[December 2024] Monthly Webinar Series with the World Bank

00:35:53
https://www.youtube.com/watch?v=KG8rL4m3tWQ

Ringkasan

TLDRThis webinar by the KDI School in collaboration with the World Bank features Mr. Rishab Chowdhury, an economist at the World Bank, discussing his paper "Taxing for Growth: Revisiting the 15% Threshold." The presentation is structured into four parts, beginning with the motivation behind examining the relationship between taxation and economic growth, particularly the 15% tax-to-GDP threshold. Chowdhury explains how achieving this threshold is crucial for inclusive growth and cites empirical analysis showing positive correlations between higher taxation and better economic outcomes. Channels such as health and education spending, progressive taxation, and reduced economic volatility are explored. The presentation includes statistical models to illustrate the significance of reaching a near 13-15% tax-to-GDP ratio for promoting growth and equity in developing economies.

Takeaways

  • 📊 The 15% tax-to-GDP ratio is viewed as a pivotal threshold for economic growth.
  • 🌍 Tax policies are crucial for inclusive development.
  • 📉 Higher tax-to-GDP ratios correlate with reduced economic inequality.
  • 📈 Improved fiscal revenue leads to better spending on health and education.
  • 💡 The World Bank's research integrates both qualitative and quantitative data.
  • 🔍 Causality between tax policies and growth is complex and multifaceted.
  • 📚 Understanding international economic policies benefits developing economies.
  • 📝 Designing effective tax systems involves holistic policy consideration.
  • 📈 Models predict better growth with increased tax revenue.
  • 🌱 Sustainable tax revenues are pivotal during economic transitions.

Garis waktu

  • 00:00:00 - 00:05:00

    The webinar, as part of the KDI School World Bank monthly series, features Mr. Rishab Chawda from the World Bank discussing the intersection of taxation and growth. The session, recorded for knowledge sharing, emphasizes the exploration of cutting-edge research, with Mr. Chawda focusing on the taxation-growth relationship. He outlines the cooperation between the KDI School and the World Bank in disseminating expert insights.

  • 00:05:00 - 00:10:00

    Mr. Chawda introduces the topic of taxation's impact on growth, explaining its analysis through the World Bank's corporate scorecard, which is a streamlined framework for measuring development priorities and progress. He discusses the 15% taxation threshold in contexts of domestic revenue mobilization, highlighting its role in analyzing the revenue capacity of low-income countries and its potential effect on development outcomes.

  • 00:10:00 - 00:15:00

    The presentation moves towards an event study analysis that investigates whether an increase in a country's tax-to-GDP ratio precedes its transition to a higher income status. Data from World Bank classifications from 1987 to 2021 are used, examining transitions across income brackets and observing if high tax-to-GDP ratios correlate with economic advancement.

  • 00:15:00 - 00:20:00

    Mr. Chawda examines the observed correlation between high tax-to-GDP ratios and economic growth or transitions to higher income brackets using real-world examples from countries like Georgia, India, and Maldives. He observes a pattern where tax-to-GDP ratios climbed before reaching new income statuses, suggesting a possible link between tax levels and economic transition.

  • 00:20:00 - 00:25:00

    The empirical model detailed by Mr. Chawda investigates the relationship between tax-to-GDP ratios and long-term growth or prosperity gaps, aiming to determine a threshold where taxation impact is maximized. The model analyzes data on growth metrics against tax-to-GDP levels across various thresholds to find the most impactful taxation rate, around the 13% level.

  • 00:25:00 - 00:30:00

    Using scatter plots and charts, Mr. Chawda illustrates that higher tax-to-GDP ratios at around 13% correlate with better long-term growth and reduced prosperity gaps. He suggests this ratio level, backed by statistical significance, potentially supports inclusive growth and economic stability through increased revenue, progressive taxation, and reduced volatility.

  • 00:30:00 - 00:35:53

    In concluding, Mr. Chawda argues that higher taxation supports growth by enabling better public spending, reducing inequality, and stabilizing government finances. The presentation suggests a target tax-to-GDP ratio of about 15%, accounting for variability and ensuring robust fiscal health. He summarizes potential channels of impact, such as productive spending, tax progression, and economic stability achieved through a balanced approach to taxation.

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Peta Pikiran

Video Tanya Jawab

  • Who is the speaker for the webinar?

    The speaker is Mr. Rishab Chowdhury, an economist with the World Bank.

  • What is the main topic of the webinar?

    The main topic is taxation and its relationship with economic growth.

  • Which institution is collaborating with KDI School for this webinar?

    The World Bank is collaborating with KDI School for the webinar.

  • What is the 'World Bank corporate scorecard'?

    It is a mechanism for assessing progress on development priorities.

  • Why is a 15% tax-to-GDP ratio discussed?

    It is considered a threshold that affects economic growth.

  • What channels are explored in relation to taxation?

    Health and education spending, progressive taxation, and volatility are explored as channels.

  • What data is used for the analysis?

    World Bank income group classification data and tax-to-GDP ratio data from various countries.

  • What is Prosperity Gap?

    Prosperity Gap measures the income disparity and economic inclusiveness.

