Better services will ensure higher tax mop up, says report

The latest World Development Report (WDR) calls for broad-based taxation, making indirect taxes less regressive and avoiding high marginal tax rates in developing countries. It also favours exemptions on basic food items and a greater focus on property taxes.

At an international level, it calls for global taxes and private contributions to expand development assistance.

"Public spending should play the primary role in furthering equity. There is also some scope for making the overall tax system more progressive without large efficiency costs," says the WDR 2006. It adds that when citizens are sure that services are actually being provided, they are more willing to be taxed.

It says exempting a few key items from the VAT umbrella can reduce its impact on the poor, and reducing excise taxes and import duties on food and kerosene is desirable. It suggests that revenue can be generated by imposing higher taxes on private transport, and that export taxes should be avoided.

It says combining land taxes with value-added tax can limit evasion of land tax. "In the absence of insurance markets, combining the VAT and land taxes can reduce the risk small holders face because tax burdens will then be correlated with output fluctuations," it adds.

It also advocates inheritance taxes to prevent extreme concentration of wealth from being passed from generation to generation, and a design that restricts transfer of control rights on corporations.

It says to ensure revenues from extractive industries are used well, there should be high standards of transparency and accountability.

"A focus on equity does not change the facts that asset expropriations - even in instances of historical grievances - may adversely affect subsequent investment, that high marginal tax rates create disincentives to work, or that inflationary financing of budget deficits leads to regressive implicit taxation, economic disorganisation, and reduced investment and growth," says the report.

It argues that a concern for equity will translate into a highly prudent stance on macroeconomic management and financial regulation. Policy design can increase equity by pursuing counter cyclical fiscal policy, building safety nets before a crisis, reducing risky lending and supporting only smaller depositors in bailouts.