Abstract
This paper studies whether Peru’s excise tax refund of 30% for fuel purchases has had the effect of increasing formalization in the intercity passenger ground transport market and whether the resulting tax expenditure has been fruitful in increasing investment in vehicles. Based on a partial equilibrium market framework, transport operators are segmented among formal, informal and illegal operators, and a new methodology to measure how the tax refund makes these operators change their market shares is perfected. Evidence shows that the tax refund has worked by augmenting the market share of formal but not informal operators, thus increasing the overall formalization of the passenger transport market. This contradicts the Ministry of Finance impact evaluation asserting that market formalization has not occurred because informal operators did not take advantage of the tax refund and did not convert into formal operators. An epilogue challenges a 2020 government decree establishing a new tax refund no longer intended to reduce informality but rather to reduce accident rates.
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Specifically, taking into consideration only the passenger transport market (not freight transport), only 38 large and medium well-known formal operators took advantage of the tax refund: 9.74% of passenger transport operators registered with the MTC.
To replace their depreciated buses, informal operators reduce costs by not paying taxes or labor contributions, by buying falsified spare parts and modifying their vehicles, by renting out routes and license plates and by engaging in other opportunistic and inefficient commercial practices (Alcorn and Karner 2020).
“Chicha culture” is a term coined in Peru that reflects lax and transgressive conduct that does not pay attention to the law, which, taken to extremes, could result in unscrupulous behavior. A permissive embedded “chicha” culture creates asymmetries and a lack of information and affects many passengers through adverse selection, thus causing them to tolerate insecure, unhealthy and low-quality services in exchange for lower fares.
For example, a firm with annual sales of US$ 2 million could be relatively large if participating in a US$ 50 million market but relatively small if participating in a US$ 1 billion market.
Although this range is rather broad, it should not generate a statistical bias because the average in this interval is 10.5 buses per operator, a figure that is lower than the 16 buses determined by INEI to qualify as a small business.
These operators cover relatively short routes (for example, 300 km per trip, like Lima to Huancayo or Lima to Ica), transporting 4 to 10 passengers per vehicle. Their major differentiated service characteristics are their speed and low wait and travel time, not QSC. Passengers end up paying higher fares than those of standard formal service and sometimes even more than for the premium formal service.
Although illegal service (zone A) is adjacent to formal premium service (zone B1, defined by Spremium), it is not a substitute for the consumer because the distinguishing feature of illegal service is speed, while for premium service it is comfort and quality.
From a broader perspective, this policy of returning the ISC on fuel purchases is framed within the general concept of tax expenditures, that is, “resources foregone by the State, by the existence of incentives or benefits that reduce the direct or indirect tax burden of certain taxpayers in relation to a reference tax system, in order to meet certain economic or social policy objectives” (CIAT 2011, p. 78). The IMF adds the idea of equivalency with public spending by considering tax expenditures to be “concessions or exemptions from a ‘normal’ tax structure that reduce government revenue collection and, because the government policy objectives could be achieved alternatively through a subsidy or other direct outlays, the concession is regarded as equivalent to a budget expenditure” (IMF 2007, p. 132).
Interviews with some bus owners also reveal that they preferred saving those monthly tax refunds to enlarge profits rather than lowering fares and increase bus occupancy rates. Larger profits were channeled into buying new buses, given other profit reinvestment incentives.
There is no single consensus in the literature that larger bus fleets per operator produce constant, decreasing or increasing returns to scale and economies of scale. Neither are economies of scope also linearly related to fleet size. Results depend not only on different relative definitions of what constitutes a small, medium or large operator ( Xu, et al. 1994; Hirschhausen et al. 2010; Singk 2014; Cowie 2002) but also whether one takes into consideration only production factors , demand factors (Fernandez et al. 2005; Mohring 1972), urban and intercity characteristics (Batarce 2016; Xu et al. 1994), integrated transport systems (Farsi et al., 2007), supply of multiple services (Abrate et al. 2016) and managerial and organizational factors (Cowie and Asenova 1999), for example. Nevertheless, in the current research, it is observed that larger bus operators have significantly higher returns and productivity than smaller firms do, basically because of managerial, organizational and technological factors. For example, firms larger than 100 buses get increasing numbers of passengers per bus when introducing digital inbound logistics technology and organizational and managerial upgrades. To maintain increasing returns to scale, companies facing increasing demand must increase their capacity to offer higher bus rotation, increase their power with suppliers, have better digital marketing and logistic platforms and implement more 8 h maintenance shifts. Larger operators can serve more passengers per bus (up to full capacity) due to the diversification and planning of routes, market segmentation, better managerial control, better bus maintenance and fewer accidents. Larger operators also obtain economies of scope in transporting parcels; providing interfirm transport services; renting small stores and restaurants in terminals and adopting and promoting “passenger ducts” to guide passengers to affiliated lodges, tourism agencies and other businesses.
According to Tables 1 and 90.26% of transport operators have an average of 7.4 buses.
This estimation matches informal operators’ real-life cycle. They, after long years in business, end up wearing out their buses and subsequently exiting the market.
This US$172,400 tax refund is extracted from the economic and financial information of 5 large, major transport operators adjusted by the typical fleet size, which is composed of 75.6 buses.
This assumes that small informal operators remain in the market or satisfy steady state conditions. That is, they are able to replace the original stock of buses in the long run.
If the 30% tax refund is excluded, the use of the PIV to finance operators’ long-term growth would be 1.04 buses, measured by the PIV with no tax refund (1.47) minus the PIV assigned to bus depreciation (0.43).
These numbers are extrapolated from Table 6, comparing the propensity to invest in vehicles over the 5-year period in the 30% tax refund scenario to the propensity to invest in vehicles in the 0% scenario (-0.86 × 5) = -4.31 and the 100% scenario (2.87 × 5) = 10.6. Expressing these values in terms of buses per operator comes out to 71.23 in the 0% scenario and 85.64 in the 100% scenario. Ceteris paribus rows D and E in Table 6, the numbers of passengers are 41.2 million in the 0% scenario and 49.5 million in the 100% scenario.
The fare reduction is estimated by making a linear approximation of aggregate demand: Fare = 1.904 − 0.015 passengers. This equation is obtained by joining the two border equilibrium points delineating the informal operator zone; that is, in Fig. 1, where demand intercepts Supply 2 (58.5, 1.00) and where demand intercepts Supply 3 (98.0, 0.39).
For Tanzi and Zee (2000), tax expenditures are justified if they attack a market malfunction and/or when they involve externalities. For James (2009), they can be applied in cases of market failures if they generate important multiplying effects. UN-CIAT (2018) uses them to promote and attract investors.
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Roca, S., Simabuko, L. Informality and Tax Refund in Peru’s Intercity Passenger Ground Transport Market: An Empirical Appraisal. Transportation 50, 1103–1123 (2023). https://doi.org/10.1007/s11116-022-10273-0
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DOI: https://doi.org/10.1007/s11116-022-10273-0