Note: Below is a recap of our recent policy conference held on April 13th, 2023.
With global GDP growth projected to dip below historic averages, interest rates and inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. on the rise, and debt continuing to mount, pro-growth strategies are more important than ever.
Lawmakers need solutions that unlock development while rebalancing budgets. They need policies that encourage innovation and promote society-wide improvements.
Our recent policy conference brought together academics and political leaders to present research on some of the most pressing issues in global taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. policy and to discuss solutions that can unlock genuine global growth.
Daniel Bunn: President and CEO, Tax Foundation
Adam Hoffer: Director of Excise Tax Policy, Tax Foundation
Adam Millsap: Senior Fellow of Economic Opportunity, Stand Together Trust
Andreas Hellmann: Director of Outreach, Tax, and Regulatory Policy, Tholos Foundation
Barbara Kolm: Vice President of the General Council, Austrian Central Bank
Juan Carlos Buitrago Arias: Brigadier General, Colombia Nacional Police; Founder & CEO, Strategos BIP
Walter De Wit: Global Trade Indirect Tax Partner, EY
Mario Mansour: Division Chief, Tax Policy – Fiscal Affairs Department, International Monetary Fund (IMF)
Matt Porterfield: Vice President of Policy and Research, Climate Leadership Council
Introductory Remarks from Daniel Bunn, CEO & President:
Mr. Bunn stressed how this conference, held concurrently with the IMF/World Bank Spring Meetings, is relevant to provide insights into some of the most pressing global tax issues, including the global minimum tax, carbon taxation, and excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. es. Mr. Bunn stressed that discussions on these topics need to consider the incentives and distortions to economic actors and businesses that occur when designing pro-growth policy. Mr. Bunn previewed the forthcoming discussions in this event that would provide insights into a broad range of issues that affect us all, such as the role of taxation in a world of high inflation, climate change, and sluggish economic growth.
Remarks from the participants:
Dr. Hoffer stressed the evolving role of excise taxes worldwide. The nature and design of excise taxes vary widely, and the complexity of designing tax policies is a central concern. Cannabis is an apt example. Jurisdictions have a wide range of tax rates applied to different parts of the cannabis plant and at different stages of production, resulting in a web of complexity.
To guide excise tax design, Tax Foundation has recently published a comprehensive study on the Global Excise Tax Application and Trends which provides an overview of excise structures in the world and some of the latest global trends in excise taxes. This paper brings forward certain principles in excise taxation:
- Excise taxes should target a negative externalityAn externality, in economics terms, is a side effect or consequence of an activity that is not reflected in the cost of that activity, and not primarily borne by those directly involved in said activity. Externalities can be caused by either production or consumption of a good or service and can be positive or negative. or social cost associated with a product.
- Specific taxes are superior to ad valorem taxes in most cases.
- Excise taxes are regressive and should not be used to raise broad revenue; rather they should be used in a targeted manner.
- Excise taxes should take harm reduction into account to maximize well-being and welfare.
- Revenues should be aligned with user fees or paired with programs minimizing the costs of the taxed behavior.
- Revenues should not be paired with expenditure programs needing more revenue over time.
The tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. of traditional excise products is shrinking. “Newer” excise taxes have the potential to completely change the landscape of excise taxation. Growth in excise taxation of cannabis products, alternative tobacco products, sugary products, and plastics has the potential for global implementation and would result in major implications for consumption. Carbon taxA carbon tax is levied on the carbon content of fossil fuels. The term can also refer to taxing other types of greenhouse gas emissions, such as methane. A carbon tax puts a price on those emissions to encourage consumers, businesses, and governments to produce less of them. es have the potential to exceed the revenues of all the other excise taxes combined, and they present broad incentives for change. Similarly, alternative tobacco products can move smokers to products that create much less harm.
Proper design and implementation of excise taxes can improve overall well-being and fund public programs to improve market outcomes. Poor design and implementation of excise taxes can create an environment in which people are worse off than if no policy had been implemented.
Dr. De Wit stressed the trends surrounding new taxes being introduced as excise taxes or specific consumption taxA consumption tax is typically levied on the purchase of goods or services and is paid directly or indirectly by the consumer in the form of retail sales taxes, excise taxes, tariffs, value-added taxes (VAT), or an income tax where all savings is tax-deductible. es. These taxes consider the level of risk of the product, attaching a higher rate to a higher perceived risk. Examples of these are taxes on sugary beverages, energy, and alternative tobacco products.
Risk-based taxes mirror market trends. On the demand side, consumers are moving from higher-risk products to lower-risk-products. On the supply side, businesses have been innovative, creating less-risky products.
Dr. Kolm stressed the importance of the polycrisis on the current state of our economy. Asset purchasing programs (APP) and pandemic emergency purchasing programs (PEPP) in the EU have raised questions on how to fund these measures. She claims Europe made a mistake when placing fiscal and monetary policy in the same basket, when they should be separate.
Dr. Kolm also stressed the importance of institutions. These include the rule of law, which should be predictable both for taxpayers and the private sector. These multiple crises have made emergency and patch measures more necessary, which does not help actors have more predictability and visibility on future policy actions.
At the European level, Dr. Kolm expressed that there should be no tax harmonization, but rather tax competition. She emphasized that Europe has always been more successful when political entities were smaller than economic ones and competition drives innovation, success, and economic growth—and it’s time to go back to competition. Implementing a principled approach to tax and regulatory policy that encourages and incentivizes innovation, such as the recent developments in energy and alternative tobacco products, can decrease societal costs and free resources to be used in economic growth and development.
