World Bank Document

probably China-have managed Table 6.1 Taxes as a percentage wasteful showcase projects, subtoprovide the essential services of GNP sidizing inefficient enterprises and,(primary education, food supple- Group of Percentage so far as security considerationsments and basic health and family countries 1953-551972-76 increase permit, military spending (whichplannirng facilities) to almost every- 7 low-income on average in East Asia, Southone for less than 10 percent of countries 11.2 16.0 43 Asia and the Middle East exceedsGNP. Typically, though, govern- 17 middle- public outlays on education andments are spending from 3 to 10 income health combined). And withinpercent of GNP for human devel- developing human development programspercent~~~~~~~~~countries12.1 16.4 36 thuman developenromto prelogramsopment programs that are far from Total (24 there is often room to reallocatecomprehensive-and whose effec- developing budget shares away from high-costtiveness is often reduced by lack countries) 11.8 16.3 38 and less-urgent projects (such asof money for operating costs (wages 15 developed urban hospitals and universitiesfor health workers and teachers, countries 26.2 36.2 38 largely serving the relatively wellmaintenanceof water supply Note: Taxes include social security taxes. off) and toward more basic prosysterms,gasoline for transporta- grams (such as primary health caretion of doctors in rural areas, and education).textbooks in schools). in the distribution of income). OnHow can financial constraints this basis, India's taxable surplus Keeping costs downon hurnan development programs in 1975 was 41 percent of aggregate By modesty in standards and effibeeased? There are four ways: income; the ratio of taxes to taxable cient choice of technology, govemincreasingtaxes, reallocating surplus therefore was 34 percent ments can provide services relativelyrevenues, reducing costs and using -comparable with the tax-to-GNP cheaply-and without precludingresources other than those obtained ratios of industrialized nations. future improvement. (For examfromnational taxes and duties. Earmarking taxes for programs ple, public standpipes can supplywith strong ethical or political safe water at some sacrifice in con-Increas.;ng tax revenues appeal can raise extra money when venience but at less than half theMany developing countries have further general taxation is not cost of individual house connecalreadymade impressive progress feasible. In Colombia a share of tions.) This general approach willin improving their tax-gathering the beer tax is reserved for public often be opposed by teachers,(see Table 6.1). Since 1975, how- hospitals. Many Latin American doctors, architects, engineers andever, tax ratios in developing countries finance their health and other professionals who insist oncountries have not increased; social security budgets by a pay- high standards-and correspondalthoughsome obvious steps can roll tax. (But payroll taxes cover ingly high costs. Not surprisingly,be taken (making taxes more only formal employment, and they the financial constraint is then saidprogressive and reducing evasion tend to reduce growth in jobs by to prevent the extension of serandarrears), the scope for raising raising the cost of labor relative vices to poor rural areas. Politicaltaxation is less now than it was to capital.) Motor fuel taxes are leaders have sometimes felt that20 years ago. good for earmarking, for several it was better to accept unaffordablyThis is especially true of the reasons. They are easy to collect, expensive standards than to riskpoorer countries-even where are progressive, help curb oil con- the charge that they were backingforeign trade is a substantial share sumption, and have high revenue "second rate" projects. But theof output. Their tax administration potential-in some cases exceeding World Bank's experience in health,is generally weaker, there is usually 1 percent of GNP. But like all education and urban developmentsubstantial unmarketed output, earmarked taxes, they should be projects suggests that many govemandtheir taxable surplus accounts used only sparingly, because they ments now see political as well asfor a smaller share of their GNP. increase the rigidity of the way economic benefits from being ableEven a tax-to-GNP ratio of 15 per- government revenues are spent. to reach the poor by acceptingcent in such countries implies a lower standards initially.heavy tax burden. Take India as Reallocating existing revenues Chapter 5 discussed a numberan example: its taxable surplus may Public spending on human de- of specific ways of economizingbe defined as all income beyond velopment can be increased by in health, education and nutritionthe poverty line (defined there as reallocating government revenue programs. China's barefoot doctheincome of the fortieth percentile from less productive uses, including tors (see box overleaf) are an excel-73