The Personal Income Tax
A recent paper argues persuasively that the two basic pillars of taxation in most countries are the income tax and the VAT (Barreix and Roca 2007). The authors argue that the VAT is excellent as a revenue raiser and works best if it is applied in the simplest and most neutral fashion possible that is, on as broad a base as possible and preferably at a uniform rate. Given the relative unimportance of personal income taxes in most developing countries this argument is at first sight perhaps somewhat surprising. Personal income tax (PIT) revenues are often three to four times corporate tax revenues in developed countries, but in developing countries corporate tax revenues usually substantially exceed PIT revenues. As a percentage of gross domestic product (GDP), PIT revenues in developed countries average about seven percent of GDP as compared to about two percent for developing countries. Moreover, as Bird and Zolt (2005) note, in many developing countries personal income taxes often amount to little more than taxes on labor income. At the same time, although little revenue is received from capital income, income taxes often impose high marginal effective rates on investment and hence discourage growth.
| Summary: | A recent paper argues persuasively that
the two basic pillars of taxation in most countries are the
income tax and the VAT (Barreix and Roca 2007). The authors
argue that the VAT is excellent as a revenue raiser and
works best if it is applied in the simplest and most neutral
fashion possible that is, on as broad a base as possible and
preferably at a uniform rate. Given the relative
unimportance of personal income taxes in most developing
countries this argument is at first sight perhaps somewhat
surprising. Personal income tax (PIT) revenues are often
three to four times corporate tax revenues in developed
countries, but in developing countries corporate tax
revenues usually substantially exceed PIT revenues. As a
percentage of gross domestic product (GDP), PIT revenues in
developed countries average about seven percent of GDP as
compared to about two percent for developing countries.
Moreover, as Bird and Zolt (2005) note, in many developing
countries personal income taxes often amount to little more
than taxes on labor income. At the same time, although
little revenue is received from capital income, income taxes
often impose high marginal effective rates on investment and
hence discourage growth. |
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