Mr. Hellman focused on the competitiveness of the West with regard to China. The transatlantic relationship needs to be revived on a variety of levels. He stressed that, while we have been united on areas such as support to Ukraine, we should also focus on unity in regulation and taxation, especially with regard to growth and China. To have better transatlantic relations, some of the measures that the EU has implemented targeting American companies have affected our relations. He proclaimed certain taxes, such as Digital Services Taxes (DSTs), err in the way of measuring value creation, focusing on where value is consumed rather than created.
Global solutions were supposed to end these unilateral measures. Mr. Hellman described that these policies are failing and hampering the ability of the West to compete with China. He concluded by arguing that, rather than quarreling among ourselves, the pettiness of individual measures should be overcome to focus on the larger concerns, such as the overall competitiveness of the West.
Mr. Porterfield focused on the role of carbon taxation, giving an overview of carbon taxation measures worldwide and recent developments in the U.S. Border adjustments refer to the imposition of domestic taxes on the import of certain products and sometimes export rebates on these products. Carbon border adjustments are imposed to tackle the problem of carbon leakage. They range from the EU’s CBAM to other proposals of explicit carbon pricing such as the Baker-Schultz Carbon Dividends Plan, which calls for an economy-wide upstream carbon tax that would be border adjusted on imports and export for carbon-intensive goods—which tend to be more compatible with the WTO obligations. Other proposals bring forward the calculation of domestic cost incurred—taking the aggregated cost of producers of compliance and imposing that “price” on imports.
Mr. Porterfield described other ideas for carbon incentives, including a fee upon certain energy-intensive imports without a corresponding domestic price. Further from conventional conceptions of border adjustments, Nobel prize recipient William Nordhaus has also proposed a system of punitive tariffTariffs are taxes imposed by one country on goods or services imported from another country. Tariffs are trade barriers that raise prices and reduce available quantities of goods and services for U.S. businesses and consumers. s economy-wide for companies that don’t adopt an aggressive approach to climate. These proposals all deserve careful consideration and thinking about design and implementation complexities.
Dr. Millsap stressed the role of innovation in economic growth. Innovation helps us produce more with less and boosts economic growth. To promote innovation, Dr. Millsap suggested a focus on total factor productivity (TFP), which has been declining in the U.S. and Europe in recent years. Tax policy has a role in increasing TFP. According to a paper on taxation and innovation, increasing personal income taxes, for instance, affects the quality of patents. Dr. Millsap summarized that lowering tax rates is a proven way to increase innovation, and other measures such as R&D tax credits are also proven to stimulate innovation, as addressed by a paper on toolkits to promote innovation.
Dr. Millsap described other measures that contribute to innovation, including immigration or competition in international trade, but these are not necessarily easy to sell to the broader public. Tax policies have a place in spurring innovation but can also be used along with other innovation-boosting measures for an optimal result.
Mr. Buitrago Arias stressed the challenges of tax policy enforcement in Latin America and underlined the concrete negative results of poor policy design. Latin America faces challenges stemming from poverty, crime, governance, corruption, and other institutional fragilities that affect the ability to enforce sound policies. Mr. Buitrago Arias summarized that economic growth can be unblocked in Latin America by tackling these challenges and by designing efficient policies.
From his experience, Mr. Buitrago Arias viewed corruption as the main fuel of organized crime in Latin America, and, as such, government efforts are often hampered by corruption and (sometimes intentionally) poorly designed policies; these problems are exacerbated by low levels of dialogue and trust from the private to public sectors. To fight these challenges, he stressed that the efforts need to be coordinated at the global, regional, and national levels.
Mr. Buitrago also shared his experience of attempting to disrupt organized illicit trade. He said organized illicit trade is becoming the main tool for organized criminals, which is affecting the well-being, economic growth, and security of our societies and programs. His suggestion was to approach organized illicit crime as a broad economic strategy, created by the institutional environment and incentives facing individuals, and not as an isolated measure. The costs of global illicit trade are high, but so are the stakes—and disrupting illicit trade can be a key to unlocking economic growth. He concluded with a recommendation of coordinating regional policy, targeting and eliminating corruption, increasing public/private dialogue and trust, and strengthening market-based institutions to unlock economic growth.
Mr. Mansour focused on the global perspectives on tax trends. Design of tax policies matter—and challenges arise from the levels and composition of taxes.
In terms of the composition of tax revenues, Mr. Mansour described that the further away you move from the production supply chain, the higher the distortions; thus, labor and capital taxation are more distortive than taxes at the end of the chain, such as consumption taxes. He summarized that in advanced economies, the share of income taxes has been remarkably constant in the past three decades and low-income countries raise much less from income taxes than high income countries. He argued theory indicates that a greater share of tax revenue coming from consumption generates faster growth, but efficiency is not the only principle by which tax policy should be designed, costs and benefits must also be weighed.
On future challenges, digitalization provides opportunities to rethink tax design, but digitalization poses numerous challenges in terms of taxing the places of consumption and production, for example. Mr. Mansour claimed there is merit in adapting simpler taxes like value-added taxes (VATs) to raise more revenues and thinking about simpler ways to raise revenue efficiently. Taxation also plays a key role in fighting climate change. Mr. Mansour concluded by stating a key aspect of this is the use of consumption taxes to generate revenue but also to orient consumption for more environmentally friendly options; in this dynamic, the key concern is how governments choose to use this revenue.
The discussion concluded with a Q&A session and a networking lunch.
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