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Why New International Taxes for Development Are Inefficientfinance criteria to evaluate specific taxes, like IFDtaxes. More precisely, the requirements are thefollowing:1) Efficiency – In the economic sense,efficiency refers to the capacity ofindividuals to maximize their utility (orsatisfaction) by making choices basedon the real costs of things. Hence a tax isinefficient to the extent that it introducesdistortions in these choices. Most taxescreate distortions and generate a specialcost that is called a deadweight loss or excessburden. The easiest way to understand thisis to consider the case of an indirect tax ona specific good, called an “excise tax.” Byincreasing the price of the good, the taxreduces its consumption (technically, its“quantity demanded”), and the consumerloses part of the utility he previouslyobtained. This loss in welfare is the excessburden of the tax. The excess burden of atax is its net cost, that is, what the consumerloses in excess of what is transferred to thepublic treasury. If the expenditures madewith the tax revenues create more benefitsthan the deadweight loss (plus the othercosts of the tax), the total package (tax plusexpenditure) will have been efficient. Yet,the less inefficient the tax is in itself—thatis, the lower its excess burden—the betterit is. Moreover, if a tax corrects a distortioncreated by market failures (pollution, forexample), it increases welfare by itself. Suchtaxes are called “Pigovian taxes,” followingthe late British economist Arthur CecilPigou. 48 But note that a Pigovian tax stillneeds to be the most efficient one available,the one that is best at correcting the marketfailure involved.2) Administrative costs – Collecting andenforcing a tax imposes a real cost upongovernment, in terms of resources used:48. See Pigou (1932).labour, computers, buildings, etc. Anotherform of cost to be included is the compliancecost to individuals and companies, whichincludes time, the hiring of accountants, andthe keeping of records. The less generallyaccepted a tax is, the higher the cost ofcollection and enforcement. Also, the morecomplex a tax, the higher the compliancecosts.3) Flexibility – According to Stiglitz, a taxshould be flexible in the sense that eitherits rate or rates should move automaticallywith the business cycle (lower rates inrecession time, like with the income taxwhen incomes decline), or changing therates with changing circumstances shouldnot be too difficult politically.4) Political responsibility (accountability) –The accountability criterion has two relatedaspects. First, taxes should not be hidden, astaxpayers should know what they are paying.Second, a government should be accountableto its citizens for the taxes it levies.5) Fairness – Again according to standardpublic finance theory, a tax should be fair orcontribute to the fairness of the tax systemin which it is imbedded. This is obviouslythe most subjective criterion of a good tax,as it depends on conflicting philosophicaltheories of fairness and justice. Traditionalpublic finance usually assumes that a tax thattreats all individuals equally is a good tax. 49A rapid analysis will show that each of the mainIFD taxes (current and proposed) violate some orall of these criteria (see Chart 4 for a summary ofthe analysis).49. Of course, defining what equal treatment is and which are thetaxpayers’ characteristics according to which the tax should be equalgets us back to philosophical issues.16Montreal Economic Institute
Why New International Taxes for Development Are InefficientChart 4Qualitative Evaluation of Current or Proposed IFD Taxes Using Standard Criteria for Good TaxesSolidarity Levyon AirlineTicketsFinancialTransactionTaxes (FTTs)CarbonTaxesSolidarityTobaccoContributionSDRAllocationsEfficiencygenerally poorGillen et al. (2002),probably poorMatheson (2011)averageIMF (2011)probably poorSee references in textprobably poorCooper (2011)IMF (2011)The Economist (2013b)Coto-Millán et al.as discussed(2005)in textAdministrativecostslow to averageCour des comptesaverage to highBronolo (2011)average to highIMF (2011)probably highlow(2010)FlexibilitypoorpoorpoorpooruncertainPoliticalresponsibility(accountability)mostly poormostly poormostly poormostly poorpoorFairness and taxincidencegoodCour des comptes(2010)probably poor inthe long runMatheson (2011)poor exceptwith elaboratecompensationarrangementspoorprobably poorIMF (2011)Source: See text. The criteria are borrowed from Stiglitz (1988), pp. 385-410.2.2 EfficiencyFirst, let us apply the efficiency criteria. A taxcan be called efficient if its excess burden is as smallas possible for the required revenues to be raised. Wecan measure the extent of the excess burden if weknow the price elasticity of demandfor the good orservice in question. 50 Here, we need to understandthat, other things being equal, the lower the priceelasticity of demand of a good, the smaller will bethe excess burden imposed by a tax on this good.Price elasticity of demand, or “price elasticity”for short, is a technical concept that describesresponsiveness to price changes. Demand is more50. For a technical discussion of elasticities, see IMF (2011), pp. 23-26. Other elasticities are used in scientific literature, such as supplyelasticity.elastic if quantity demanded changes more inresponse to price changes; it is less elastic (or moreinelastic) if quantity demanded is less sensitive toprice changes. If, for example, a price increase of10% brings a 15% drop in quantity demanded, wesay that the elasticity of demand is 1.5—for theproportional change in quantity demanded is oneand a half times the change in price. To take anotherexample, if the resulting drop in quantity demandedis only 3%, the elasticity of demand would be 0.3—for the proportional change in quantity demandedis 30% of the change in price. 51 The convention is51. Technically, the coefficient of elasticity has a negative sign, for there isan inverse relation between a price change and the resulting change inquantity demanded. Properly speaking, then, the coefficients we usedas examples should be written as -1.5 and -0.3. We will neglect thenegative signs for purposes of simplicity. (They will appear in Chart 6,though, which is reproduced from an econometric evaluation.)Montreal Economic Institute 17
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