The document discusses several key topics related to taxation and its role in public financial management. It describes some general principles of taxation including that taxes express sovereignty and are typically decided through checks and balances. It also outlines what can be taxed including income, production, trade, and property. The document discusses aims of taxation like revenue generation and influencing behavior. It covers issues like tax competition between countries and tax havens.

1. Taxation
Dr Alberto Asquer

2. The role of taxation in PFM
Some general principles of taxation:
• Taxes are an expression of sovereignty and
authority
• Taxes are typically decided within institutional
systems of checks and balances, e.g.,
parliamentary approval
• Taxes play a central role in the redistribution of
income and wealth within economies, in
economic growth, and in PFM

3. The role of taxation in PFM

4. The role of taxation in PFM

5. What can be taxed?
Income taxes
• On individual income
• Of business income
Production taxes
• On inputs (labour)
• On outputs (excises on
volume)
Trade taxes
• On domestic trade (VAT)
• On international trade
(custom duties)
• On financial transactions
(Tobin tax)
Property taxes
• On ownership of assets and
durable goods (e.g., cars)
• On the transfer of property
(e.g., inheritance tax)
The role of taxation in PFM

6. Tax Foundation, 2013; US Internal Revenue Service Historical Data Tables, https://www.irs.gov/uac/soi-tax-stats-historical-data-tables. Individual tax rates refer to head of
household from from 1952 onwards)
The role of taxation in PFM

7. https://commons.wikimedia.org/wiki/File:VAT_in_World_Barry_Kent.png
VAT/GST rates in the world
The role of taxation in PFM

8. OECD, 2016; average composition of public revenue in OECD countries
The role of taxation in PFM

9. Aims of taxation
• To raise up revenue for the government
• To attain desired macroeconomic effects
• Promoting growth
• Stabilising fluctuations
• Reducing inequality
• To induce desired behaviour of individuals and firms
• Encouraging welcome behaviour
• Discouraging unwelcome behaviour

10. Investments
Income
Consumption
Savings
Financing
Expected
demand
Aims of taxation

11. Investments
Income
Consumption
Savings
Financing
Expected
demand
Income
tax
Tax on
consumption (sales)
Tax on
wealth (assets)
Aims of taxation

12. Investments
Income
Consumption
Savings
Financing
Expected
demand
Income
tax
Tax on
consumption (sales)
Tax on
wealth (assets)
Public
investments
Public
spending
Income
support
Aims of taxation

13. Tax revenue
The Laffer curve
https://en.wikipedia.org/wiki/Laffer_curve
Tax rate
100%
0%
Aims of taxation

14. • Too high tax rates may reduce incentives to earn income
• Too high tax rates may induce tax avoidance (e.g.,
earning as corporate income rather than personal
income)
• Too high tax rates may induce tax evasion (e.g., black
economy)
• Too high tax rates may induce relocation of individuals
and/or businesses
Aims of taxation

15. What is the desired outcome of a redistribution:
• Equal income for everyone?
• Equal wealth for everyone?
• Equal access and provision of public services?
(education, housing, health care)
• Equal opportunity to earn income?
Aims of taxation

16. Inducing the desired behaviour:
• Levying taxes on polluting activities to reduce emissions
• Levying taxes on alcohol drinks, cigarettes and cigars,
soda drinks, and junk food (sin taxes) to reduce
consumption of dangerous products
• Granting tax deductions for installing solar panels to
stimulate the green economy
• Granting tax deductions for gym subscriptions to
stimulate better health and fitness
Aims of taxation

17. Sub-national government revenue
https://www.oecd.org/regional/regional-policy/Subnational-Governments-Around-the-World-%20Part-I.pdf

18. https://www.washingtonpost.com/news/wonk/wp/2013/07/19/detroits-pension-problems-in-one-chart/?utm_term=.44307a02f9c4
https://en.wikipedia.org/wiki/Detroit_bankruptcy
Sub-national government revenue

19. Issues of international taxation

20. Tax competition
Tax competition refers to countries’ policies that are
intended to make the country more attractive for
businesses and individuals than other countries because of
tax reasons.
Tax competition may play out on the basis of lower tax rates
or more efficient and convenient tax administration.
Tax competition is often pursued by relatively small
countries with respect to large (often neighbouring)
economies.

21. Tax competition
Effects of tax competition include:
• “Tax shopping” of individuals and firms for fiscal
residency decisions
• Relocation of individuals and businesses (Tiebout, 1956)
• Attraction of foreign capital investments
• “Race to the bottom” if other countries retaliate with
aggressive tax competition policies

22. Tax havens
Tax havens are commonly understood as countries with
zero or very low taxation (on personal income, corporate
income, indirect taxes)

23. Tax havens
• “The Cayman Islands, the British Virgin
Islands, Bermuda and the Bahamas are
home to 52% of the world’s hedge fund
industry”
• “It is now clear that Britain sits, spider-
like, at the centre of a vast
international web of tax havens, which
hoover up trillions of dollars’ worth of
business and capital from around the
globe and funnel it up to the City of
London”

24. Tax havens
• “… around 8% of the world’s financial
wealth is held in tax havens.”
• “In Africa the share of financial wealth
that is held offshore is estimated … to
be around 30%. In Russia and the oil-
rich countries of the Middle East …
above 50%”

25. Contemporary international tax policies
OECD Base Erosion and Profit Shifting (BEPS) initiative
• The initiative targets tax avoidance strategies of
multinationals that builds on legal differences, transfer
prices, trade of digital goods and transactions within
corporate groups
• G20 countries promoted anti-BEPS measures in 2012
(OECD BEPS multilateral instrument, MLI), which failed
to achieve significant results
• The US adopted the Tax Cuts and Jobs Act in 2017
("TCJA") with anti-BEPS measures but again they have
been ineffective so far

26. The end