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Teks
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Gulir Otomatis:
  • 00:00:00
    ladies and gentlemen welcome to the kdi
  • 00:00:02
    school World Bank monthly webinar series
  • 00:00:05
    my name is yanji Kim from the kdi school
  • 00:00:08
    of public policy and management and I
  • 00:00:10
    will saler MC for today's
  • 00:00:13
    webinar before we get started please
  • 00:00:16
    note that today's webinar will be
  • 00:00:18
    recorded for knowledge sharing
  • 00:00:20
    purposes the recording will also be
  • 00:00:22
    uploaded later to the kdi school's
  • 00:00:24
    official YouTube
  • 00:00:26
    channel this webinar is our joint
  • 00:00:29
    venture with the world Bank where
  • 00:00:31
    experts from the bank will share their
  • 00:00:33
    recent findings with the school
  • 00:00:35
    Community we hope you gain exclusive
  • 00:00:38
    insights into The Cutting Edge research
  • 00:00:40
    by the bank and have time to reflect on
  • 00:00:43
    possible
  • 00:00:44
    applications during the presentation
  • 00:00:47
    please keep your microphone muted if you
  • 00:00:50
    have any questions or comments please
  • 00:00:52
    wait for the Q&A session or leave your
  • 00:00:55
    messages in the
  • 00:00:57
    chat now I'm pleased to introd U today's
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    distinguished speaker Mr RF
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    CH he is an economist in the economic
  • 00:01:07
    policy division of the prosperity unit
  • 00:01:10
    at the World Bank group his expertise
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    includes microeconomic modeling fiscal
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    policy and analyzing the macroeconomic
  • 00:01:19
    and fiscal impacts of climate
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    change since joining the bank in
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    2018 he has held concerting roles
  • 00:01:27
    contributing to macroeconomic and fiscal
  • 00:01:30
    policy analysis in
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    India he holds a master's degree in
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    quantitative economics from the Indian
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    Statistical Institute and bachelor's
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    degree in economics from H Raj College
  • 00:01:43
    Delhi
  • 00:01:44
    University everyone please join me in
  • 00:01:47
    welcoming Mr rishab
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    chower Mr chower please share your
  • 00:01:53
    slides when you're ready to
  • 00:01:55
    begin thank you for the introduction and
  • 00:01:58
    having me here very good morning to
  • 00:02:01
    everyone I'll share my slides
  • 00:02:14
    with please let me know whenever you can
  • 00:02:16
    see the
  • 00:02:24
    slides um I hope you can see the slides
  • 00:02:28
    by now yeah we can see the a s okay
  • 00:02:31
    thank you so
  • 00:02:34
    uh so this uh work today I'm going to
  • 00:02:37
    present uh has been co-authored with my
  • 00:02:39
    colleagues zilia and France uh as the
  • 00:02:41
    title suggest taxing for growth
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    revisiting the 15%
  • 00:02:46
    threshold uh in this uh paper uh we
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    revisit this relationship between
  • 00:02:51
    Taxation and growth and extend the
  • 00:02:54
    analysis to inclusive growth when I say
  • 00:02:56
    revisit it means we are building on the
  • 00:02:58
    existing work that has been there around
  • 00:03:01
    uh exploring this
  • 00:03:03
    relationship so I'll uh structure my
  • 00:03:06
    presentation in U four broad parts I'll
  • 00:03:09
    first start with the motivation around
  • 00:03:12
    this paper why we did this there's a
  • 00:03:14
    world Bank corporate
  • 00:03:16
    scorecard and we did some uh event study
  • 00:03:19
    analysis uh before proceeding with more
  • 00:03:21
    rigorous approaches uh then I will move
  • 00:03:24
    on to uh discussing the modeling uh work
  • 00:03:27
    done behind this paper which explores
  • 00:03:29
    the relationship between inclusive
  • 00:03:30
    growth and
  • 00:03:32
    Taxation eventually I'll cover the last
  • 00:03:34
    section where I'll explore uh the
  • 00:03:36
    possible channels which explains the
  • 00:03:38
    relationship we
  • 00:03:41
    observe so the first part uh the World
  • 00:03:44
    Bank corporate score card well it's an
  • 00:03:47
    uh accountability mechanism where uh the
  • 00:03:50
    World Bank tracks its uh progress on
  • 00:03:53
    development
  • 00:03:54
    priorities our president recently
  • 00:03:56
    reduced the size of the previous score
  • 00:03:59
    cards that has been there to one single
  • 00:04:01
    scorecard and uh not just that uh we
  • 00:04:05
    have earlier about 150 indicators now we
  • 00:04:08
    just have 22 indicators broadly covering
  • 00:04:11
    our development priorities on um poverty
  • 00:04:15
    climate change uh inclusive
  • 00:04:18
    growth um and finally uh on this uh we
  • 00:04:22
    have moved from uh more like
  • 00:04:24
    harmonization of these results
  • 00:04:26
    indicators with other multilateral
  • 00:04:28
    institutions which was one of the G20
  • 00:04:32
    priority
  • 00:04:33
    uh and uh now just to give you another
  • 00:04:37
    context within this uh
  • 00:04:40
    scorecard uh domestic Revenue
  • 00:04:42
    mobilization Still Remains uh one of the
  • 00:04:45
    components and domestic Revenue
  • 00:04:48
    mobilization is of course the country's
  • 00:04:50
    capability to mobilize revenues
  • 00:04:53
    domestically U raise fiscal revenues
