The determinants of tax revenue and its redistributive effects on inequality and human development
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2022
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Angkana Asawasakulkrai (2022). The determinants of tax revenue and its redistributive effects on inequality and human development. Retrieved from: https://repository.nida.ac.th/handle/662723737/6580.
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The determinants of tax revenue and its redistributive effects on inequality and human development
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Abstract
Taxation is a contentious public policy issue. Whether theoretical or pragmatic senses, tax policy is universally deemed one of the most significant fiscal strategies. While it is mostly viewed as a means for governments to raise revenue, it has much more nuances than just that. In recent decades, due to the ever-widening wealth and income gaps around the world, tax policy has been intensely discussed, debated, and recognized as both the problem causing inequality and the solution to reducing inequality. Taxation as a problem stems from the increasing income and wealth gaps believed to be the direct consequences of ineffective tax policy, tax evasion, and tax avoidance mostly by the world’s top earners. Taxation as a solution emerges as a government action that must be undertaken to repair the damage and restore the social justice.
This study aims at investigating the factors claimed to contribute to tax collectability and its redistributive effects. With these two-dimensional purposes, the study is designed as a cross-country quantitative study divided into two stages, using dynamic panel data from 2009-2018 with the target population of 75 countries. The first stage examines the possible cause and effect between three groups of explanatory variables and three outcome variables. The three groups of explanatory variables include institutional, globalization, and socio-economic factors which are based on theoretical significance and past literature. The three outcome variables are individually examined as three dependent variables: overall tax revenue, personal income tax revenue or direct tax, and consumption tax revenue or indirect tax. Furthermore, to understand how taxation contributes to the inequality problem, the second stage investigates the real magnitude of redistributive effects of tax revenues on the quality of life, which is measured by the reduction of income inequality and human development. Gini coefficients of income inequality index and human capital index are proxy variables representing the quality of life. Tax revenue is, in the second stage, transformed into explanatory variables consisting of overall tax revenue, personal income tax revenue, and consumption tax revenue. Tax revenues are designed to be the key component connecting the three groups of explanatory variables in the first stage and the final redistributive impacts on quality of life. The three groups of explanatory variables are also examined directly with income inequality and human capital index in order to identify whether they have direct relationships, or the redistributive impacts only occur through tax revenues.
The overall examination of data demonstrates that while the dataset displays large gaps in tax revenues between high- and low-income countries, the institutional characteristics and economic trends of the data have not varied much over the duration of the study. In addition, for all income groups, Gini coefficients and human capital index have remained relatively static during the 10-year period, which is not an encouraging outlook. Although taxation is found to be a major source of income for most countries in the world, it is specifically intriguing that the majority of countries in the study rely more heavily on consumption tax than income tax with the highest consumption tax revenue found among the lower- and upper-middle income countries. While this unbalanced reliance can be seen as a natural economic response to the expanding economy and higher level of consumption, there are institutional concerns supported by the study’s results including partisan politics, corruption, and international trade. When this reliance on consumption tax is investigated with respect to income inequality and human capital development, the results clearly show that the higher rate of consumption tax revenue is an impediment to the government policies or efforts to reduce income inequality and increase human capital development.
The findings reveal that the institutional factors have critical roles in tax collectability at varying degrees. The level of democracy is found to be a significant determinant for the collection of both income and consumption tax revenues, supporting the theory of political economy, public choice, and voting paradox. The eventual policy decisions are a reflection of public choice, which is to increase tax revenues for redistributive purposes. The incidence of corruption is however found to have a contradictory effect on tax revenues, which could most likely be explained by corruption itself and the fiscal illusion used by the governments. The higher the incidence of corruption, the higher the level of tax revenue a country needs to fuel the corrupted operations and malpractices. The government would thus seek to raise its revenue mainly through income and consumption taxation. Higher tax rates and higher tax revenues may instead be the intended consequences of tax policies designed and implemented to benefit only a handful groups of elites and politicians.
