Creating

45
Paying taxes
Who is reforming?
What to reform?
Why reform?
Tax collection has long been a despised activity. In biblical
times the Pharisees scorned the disciples by asking,
“Why does your teacher eat with tax collectors and sinners?”
1 Things had not improved by the French Revolution—tax
collectors were convicted of treason and sent
to the guillotine.
Yet taxes are essential. Without them there would
be no money to build schools, hospitals, courts, roads,
airports or other public infrastructure that helps businesses
and society to be more productive and better off.
Still, there are good ways and bad ways to collect
taxes. Imagine a medium-size business—TaxpayerCo—
that produces and sells consumer goods. In Hong Kong
(China) the business pays 1 income tax and 1 fuel tax totaling
14% of gross profit (sales less materials and labor
costs; figure 8.1). It takes 1 annual electronic filing and
80 hours to comply with tax requirements. Meanwhile,
in Belarus TaxpayerCo is subject to 11 taxes, including an
income tax, value added tax (VAT), transport duty, land
tax, property tax, ecological tax, fuel tax and a turnover
tax where taxes are paid on inputs and again on outputs.
Despite many deductions and exemptions, required
payments add up to 122% of gross profit—leaving the
business with 2 choices: stop operating or start evading.
The business would make 113 tax payments to 3 agencies,
all by paper, and spend 1,188 hours doing so. Tax
refunds would take 2 years to process. This complexity
and delay make Belarus’s tax system among the world’s
most burdensome (box 8.1).
Arguments for business tax reform usually emphasize
rates, especially corporate income tax rates. That is
misleading on 3 counts. First, corporate income taxes
are only a small share of the total business tax burden—less
than 25% on average. For example, Hungary’s
nominal corporate income tax is only 16% of net profit,
but the total business tax bill is 57% of gross profit
because of VAT, property tax, land tax, local business
tax, community tax, vehicle tax and 9 others, after taking
into account deductions and exemptions. In several
Eastern European countries simplification has not had
the desired impact on perceived business obstacles, in
part because it focused on income tax only. 2