  • 00:04:57
    domestically uh well there are three uh
  • 00:05:00
    elements broadly I would say first is uh
  • 00:05:03
    what are the vision indicators and then
  • 00:05:07
    what are the result indicators and
  • 00:05:09
    what's the narrative around those
  • 00:05:10
    results so giving a very quick
  • 00:05:13
    overview uh we start with looking at the
  • 00:05:16
    high level measurements of uh
  • 00:05:18
    development progress uh move on to some
  • 00:05:20
    aggregate results of uh interventions
  • 00:05:23
    and finally uh some narrative stories
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    around how those reforms were
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    implemented so uh within the this uh DRM
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    agenda I will specifically point out the
  • 00:05:34
    indicators how we track progress is uh
  • 00:05:38
    looking at the country's progress in
  • 00:05:40
    passing the tax to revenue 15% threshold
  • 00:05:43
    which uh we are going to revisit in this
  • 00:05:46
    paper and then of course looking at how
  • 00:05:49
    uh the low uh collection countries U
  • 00:05:53
    with the World Bank is helping increase
  • 00:05:54
    their revenue how they address their tax
  • 00:05:56
    Equity systems and lastly on the stories
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    we look at how the bank supported
  • 00:06:01
    reforms help in this uh help these
  • 00:06:04
    countries improve revenues and improve
  • 00:06:06
    other
  • 00:06:07
    outcomes this was a broad summary of the
  • 00:06:10
    corporate scorecard in a nutshell we
  • 00:06:12
    look at uh the countries with weak
  • 00:06:14
    Revenue capacities and see how the banks
  • 00:06:17
    reforms have helped them and improve
  • 00:06:19
    their development
  • 00:06:22
    outcomes now uh uh moving to another uh
  • 00:06:26
    before moving to the modeling approach
  • 00:06:28
    we do another m exercise behind this
  • 00:06:32
    paper which where we try to look at uh
  • 00:06:34
    the relationship between tax to GDP and
  • 00:06:37
    economic growth or development outcome
  • 00:06:39
    using an event
  • 00:06:41
    study so what is the objective the
  • 00:06:44
    objective here is very clear we want to
  • 00:06:46
    see whether that increase in the tax to
  • 00:06:49
    GDP ratio of a country preceded a
  • 00:06:51
    country's transition to a higher income
  • 00:06:54
    group so when countries moving from
  • 00:06:57
    lower income to lower upper middle
  • 00:06:59
    income or upper middle to high income do
  • 00:07:03
    these countries observe an increase in
  • 00:07:05
    tax or GDP ratio prior to those
  • 00:07:07
    transition
  • 00:07:09
    dates we use the World Bank income group
  • 00:07:11
    classification data from 1987 to
  • 00:07:15
    2021 uh a broad um stats some broad
  • 00:07:18
    stats are presented on the right side we
  • 00:07:20
    see that when countries move from low
  • 00:07:22
    income to lower middle income we have
  • 00:07:25
    about 53 countries in this sample period
  • 00:07:28
    likewise 67 when they move from lower
  • 00:07:30
    middle to upper middle and when they
  • 00:07:32
    move from upper middle to high we have
  • 00:07:34
    about 41 such
  • 00:07:35
    cases however there are limitations on
  • 00:07:37
    the tax to GDP rati not every country
  • 00:07:40
    during the time of transition had this
  • 00:07:42
    data available at least in public uh
  • 00:07:44
    domain so this reduces our sample size
  • 00:07:47
    so you can see about
  • 00:07:49
    27 uh countries have data when they move
  • 00:07:51
    from low to Low Middle income so we were
  • 00:07:54
    able to only track those in the event
  • 00:07:57
    study
  • 00:08:00
    and uh another thing maybe I can put
  • 00:08:03
    some context to the numbers so low
  • 00:08:04
    income class recent number suggest has a
  • 00:08:07
    classification of about
  • 00:08:10
    $1,145 gni per capita by uh Atlas
  • 00:08:14
    method and uh for Middle income the cut
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    off is like uh you cross 1145 and
  • 00:08:20
    between $145 to
  • 00:08:22
    $4,500 for upper middle income group the
  • 00:08:25
    income range is 4500 to 14,000 and
  • 00:08:27
    higher income is above that threshold
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    this is the recent one but it has
  • 00:08:32
    increased over time of course adjusting
  • 00:08:34
    for inflation and other
  • 00:08:36
    factors now uh coming to this uh chart
  • 00:08:41
    where we present findings from our event
  • 00:08:43
    study the leftmost chart looks at the
  • 00:08:47
    tax to GDP
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    ratios of the countries which were
  • 00:08:52
    transitioning from different income
  • 00:08:54
    groups and what we find is that in the
  • 00:08:57
    first stack
  • 00:09:00
    when countries transition from lower to
  • 00:09:02
    lower middle income category at the time
  • 00:09:04
    of transition their average tax to GDP
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    ratio was about
  • 00:09:10
    15% and the median which is sky blue
  • 00:09:12
    color is about
  • 00:09:15
    13% similarly we see that the tax to GDP
  • 00:09:19
    ratio from when countries transition
  • 00:09:23
    from Low Middle to Upper Middle was
  • 00:09:25
    about 23 and correspondingly it was 25%
  • 00:09:28
    for transition from upper middle to high
  • 00:09:30
    income group so we find that no
  • 00:09:34
    will 15% number when countries are
  • 00:09:37
    transitioning from this low to lower
  • 00:09:38
    middle income group so there's something
  • 00:09:41
    about that threshold that just a
  • 00:09:43
    motivation and in the right side chart
  • 00:09:45