The globalization phenomenon has by far the most astounding impact on the results in this study. The effects created by globalization-related events on both personal income and consumption-based taxes provide an important piece of evidence that the utilization of different functions of tax principles and tax policies is indeed a powerful fiscal tool in the planning and managing of public spending and fiscal policy. The significant impacts foreign trade and free movement of capital have on the overall tax revenue suggest that the more open the economy is, the higher the amount of tax revenue available for public spending, which directly contradicts the theory of compensation and welfare. While globalization today may produce a different set of challenges, it is assumable that countries may have learned how to better handle and manage the ins and outs of the dislocation effects created by the globalized economy. The governments may also have provided more effective policy responses to the globalization effects such as import quota or restrictions that are helpful to domestic producers and employment-related policies providing more stability and security for domestic workers. However, the negative effects globalization has on consumption tax revenue insinuate that globalization does create a chain of events that eventually results in the changes in domestic consumption patterns.
The socio-economic factors may not be as much impactful as they are originally and theoretically believed to be in terms of economic growth and directions of fiscal policy. The macroeconomic characteristics conventionally used as determinants for government spending and level of tax revenue no longer carry the predictive power in this new global environment in which geopolitics and internationally integrated economy have become key players. As evidenced by the results from the two previous groups of explanatory variables, the other forces including tax structure, tax policy, tax collectability, quality of domestic institutions, and foreign trade policy appear to play a much larger hand in determining the level of tax revenue and tax collectability than the good old-fashioned macroeconomic or socio-economic indicators.
Through taxation, the study also investigates income inequality and human capital development and finds that tax revenues do not produce the outcomes that they are traditionally intended to. Tax revenue is found to have no relationship with the level of income inequality, suggesting that the higher level of tax revenue does not translate into the higher level of well-being of taxpayers. In fact, the reliance on personal income tax appears to lead to higher income inequality despite its progressive structure. The similar results are found with human capital development for which the findings reveal the adverse relationships with tax revenues. A progressive tax system would leave income earners, particularly those of middle- and low-income groups, worse off than before and reduce the accumulation of capital that can be used for human capital development. Several unintended outcomes of the personal income taxation include higher tax rates causing lower disposable income, market and price inflations, and tax avoidance by the well-off. The utilization of consumption-based taxation does not bode well either. Based on the theory of tax incidence, consumption-based taxes do indeed burden low-income individuals and households, resulting in higher inequality and lower human development. All these lead to the phenomenon of shrinking middle class in many countries. As such, tax progressivity might not be the ideal solution to closing the income gaps and achieving wealth redistribution after all.
The initial comparative data inform that income inequality and human capital index tend to correspond with the higher level of consumption tax revenues in the majority of countries around the world but have no clear patterns with tax revenue and income tax revenue. To corroborate this result, two comparative statistical models between the top 25 high-tax revenue countries and bottom 25 low-tax revenue countries are performed for an in-dept analysis. The results corroborate the conclusion under which tax revenue, regardless of types, does not seem to have played a role in reducing inequality or improving human development. The only exception is consumption tax revenue, which is found to negatively impact human capital index, proving that consumption-based taxes do have an adverse effect on human capital development. The findings reveal such irony that even when the level of collected tax revenue is high, the quality of life does not progress correspondingly. The most probable explanation that may be offered is that tax revenue, whether income or consumption-based, is being improperly used or misdirected. Even when tax revenue is being put into good use, it may also be possible that other variables may obstruct or obscure the real outcomes of the government’s redistributive programs.
Based on the study’s findings, it seems appropriate to conclude that the redistributive power and the future of fiscal policy are rather doubtful. In addition to the progressive system of personal income taxation having turned out to be the fiscal weapon destroying the middle- and lower-income classes, the government’s main reliance on consumption-based taxation rubs salt into the wound. The higher level of tax revenue does not mean the tax money being channeled for redistributive purposes. As such, tax policy may no longer be an exclusive tool specifically designed to reallocate resources or redistribute wealth. It may only be a means for the government to generate revenue streams to fund the traditional mundane government tasks, or worse a source for corruption or questionable government activities. The analysis herein demonstrates that incidence of corruption, misused and misdirected public budgets, free trade policies, personal income tax progressivity, and strong reliance on consumption-based taxation together have undesirable and unintended outcomes that have exacerbated wealth gaps and income inequality in the past half century.
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Thesis (Ph.D. (Development Administration))--National Institute of Development Administration, 2022
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