the government wont have to pay unemployment benefit
38、s). In short, the results presented here are a conservative estimate. Table 1: Employment and Growth Effects (1)(2)(3)(4)Employment rateGrowth ratePayroll Tax-0.348*(0.097) -0.119*(0.033) All Business Taxes -0.354* -0.108*Log GDPpc-2.316*(0.563)-2.402*(0.582)-1.007*(0.173)-1.060*(0.176)Constant82.38
39、*(4.744)71.67*(5.546)15.972*(1.654)14.856*(1.606)Observations85858484R-Squared0.2870.2350.510.48Standard errors in parentheses* significant at 10%; * significant at 5%; * significant at 1%Source: The analysis is based on Djankov et al (2008). For our base specification, we assume a tax reform of 7.5
40、 percentage points reduction in payroll taxes, including a 5 percentage points reduction in taxes for businesses and a 2.5 percentage points reduction for workers. Under this scenario, the reform could result in 130,000 jobs being created or saved during the crisis, and a half percentage point incre
41、ase in GDP growth. We also report a “low” and “high” scenario: a 5 percentage points reduction (3.5 percent for businesses and 1.5 percent for workers); and a 10 percentage points reduction (7.5 percent for businesses and 2.5 percent for workers). In the “low” scenario, employment would increase by
42、91, 000 jobs and the annual growth rate by 0.35 percentage points. In the “high” scenario, employment would increase by 195,000 jobs, and the annual growth rate by 0.75 percentage points. 3. Budget Effects of the Proposed Tax Reform The proposed tax reform will have two types of effects on the governments budget: static and dynamic effects.