    what we look at is we zoom in our focus
  • 00:09:49
    on those countries transitioning from
  • 00:09:51
    lower income to lower middle income
  • 00:09:53
    category what we see is that t denotes
  • 00:09:56
    here on the xaxis the period of
  • 00:09:58
    transition
  • 00:10:00
    and the solid Orange Line denotes the
  • 00:10:02
    median tax to GDP ratio the dash line
  • 00:10:06
    denotes the interquartile range of those
  • 00:10:09
    countries so what we see is that 10
  • 00:10:12
    years prior to the transition the median
  • 00:10:14
    ratio was 9% and it increased to almost
  • 00:10:18
    133% at the time of transition so the an
  • 00:10:22
    increase of about
  • 00:10:24
    4% which is interesting that uh
  • 00:10:27
    countries have increased their tax
  • 00:10:28
    capacity now this can be because of that
  • 00:10:31
    they were growing better and better
  • 00:10:34
    growth outcomes imply better tax revenue
  • 00:10:36
    collection their base was expanding they
  • 00:10:38
    have more efficient tax systems
  • 00:10:41
    Administration it could also mean the
  • 00:10:43
    other way around that you have higher
  • 00:10:45
    tax to GDP ratio means that you
  • 00:10:48
    are able to do more redistribution in
  • 00:10:51
    the economy reduce inequality and do
  • 00:10:54
    more uh growth oriented expenditures to
  • 00:10:57
    support growth so there relationship can
  • 00:11:00
    work either way so far we have just
  • 00:11:02
    established a more of a correlation kind
  • 00:11:06
    of framework not any caus about the
  • 00:11:08
    relationship between Taxation and growth
  • 00:11:10
    and what we have observed is that around
  • 00:11:13
    uh the transition uh date the tax to GDP
  • 00:11:16
    ratio average around
  • 00:11:20
    15% there are just some country examples
  • 00:11:22
    because so far I reported main median uh
  • 00:11:25
    now I just show some country examples
  • 00:11:27
    starting uh the top left one is Georgia
  • 00:11:31
    where the tax to GDP ratio increased
  • 00:11:34
    from 7.3 to 14 uh in the 10 years
  • 00:11:37
    preceding this uh income transition from
  • 00:11:39
    low to lower middle income uh group
  • 00:11:42
    likewise in codia it increased from 8 to
  • 00:11:44
    14.6 in India 8.9 to
  • 00:11:48
    11.9 uh in maldiv 7.7 to 12.8 so you see
  • 00:11:52
    broadly the number is of course not
  • 00:11:53
    exactly 15 but there's a range uh around
  • 00:11:56
    that number that we see the increase
  • 00:11:58
    happened
  • 00:12:01
    um and uh so this ends the event study
  • 00:12:04
    we have learned some lessons from the
  • 00:12:06
    event study that uh tax to DDP ratio
  • 00:12:08
    increased 3 to 4 percentage points prior
  • 00:12:11
    to the income
  • 00:12:12
    transition well it just motivates the
  • 00:12:15
    idea that uh there's something that
  • 00:12:17
    matters for growth that increase
  • 00:12:19
    maybe now we'll revisit this
  • 00:12:22
    relationship from a more technical
  • 00:12:24
    perspective to establish uh causality
  • 00:12:29
    and uh I will start with some motivation
  • 00:12:33
    uh again looking at some correlations uh
  • 00:12:36
    on the entire data set between tax to
  • 00:12:39
    GDP ratio and measures of growth so the
  • 00:12:43
    first thing I look at is on the leftmost
  • 00:12:45
    chart is whether the tax to GDP ratio
  • 00:12:49
    today is correlated with 10e ahead
  • 00:12:53
    growth rate GDP growth rate
  • 00:12:56
    normal we don't really observe any
  • 00:12:58
    strong POS relationship as you can see
  • 00:13:00
    in the leftmost chart but uh well the
  • 00:13:03
    red line is a predicted polinomial uh
  • 00:13:06
    fractional polinomial fit where we do
  • 00:13:09
    see that at least in the very initial
  • 00:13:11
    phases there is an increase and then of
  • 00:13:13
    course relationship is flat so there's
  • 00:13:15
    no such relationship that is coming
  • 00:13:18
    out now on the right chart I do the same
  • 00:13:22
    uh scatter but instead of growth I look
  • 00:13:24
    at Prosperity Gap Prosperity Gap is
  • 00:13:27
    coming from this create all paper which
  • 00:13:30
    is published by World Bank authors so
  • 00:13:33
    Prosperity Gap is a indicator which is
  • 00:13:37
    measuring how by how many times your
  • 00:13:42
    income uh of all the persons in an
  • 00:13:45
    economy must be multiplied by a certain
  • 00:13:48
    Factor so that you reach this $25 per
  • 00:13:52
    day income now that $25 per day is
  • 00:13:57
    coming from the fact that it is observed
  • 00:13:59
    at uh when the countryes transition from
  • 00:14:03
    uh upper middle income to high income
  • 00:14:05
    status so it's a
  • 00:14:07
    factor uh the lower factor means you are
  • 00:14:10
    better off the higher means that you
  • 00:14:11
    need to do more to improve the incomes
  • 00:14:14
    and have shared prosperity in the
  • 00:14:15
    economy so higher uh factor is a bad
  • 00:14:19
    outcome uh it means higher inequality
  • 00:14:22
    kind
  • 00:14:23
    of now what we see is that countries
  • 00:14:26
    with higher taxation to GDP ratio have
  • 00:14:29
    lower factor which means uh 10 year
  • 00:14:32
    ahead uh growth is more inclusive when
  • 00:14:35
    you have higher tax or GDP ratios again
  • 00:14:38
    these are
  • 00:14:39
    correlations but there is some
  • 00:14:41
    motivation that there is in relationship
  • 00:14:43
    and we can explore further by our
  • 00:14:45
    empirical
  • 00:14:49
    approach okay so this is our empirical
  • 00:14:53
    model now let's go step by
  • 00:14:57
    step the left hand side of this equation
  • 00:15:02
    denotes the change in the Y variable Y
  • 00:15:06
    is our either growth rate or why is why
  • 00:15:10
    can be seen seen as a GDP measure or
