Social security and taxation operate jointly to overcome individual deprivations, reduce income inequality and promote development, bringing ‘taxation into social protection analysis and planning’. There are several ways in which governments can create fiscal space to finance social protection programmes (e.g. social pensions). The idea is to create new sources of revenue –sustainable in the long-run – which can be used to finance social pensions, without building new liabilities and without distorting macroeconomic stability. The literature specifically addressing the potential fiscal space that could be created to finance social pensions is limited. This paper aims to begin filling some of those gaps and identify sources for creating fiscal space for social pensions through the revenue side (i.e. examine the revenue-generating potential of taxation for social pensions). Specifically, examine the potential funding power of three types of taxes (income tax, corporate tax, and trade tax) using cross-country tax revenues and tax rate data in a global perspective. The paper demonstrates that the three taxes have a revenue-generating potential to finance social pensions in several countries. There is not a magic prescription useful for every country, but there are numerous options to design a tailored mix of sources to create fiscal space.
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See Bastagli (2016) for a guidance note and examples of the impact of poverty and inequality on taxes and transfers, and the financing role of taxation in social protection.
Durán-Valverde and Pacheco (2012) identified distinct fiscal space creation strategies adopted by eight low- and middle-income countries (Bolivia, Botswana, Brazil, Costa Rica, Lesotho, Namibia, Thailand and South Africa) to finance the extension of social protection. For example, Bolivia’s strategies combine natural resources extraction taxes, debt reduction and sales of state assets, while Namibia increased social contributions, used budget surpluses and used official development assistance.
The sample comprises 153 cases, of which 51 are labelled as high-income, 43 as upper-middle-income, 38 as lower-middle-income, and 21 as low-income.
According to the OECD (2014), direct taxes on income ‘are levies by public authorities at regular intervals, except social contributions, on income from employment, property, capital gains or any other source’. The IMF Government Finance Statistics database includes taxes deducted by employers (pay-as-you-earn taxes) and surtaxes.
The ILO defines employment in the informal economy ‘as the sum of employment in the informal sector and informal employment found outside the informal sector’ (ILO 2012).
Anguilla, Bahamas, Bahrain, Bermuda, Brunei Darussalam, Cayman Islands, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates (data is for 2015 or the most recent value).
Austria, Aruba, Belgium, Denmark, Finland, Israel, Japan, Netherlands, Senegal, Slovenia, Sweden, Zimbabwe (data is for 2015 or the most recent value).
Recent work from the Brookings Institution argues that increasing the top personal income tax rate in the United States from 39.6 to 50 per cent would bring in an additional 95.6 billion US$ (around 0.55 per cent GDP) (Gale et al. 2015). Therefore, this figure is smaller –although significant- in comparison to the ones using data from the Tax Policy Center.
The most recent data in the World Wealth and Income database is used.
Kinderman and Krueger (2014) argued the optimal top income tax –for the US- would be close to 90 per cent. Future studies should replicate these studies in low- and middle-income countries in order to estimate an optimal tax rate.
According to Durán-Valverde (2014) the Uruguayan Monotax is a simplified taxation system that combines social security provision. The Monotax was created in 2001 and modified in 2007 to increase the number of freelancers and workers in the informal sector in the social security scheme. In just three years after the modification the number of workers and firms in the social protection scheme has tripled. See Durán-Valverde (2014) and Amarante and Perazzo (2013) for more details on the Monotax.
The IMF Government Finance Statistics database includes taxes on ‘the income of units such as partnerships, sole proprietorships, estates, and some trusts that are recognized as corporations. This covers income from all sources and not simply profits generated by production’ (IMF 2014, p. 91).
By this logic, economic gains will eventually ‘trickle-down’ to the rest of the population making everyone better off in absolute terms (Chang 2014, pp. 318-319). However, Piketty et al. (2011a) find a strong correlation between cuts in top tax rates and increases in the income share of the highest earners (top 1 per cent), working against the principles of inclusive growth.
Authors used the average rate for the years 2010-2013.
Bahamas, Bahrain, Bermuda, Bonaire, Saint Eustatius and Saba, Cayman Islands, Guernsey, Isle of Man, Jersey, Vanuatu
Corporate tax havens are fiscal homes to corporations operating worldwide, using tax loopholes or practices such as transfer pricing to evade/avoid paying the corresponding amount of burden. These practices deprive countries worldwide of collecting revenues from profits made on their own territories.
According to Citizens for Tax Justice (CTJ), only 55 corporations disclosed the U.S. tax rate (28.6 per cent) they would pay if offshore profits were repatriated. CTJ estimated the value of corporate tax revenues lost to tax havens by using the same average tax rates (28.6 per cent) on the 248 non-disclosing companies (Citizens for Tax Justice 2016).
Transfer mispricing –also known as transfer pricing manipulation- occurs when two subsidiaries of the same multinational group ‘artificially distort the price at which the trade is recorded, to minimise the overall tax bill’ (Tax Justice Network, n.d.).
Sales, payroll and/or physical assets could be used as proxies in a formula to estimate the genuine profits/share of revenues in each country. See Picciotto (2012) for further details on the unitary taxation system and Picciotto (2015) to access the 8 outputs produced in a research programme financed by the international Centre for Tax and Development.
Highly important as ‘more than 60% of world trade takes place within multinational enterprises’ (Neighbour 2008).
Burkina Faso, Congo, Malawi, Burundi, Uganda, Zimbabwe, Togo, Myanmar, Chad, Cameroon, Ghana, Kenya, Mauritius, Mozambique, Gambia, Zambia, Nigeria, Tanzania and Bangladesh.
The WTO defines tariffs as custom duties on merchandise imports.
Therefore, this paper is not recommending raising tariffs by 5 per cent or 10 per cent. The countries selected have the space to increase tariffs if the average, the mean and the WTO-bound are used as a threshold.
Chinese Taipei is excluded due to unavailability of imports data.
The following taxes where considered: taxes on income, profits and capital gains, taxes on payroll and workforce, taxes on property, taxes on financial and capital transactions, excise taxes, taxes on trade and transactions and other taxes considered on the IMF Government Finance Statistics database under the 116 category.
For example, if a large part of older-age people’s income is used to buy goods and services (e.g. groceries, housing, medicines) then an increase in consumption tax would directly reduce their disposable income. If John earns 100 pounds and spend all of it on taxable goods and services, an increase in the consumption tax rate would reduce John’s capacity to buy groceries, medicines and other goods and services. Thus, an increase in consumption tax rate is regressive as it affects more those earning the least and spending the largest part of their incomes in consumption outputs.
This paper used the same methodology presented in a previous brief policy paper (Cruz-Martinez 2016) to estimate the cost of social pensions in 96 low- and middle-income countries. A modified version of Willmore’s (2007) formula was used, adding the 5 per cent of the total cost of transfers as administrative cost [previously proposed by Knox-Vydmanov (2011, p. 3)].
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Conflict of Interest
The author declares that he has no conflict of interest.
Informed consent was obtained from all individual participants included in the study.
Ethical Treatment of Experimental Subjects (Animal and Human)
This article does not contain any studies with human participants performed by any of the authors.
This study was funded by Help Age International, while the author was a Research Fellow.
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Cruz-Martinez, G. Revenue-Generating Potential of Taxation for Older-Age Social Pensions. Ageing Int 43, 415–437 (2018). https://doi.org/10.1007/s12126-017-9298-2
- Social pensions
- Fiscal space
- Social protection
- Tax revenue
- Cash transfers
- Poverty reduction