Fiscal & TAX Policy

IMF Fiscal Monitor

Advanced Economies
70.0

60.0

50.0

40.0
Expenditure % of GDP
30.0

20.0

10.0

0.0
15.0

20.0

25.0

30.0

35.0

40.0

Revenue % of GDP

IMF Fiscal Monitor

45.0

50.0

55.0

60.0

Types of Taxes
Taxes on Value Added and Imports
+ Taxes on Income and Wealth
(Income Taxes, Corporate Profits Tax, Capital Gains
Taxes, Property Taxes)

+ Social Security Contributions

Total Taxes

Principles of Taxation
1. Implementability. Cheap to collect, easy to
calculate, difficult to avoid.
2. Equitable.
a) Vertical
b) Horizontal

3. Efficient. Neutral effect on market decisions,

consistent with growth and prosperity.
Some Underlying Principles of
Tax Policy
by
Richard K. Vedder and Lowell E. Gallaway Link

VAT Taxes thought to be easy to collect and calculate

VAT Tax revenue as percentage of total taxation - OECD Average

25

20

15

10

KPMG Corporate and

Indirect Tax Repo
rt

Equity
Considerations
1. Personal Equality Poll Tax
2. Benefit Principle Flat Tax
3. Ability to Pay Graduated Tax

Taxes and Prosperity

Incentive Effect
Taxes on labor income reduce after tax
wages and reduce incentive to work;
Taxes on financial income reduce after-tax
returns and reduce incentive to save;
But Income Effect
High tax bills may increase need to work
or save to hit a target living standard.

No obvious relationship between

GDP and tax rates among OECD
Countries
OECD Tax vs. GDP, 2010
50000
45000
40000
35000
30000
GNI per Capita, PPP (constant 2005 US$) Title

25000
20000
15000
10000
5000
0
20.0

25.0

30.0

35.0

40.0

45.0

Tax Revenue (% of GDP)

50.0

55.0

60.0

PWC Corporate Income Tax Report

Tax Incidence
Lost income may not be borne entirely by
direct target of tax.
Corporate Tax
Raise prices, borne by consumers
Reduce wages, borne by workers
Reduce dividends, borne by shareholders
Reduce investment, born by future consumers
workers, or shareholders

Debt

Interest Rates:
Cost of borrowing $1 for 1 year $1+i. Net
interest rate: i.
e.g. if you lend me $100 today, I will pay you $104
in one year, 1+i = 1.04.

Interest Rates are reported in % terms, e.g. 4%,

or basis points, 400 points.

Debt End This Year

Debt End

Last Year

Overall DeficitThis Year

General ExpenditureThis Year

General RevenueThis Year

Overall DeficitThis Year

Overall DeficitThis Year Overall BalanceThis Year

Primary Deficit
Simplified Government Budget
Primary Revenue (less Interest Income)
- Primary Expenditure (less Interest Paid)
Primary Budget Deficit
+ Net Interest Payments on Existing Debt
Overall Budget Deficit

Primary Balance

% of GDP

Includes Interest Rates

Greece

Can you run a deficit every year?

DebtThis Year
Debt Last Year Overall DeficitThis Year
1

V
GDPThis Year (1 g ) GDPLast Year
GDPThis Year

DebtThis Year Debt Last Year

GDPThis Year GDPLast Year

Debt Last Year (1 g V ) Debt Last Year Overall DeficitThis Year
1

V
V
(1 g ) GDPLast Year (1 g ) GDPLast Year
GDPThis Year
Overall DeficitThis Year
g V Debt Last Year

GDPThis Year
(1 g V ) GDPLast Year

Sustainable Deficit
If

Overall DeficitThis Year

g V Debt Last Year

GDPThis Year
(1 g V ) GDPLast Year

then Debt-to-GDP ratio stays stable.

If

> then deficit is unsustainable

A growing economy allows the

government to borrow some money every
year and still keep debt in line with overall

Sustainable Primary Deficit

Overall DeficitThis Year Primary DeficitThis Year Net InterestThis Year

GDPThis Year
GDPThis Year
GDPThis Year
~
Debt Last Year
i

(1 g V ) GDPLast Year
Average Interest

Net InterestThis Year

GDPThis Year

If

Primary DeficitThis Year

g V i Debt Last Year

GDPThis Year
(1 g V ) GDPLast Year

then

staysDebt
stable.

GDP

http://www.imf.org/external/pubs/ft/fm/2011/02/fmindex.htm
32.9062534
.5
34.5

Debt as % of GDP
Gross Debt

Net Debt

233.1

165.6

72.3

94.6
84.1
79.9

52.5
22.8
7.7

86.9
82.6
81.0
50.2

41.1 44.3
34.9

109.3
101.2 98.8
67.1

57.2
31.6

130.6
106.0
101.8
93.5

100.4

71.1
67.5

65.5

55.4

35.3
32.0
30.830.6

100.0

44.9 43.6

67.4
56.0

80.8
72.972.6
52.4
50.8

36.0

7.8

1.86.0
0.0

121.1

0.0 0.0

-1.7

0.0 0.0 0.0

-20.8

-59.7

-161.0

Consequences of Deficits

Austerity
Financial Repression
Seigniorage
Default

Link

Austerity has a negative effect on

business cycles.

IMF

Financial Repression
Indebted governments
often draw financing
from captive financial
institutions to keep
interest rates low.
Domestic banks,
public pension funds
Increased reserve
requirements
International capital
controls.
Link

Seigniorage - Central Bank prints money to buy

government debt.

Link

Default
Link

IMF Fiscal Monitor

Sources: Bloomberg L.P.; Consensus Economics; and IMF staff estimates and
projections.
Note: Euro area countries, subject to data availability. Bond yield spreads,
measured vis--vis German Bunds, are an average of August 2011. Average
consensus real GDP growth forecasts for 201112. Standard & Poors Ratings

Crisis spreads to other

countries

IMF Fiscal Monitor

Background Reading