  • 00:15:13
    Prosperity Gap measure and when we look
  • 00:15:15
    at the difference of course in
  • 00:15:16
    logarithmic terms it becomes a growth
  • 00:15:18
    rate so yct denotes the value of
  • 00:15:22
    variable Y in for Country C in time
  • 00:15:24
    period t+ J and given our objective is
  • 00:15:29
    long-term growth impacts we look at J is
  • 00:15:31
    10 and 15 years old in our paper we look
  • 00:15:33
    how far A little bit far in
  • 00:15:36
    time and then we are saying that this
  • 00:15:39
    outcome variable depends
  • 00:15:42
    on whether your taxation tax to GDP
  • 00:15:46
    ratio which is tax of a country C in
  • 00:15:49
    time period T tax CT exceeds a threshold
  • 00:15:53
    camama so we are saying that if your tax
  • 00:15:57
    to GDP ratio exceeds the scamma then
  • 00:16:01
    your growth or the outcome variable
  • 00:16:03
    which you are interested in on the left
  • 00:16:05
    hand side that is higher by an amount
  • 00:16:08
    beta 1 for those countries and time
  • 00:16:12
    periods when your tax to GDP ratio is
  • 00:16:15
    higher than this threshold
  • 00:16:17
    level and then there are other factors
  • 00:16:20
    as we point out we have tax to DDP
  • 00:16:23
    itself which is capturing that higher
  • 00:16:26
    taxation is associated with higher
  • 00:16:28
    growth the beta 3 coefficient you see
  • 00:16:30
    here is capturing that we also control
  • 00:16:33
    for a bunch of other factors which are
  • 00:16:35
    in
  • 00:16:36
    xct X will include factors like uh other
  • 00:16:40
    Revenue sources debt to GDP ratio
  • 00:16:43
    investment to GDP ratio population
  • 00:16:47
    growth and then we have certain Capac C
  • 00:16:50
    which denotes country specific
  • 00:16:53
    characteristics uh and Capa which you
  • 00:16:55
    know time fixed effects for instance in
  • 00:16:57
    certain period there were a crisis we
  • 00:16:59
    want to control for the fact that uh the
  • 00:17:01
    relationship is not affected by those
  • 00:17:04
    specific time
  • 00:17:06
    periods and then the first is's a error
  • 00:17:08
    term around your
  • 00:17:11
    estimates but here the challenge is that
  • 00:17:15
    we don't know gamma to estimate this
  • 00:17:18
    beta 1 we need to know what threshold
  • 00:17:20
    are we putting in the model but before I
  • 00:17:23
    go there I would like to illustrate this
  • 00:17:26
    uh impact in a diagram
  • 00:17:30
    so here it's a hypothetical illustration
  • 00:17:33
    on the x-axis we have tax to GDP
  • 00:17:36
    ratio on the y axis we have uh the
  • 00:17:40
    outcome variable of interest which is
  • 00:17:42
    let's say
  • 00:17:44
    growth the blue line
  • 00:17:47
    is for those countries which are it is
  • 00:17:50
    for the country when it is below the
  • 00:17:52
    threshold and so this is just like a one
  • 00:17:54
    country example and then Red Line
  • 00:17:57
    denotes the outcome when it is above the
  • 00:17:59
    threshold hypothetically we just assume
  • 00:18:02
    here that let's say the threshold is
  • 00:18:04
    15% so what we are expecting we are
  • 00:18:07
    expecting that this outcome variable
  • 00:18:10
    will jump around this 15% threshold so
  • 00:18:13
    this beta 1 is where you will see that
  • 00:18:18
    impact this is the interpretation of
  • 00:18:20
    beta 1 you expect a jump around that
  • 00:18:23
    threshold which is captured by beta 1
  • 00:18:27
    but we don't know the threshold so what
  • 00:18:30
    we are going to do is as I mentioned in
  • 00:18:32
    the previous slide we will do a grid
  • 00:18:34
    search we will run this model for
  • 00:18:37
    different different values of gamma
  • 00:18:39
    between 7 to 30% of
  • 00:18:42
    GDP and sub increase it by a marginal
  • 00:18:45
    amount let's say 0.12% of GDP and look
  • 00:18:49
    at the values of beta 1 this beta 1 AC
  • 00:18:53
    for different values of those uh tax to
  • 00:18:55
    GDP ratio and eventually we we will see
  • 00:18:59
    where this value is
  • 00:19:01
    maximized that is where we will observe
  • 00:19:03
    that the threshold has the maximum
  • 00:19:06
    effect
  • 00:19:08
    so in this
  • 00:19:10
    Slide the left hand chart is precisely
  • 00:19:13
    doing that what we see is that tax to
  • 00:19:16
    DDP ratio is on the x- axis on the y-
  • 00:19:19
    axis we have cumulative growth rate so
  • 00:19:21
    that's why you see the numbers are
  • 00:19:22
    higher because it's a 10-year growth
  • 00:19:24
    rate uh
  • 00:19:25
    cumulative and uh what you see is
  • 00:19:30
    that the the beta one which is capturing
  • 00:19:35
    this cumulative growth rate it takes a
  • 00:19:37
    maximum value somewhere closer to
  • 00:19:41
    133% first and foremost point to note is
  • 00:19:44
    that beta 1 here is positive and
  • 00:19:47
    statistically significant which is shown
  • 00:19:49
    by this shaded band of 90% confidence
  • 00:19:53
    interval which means that the effect is
  • 00:19:57
    there there is a change there is a jump
  • 00:19:59
    but where that jump is maximum now we
  • 00:20:02
    search that
  • 00:20:04
    point which appears to be closer to 13%
  • 00:20:06
    in our uh
  • 00:20:08
    chart similarly our goal is due to the
  • 00:20:12
    similar analysis for Prosperity Gap but
  • 00:20:16
    with prosperity Gap the interpretation
  • 00:20:18
    is the opposite because higher
  • 00:20:19
    Prosperity Gap would mean that you are
  • 00:20:23
    you need to there's more inequality you
  • 00:20:25
    need to multiply your incomes by larger
  • 00:20:27
    factor to reach that 25 $5 threshold
  • 00:20:31
    so here we are interested in minimizing
  • 00:20:34
    that beta 1
  • 00:20:36
    coefficient that's why in the right
  • 00:20:38
    chart what we observe is that the
  • 00:20:40
