Saturday, February 14, 2009

Taxes, revenues and expenditures in South Asia

This is how tax structure, revenues and expenditure looks like in South Asia.

Country

VAT (%)

Corporate income tax (%)

Total tax rate (% of profit)

Maldives

0

0

9.1

Pakistan

15

35

28.9

Nepal

13

20

34.1

Afghanistan

--

20

36.4

Bangladesh

15

40

39.5

Bhutan

--

30

39.8

Sri Lanka

15

35

63.7

India

12.5

30

71.5

Source: Doing Business Report 2009

Nepal’s tax rates are the third lowest in the SAARC region. My main point: appropriability concerns due to taxes are not a binding constraint on growth in Nepal. For my bet on infrastructure see this.

Meanwhile, this is what the revenues and expenditures (% of GDP) looks like in South Asia:

And, this is how fiscal balance looks like:

Source: ADB

The puzzle now is: despite having one of the lowest and simplest tax rates, why revenue is always low in Nepal? Tax evasion and inefficient bureaucracy to check evasion might answer a part of the question. I am still looking for the other part!

Lower taxes always does not mean higher revenue (supply-side econ???). Moreover, higher taxes also does not necessarily mean higher revenue. What comes into play? Other stuffs that affect revenue collection such as bureaucratic efficiency, corruption, level of tax evasion, depth of informal economy… What would be a good policy if first best policy options do not deliver intended outcomes? Well, second best policy options might help before going for first best policy options. This takes me to Lipsey and Lancaster’s 1956 paper and Rodrik and Hausmann’s growth diagnostics!

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