    minimum value of that beta 1 over this
  • 00:20:44
    range is achieved again around 133%
  • 00:20:48
    threshold now here I have presented and
  • 00:20:51
    another thing uh I would like to mention
  • 00:20:53
    before that it is statistically
  • 00:20:54
    significant the negative number so the
  • 00:20:57
    impact is still there there is a decline
  • 00:20:59
    in the prosperity Gap indicator around
  • 00:21:02
    that
  • 00:21:03
    threshold so here I presented the case
  • 00:21:06
    for 10 year ahead growth rates and 10
  • 00:21:09
    year ahead Prosperity Gap in the
  • 00:21:11
    original paper we do have this uh 15
  • 00:21:15
    years ahead as well and the range is
  • 00:21:17
    broadly the same 12 to 14% for the
  • 00:21:19
    threshold for both the
  • 00:21:24
    cases now in this slide
  • 00:21:30
    we are doing some predictions based on
  • 00:21:32
    our model so our goal is to look at
  • 00:21:36
    whether when countries move from the
  • 00:21:38
    lower growth rate uh lower tax GDP ratio
  • 00:21:42
    of let's say 7% to 15% the threshold
  • 00:21:46
    which we are vouching for to the what's
  • 00:21:49
    the predicted Inc predicted value of the
  • 00:21:51
    cumulative roow three so the left track
  • 00:21:54
    clearly shows that there is a higher
  • 00:21:58
    growth when you have a higher tax DDP
  • 00:22:00
    ratio and this is predicted value from
  • 00:22:02
    the model where we control for other
  • 00:22:04
    factors as
  • 00:22:06
    well the orange whiskers are showing the
  • 00:22:09
    90% confidence interval around that
  • 00:22:12
    growth likewise in the right hand chart
  • 00:22:15
    we see that if we look at Prosperity Gap
  • 00:22:17
    as an indicator we see that Prosperity
  • 00:22:20
    Gap is lower when your tax to DDP ratio
  • 00:22:22
    increases from 7 to 15 percentage
  • 00:22:25
    points so the impact are visible even in
  • 00:22:29
    a more sophisticated model than just
  • 00:22:32
    Scatter
  • 00:22:35
    Plots so so far I have touched upon the
  • 00:22:39
    motivation of
  • 00:22:42
    why uh firstly why it matters and the
  • 00:22:45
    corporate scorecard the event study and
  • 00:22:48
    eventually I moved on to a empirical
  • 00:22:50
    model where we established the fact that
  • 00:22:53
    tax to GDP ratio indeed
  • 00:22:56
    U uh is relevant for explaining higher
  • 00:23:00
    growth patterns and the threshold was
  • 00:23:03
    broadly observed around 133% not exactly
  • 00:23:06
    15 but
  • 00:23:07
    13 and that is true for both the cases
  • 00:23:10
    for uh GDP growth and for inclusive
  • 00:23:13
    growth measure which is captured through
  • 00:23:14
    Prosperity
  • 00:23:15
    Gap in the next section we will explore
  • 00:23:19
    what explains this increase like why
  • 00:23:22
    does a higher tax would mean higher
  • 00:23:24
    growth or lower
  • 00:23:25
    Prosperity so now using our similar
  • 00:23:28
    model we are going to explore some
  • 00:23:30
    channels well using conventional
  • 00:23:32
    knowledge we know that uh some channels
  • 00:23:35
    obviously that might appear to our mind
  • 00:23:37
    is that these countries which have
  • 00:23:39
    higher taxation revenues they are they
  • 00:23:41
    are able to better spend on health and
  • 00:23:44
    education which is crucial for growth
  • 00:23:47
    particularly in low-income
  • 00:23:49
    countries also these countries with
  • 00:23:51
    higher taxation might be able to
  • 00:23:53
    redistribute those revenu so there is
  • 00:23:56
    this progressivity aspect I'll explain
  • 00:23:58
    this definition as I go
  • 00:24:00
    ahead likewise uh these countries where
  • 00:24:04
    higher tax revenues are collected you
  • 00:24:07
    can probably have lower volatility in
  • 00:24:09
    your government spending patterns
  • 00:24:10
    because you're not really influenced
  • 00:24:13
    when the shocks hit the economy and
  • 00:24:14
    hence you are able to better stabilize
  • 00:24:16
    the economy
  • 00:24:18
    so uh you are likely to take some
  • 00:24:20
    counter cyclical policy measures which
  • 00:24:22
    will improve your ability to respond to
  • 00:24:25
    shocks and hence improve the growth
  • 00:24:27
    outcomes
  • 00:24:29
    so these are possible channels which we
  • 00:24:31
    have explored in this
  • 00:24:33
    paper uh let's start with health and
  • 00:24:37
    education so in the leftmost
  • 00:24:41
    chart we plot tax to GDP
  • 00:24:44
    ratio and average future health and
  • 00:24:47
    education spending as a percentage of
  • 00:24:50
    GDP now these scatters are slightly not
  • 00:24:53
    not the same as previously shown like
  • 00:24:56
    it's not just a simple country year
  • 00:24:58
    scatter but what we are doing is we
  • 00:25:01
    create bins
  • 00:25:03
    so we have this tax to DDP ratio
  • 00:25:07
    associated with one particular range uh
  • 00:25:09
    in a very small vicinity let's say 0 to
  • 00:25:11
    2% we take the average of all those
  • 00:25:15
    countries in that range average of
  • 00:25:16
    health and education spending of all
  • 00:25:18
    those countries in that range and plot
  • 00:25:20
    that this makes the visualization
  • 00:25:22
    relatively uh
  • 00:25:25
    simpler so what we see is that again as
  • 00:25:28
    your tax to GDP ratios are rising You
  • 00:25:30
    observe an increase in health and
  • 00:25:32
    education
  • 00:25:34
    spending and there's no threshold L such
  • 00:25:36
    it keeps on increasing you have more and
  • 00:25:38
    more fiscal space you're spending
  • 00:25:41
    more and we see likewise that uh when we
  • 00:25:44
    do this with a model controlling for
  • 00:25:47
    fact other factors the predicted values
  • 00:25:49
    are increasing although there is some
  • 00:25:51
    tapering of when we do this model
  • 00:25:52
    approach that the increase is not that
  • 00:25:54
    large like from 7 to 15 the increase was
  • 00:25:56
    large then it is moderating so there are
  • 00:25:59
    limits of course to the public health
  • 00:26:00
    and education
  • 00:26:02
    spending and there is literature which
  • 00:26:05
    suggests that uh and there are growth
  • 00:26:08
    models which suggest health and
  • 00:26:09
    education spending particularly are
  • 00:26:10
    relevant for human capital development
  • 00:26:12
    and hence they have positive impact on
  • 00:26:14
    growth of course in some cases there are
  • 00:26:17
    uh mixed
  • 00:26:18
    findings but broadly this growth Theory
  • 00:26:21
    will suggest that there are positive
  • 00:26:23
    effects on
  • 00:26:24
    growth and that's why we believe higher
  • 00:26:27
    taxation would increase a country's
  • 00:26:30
    fiscal space
  • 00:26:31
    to increase those critical spendings and
  • 00:26:35
    hence growth effects is
  • 00:26:38
    materialized now coming to the next
  • 00:26:40
    Channel progressive taxation so uh some
  • 00:26:44
    of you may already be aware of this
  • 00:26:46
    concept but just touching uh very
  • 00:26:49
    briefly so a progressive tax is the one
  • 00:26:52
    where this average tax burden will
  • 00:26:55
    increase as your income will go up now
  • 00:26:57
    it is not that simple that higher income
  • 00:27:00
    will of course have that higher taxation
  • 00:27:04
    because just because their income is
  • 00:27:06
    higher and they'll pay a larger
  • 00:27:07
    proportion it's not just that the tax
  • 00:27:10
    rate itself has to be higher so when you
  • 00:27:14
    make the higher income individual pay a
  • 00:27:16
    higher tax rate as you can see in the
  • 00:27:18
    left uh in the right uh chart where this
  • 00:27:21
    example is
  • 00:27:23
    presented so we see that as your income
  • 00:27:25
    is going up the tax rates are increasing
  • 00:27:27
    now this makes the system more
  • 00:27:30
    Progressive the definition might be very
  • 00:27:32
    obvious for some of you but just thought
  • 00:27:34
    to start with
  • 00:27:38
    this now why does it matter so likewise
  • 00:27:44
    using the similar Bend scatter plot we
  • 00:27:47
    show that as the direct
  • 00:27:50
    taxation in the economy increases the
  • 00:27:53
    proportion of direct
  • 00:27:55
    taxation You observe that the pro in the
  • 00:27:58
    leftmost chart the Y AIS is prosperity
  • 00:28:01
    Gap this Factor Prosperity Gap it is
  • 00:28:04
    declining which means when you have
  • 00:28:06
    higher direct
  • 00:28:08
    taxation you do observe that your
  • 00:28:11
    inequality is
  • 00:28:15
    lower now we test this in again the
  • 00:28:19
    similar model setup and do the
  • 00:28:21
    prediction controlling for other
  • 00:28:23
    variables we do observe that somewhere
  • 00:28:26
    around 15% this effect is there now 50%
  • 00:28:29
    is this Direct Tax to
  • 00:28:31
    GDP U share of direct taxes in total
  • 00:28:35
    taxes it's not the tax to GDP ratio so
  • 00:28:39
    uh it's different than the previously
  • 00:28:41
    explained Concepts so what we see is
  • 00:28:43
    that you have higher proportion of
  • 00:28:46
    direct
  • 00:28:47
    taxes um as high as
  • 00:28:49
    50% then you are going to see likely the
  • 00:28:52
    progressive impacts
  • 00:28:54
    of uh your tax system
  • 00:28:58
    which means a reduced poverty uh
  • 00:29:00
    Prosperity gap which is capturing the
  • 00:29:02
    inclusive
  • 00:29:03
    growth now also we observed of course
  • 00:29:06
    that higher taxation was associated with
  • 00:29:08
    higher Direct Tax shares now that is why
  • 00:29:11
    we believe that that is one channel
  • 00:29:13
    through which we see the prosperity Gap
  • 00:29:16
    and is declining and we observe more
  • 00:29:18
    inclusive
  • 00:29:22
    growth next Chanel is volatility now
  • 00:29:26
    firstly the why and how well there is
  • 00:29:29
    literature which suggests that higher
  • 00:29:31
    volatility can negatively impact
  • 00:29:35
    growth uh there are two aspects here one
  • 00:29:38
    is of course we look at government
  • 00:29:40
    spending volatility and the economic
  • 00:29:43
    volatility the volatility and growth
  • 00:29:44
    rate itself well government spending is
  • 00:29:47
    a component of total GDP so higher
  • 00:29:49
    spending uh volatility would mean higher
  • 00:29:52
    growth
  • 00:29:54
    volatility but not just that even the
  • 00:29:57
    growth volatility itself can have a
  • 00:29:59
    negative impact on
  • 00:30:00
    growth well some literature suggest that
  • 00:30:03
    there could be some planning error by
  • 00:30:05
    the firms because you are living in a
  • 00:30:07
    more uncertain environment and
  • 00:30:08
    uncertainty can lead to lower
  • 00:30:11
    investments in the economy and hence
  • 00:30:14
    influence future
  • 00:30:18
    growth again for government spending uh
  • 00:30:22
    these economies uh with lower revenues
  • 00:30:26
    are premises that they will likely have
  • 00:30:28
    more volatile spending which will leave
  • 00:30:31
    them with lesser opportunity to borrow
  • 00:30:35
    undermining their ability to stabilize
  • 00:30:37
    the business cycle and implement the
  • 00:30:38
    counter cyclical policy measures when
  • 00:30:40
    they are needed particularly in low
  • 00:30:42
    growth time periods or volatile physes
  • 00:30:44
    of the business
  • 00:30:45
    [Music]
  • 00:30:47
    cycle so that's clear that there we
  • 00:30:50
    expect at least some impact through our
  • 00:30:53
    literature survey and theoretical
  • 00:30:56
    knowledge but how do we measure this
  • 00:30:59
    volatility we have so far used all the
  • 00:31:02
    annual taxation data but now to measure
  • 00:31:04
    volatility we use quarterly data on GDP
  • 00:31:07
    growth and government consumption in
  • 00:31:09
    real terms there seasonality we adjust
  • 00:31:12
    for the seasonal
  • 00:31:14
    factors then we look at the 10 year
  • 00:31:17
    ahead standard deviation of this quarter
  • 00:31:19
    on quarter growth rate in GDP and
  • 00:31:23
    government
  • 00:31:25
    consumption well 10 year ahead is just
  • 00:31:27
    to
  • 00:31:28
    make sure that we are not looking at any
  • 00:31:30
    contemporaneous relation and Taxation
  • 00:31:32
    today matters for future this also
  • 00:31:34
    partially takes care of the endogenity
  • 00:31:37
    issue where you might say that it's the
  • 00:31:39
    other way around that lower volatility
  • 00:31:41
    means better taxation but that's why we
  • 00:31:44
    look at 10 year ahead so that tax the
  • 00:31:47
    relationship goes from taxation to
  • 00:31:50
    volatility and then of course now we
  • 00:31:52
    want to link it to our annual data set
  • 00:31:54
    so we just pick up the first quarter
  • 00:31:55
    measure and Link call it
  • 00:31:58
    representative for that particular year
  • 00:32:00
    because it's 10 year ahead so it covers
  • 00:32:02
    the future
  • 00:32:04
    periods so then uh this is our measure
  • 00:32:07
    of volatility for both spending and
  • 00:32:09
    government spending and economic
  • 00:32:11
    growth again similar bin plot suggests
  • 00:32:14
    that in the left most chart higher
  • 00:32:17
    taxation is associated with lower
  • 00:32:19
    government spending volatility you see
  • 00:32:22
    it's declining and here one can roughly
  • 00:32:25
    say that okay up to 20% the impact is
  • 00:32:27
    sharp it's sharp Decline and then onward
  • 00:32:29
    starts to taper
  • 00:32:31
    off in the rightmost start we present
  • 00:32:35
    this commment consumption volatility
  • 00:32:37
    against
  • 00:32:39
    um future GDP volatility and see of
  • 00:32:42
    course GDP was uh government consumption
  • 00:32:45
    is a component of GDP and there's a
  • 00:32:47
    positive association between the two
  • 00:32:49
    higher consumption volatility means that
  • 00:32:51
    higher GDP
  • 00:32:55
    volatility so there is some evidence
  • 00:32:57
    that spending and output volatility with
  • 00:33:00
    drop with higher tax revenue collections
  • 00:33:03
    which is what we show now in a empirical
  • 00:33:06
    model so use in the left most chart uses
  • 00:33:09
    the same threshold model which we
  • 00:33:12
    presented in the very uh beginning slide
  • 00:33:16
    in the third
  • 00:33:17
    section what we see is that the beta 1
  • 00:33:20
    Co now we have replaced the Y by
  • 00:33:23
    volatility measure instead of growth and
  • 00:33:25
    inclusive growth what we see is that the
  • 00:33:27
    volatil
  • 00:33:28
    is minimized at around again 133% of
  • 00:33:33
    GDP so and it is negative and
  • 00:33:36
    statistically significant impact because
  • 00:33:39
    those orange whiskers are 90% confidence
  • 00:33:44
    interval so again there's motivation
  • 00:33:46
    that this channel is at work around that
  • 00:33:50
    threshold and the right hand chart is
  • 00:33:52
    just doing the same approach we look at
  • 00:33:54
    the predicted values and we see that as
  • 00:33:56
    you come uh closer to 13% there's a
  • 00:33:59
    sharp decline but afterwards it's more
  • 00:34:02
    or less flat the volatility is more or
  • 00:34:04
    less the same for countries in that
  • 00:34:06
    higher bracket but as you approach 13
  • 00:34:08
    then there's a
  • 00:34:13
    decline okay so this is my last slide on
  • 00:34:18
    conclusion what we have donear today is
  • 00:34:21
    that from this paper that government uh
  • 00:34:25
    when they collect lower tax revenues we
  • 00:34:27
    have observed that there are negative
  • 00:34:29
    impacts on growth because their capacity
  • 00:34:32
    to invest in critical infrastructure can
  • 00:34:34
    be limited which we have not really
  • 00:34:36
    shown on the infrastructure side but at
  • 00:34:38
    least on the development side human uh
  • 00:34:41
    Capital spending and U public spending
  • 00:34:44
    on health and education we have seen
  • 00:34:46
    that that is that can be limited because
  • 00:34:48
    of tax uh capacity constraints which can
  • 00:34:52
    further exacerbate inequality and lead
  • 00:34:54
    to overreliance on debt now higher debt
  • 00:34:57
    can also of course have negative impacts
  • 00:34:58
    on growth uh if you just keep on relying
  • 00:35:01
    on debt and not on your uh domestic uh
  • 00:35:04
    capacity the cut off we found uh is in
  • 00:35:08
    the range of 12 to
  • 00:35:09
    14% well now you will say why then 15%
  • 00:35:13
    the reason is we observed that about
  • 00:35:15
    there is the the standard deviation of
  • 00:35:18
    this tax to GDP ratio was again around
  • 00:35:20
    2% over our sample so then when we are
  • 00:35:25
    setting targets for the country it's
  • 00:35:26
    better to be at 15% because there'll be
  • 00:35:28
    volatility around that number so you aim
  • 00:35:31
    a slightly higher
  • 00:35:33
    number and that stabilizes your future
  • 00:35:36
    fiscal outcomes and the channels we have
  • 00:35:38
    explored it was through more productive
  • 00:35:40
    spending more Progressive taxes less
  • 00:35:44
    spending and output
  • 00:35:45
    volatility which further translated into
  • 00:35:49
    better growth
  • 00:35:51
    outs thank you
Tags
  • World Bank
  • KDI School
  • taxation
  • economic growth
  • 15% threshold
  • inclusive growth
  • health and education
  • progressive taxation
  • volatility
  • empirical analysis