The IMF’s regressive secret

Tax policy advice and its distributional impact

Published on bretton woods project.org, by Lauren Damme, Tiffany Misrahi and Stephanie Orel, June 17, 2008.

(A fully-formatted (but unreferenced) PDF version of this briefing is also available).

While tax policy and reform is an election battleground in developed countries, the IMF has increasingly turned it into a secret technocratic exercise in developing countries. This briefing examines the IMF’s involvement in providing advice on tax policy, particularly its recommendations for the imposition of value added taxes (VATs).

Taxation may not sound exciting, but it is central to the development of a nation. For this reason, the failure of numerous developing countries to collect taxes efficiently is a serious problem, as it renders them unable to provide basic social services

… Distributional effects ignored: Does the IMF look at the distributional consequences of its advice? The answer seems to be ‘not a lot’. The IMF mentions distributional consequences of their taxation advice in 25 per cent of the total sample. However, only one of these instances occurred in a low-income country, whilst the IMF acknowledges or addresses distributional consequences in 40 per cent of the lower-middle-income countries

… In 1998, Mozambique entered into the Heavily Indebted Poor Country debt relief initiative with the IMF. To qualify for this programme, which entailed $1.4 billion in debt forgiveness and eligibility for badly-needed aid, Mozambique was forced to implement a VAT by June 1999. Many believe the implementation of VAT in Mozambique has led to both increased corruption and pushed more people into the informal sector. A study by USAID found that the manner of VAT refund assessment and severe problems with refund delays have created incentives for corruption among tax officials. The report shows that it has actually increased the prices of “zero-rated items, such as medicines, wheat flour, and mosquito nets.” This has obvious implications for the poor.

Press briefings and IMF documents indicate that the Fund did not consider the distributional consequences of their advice during the VAT implementation in Mozambique. Despite the government’s recommendation of simplified taxation for small firms, which would have helped to formalise the market and address concerns about the VAT’s complexity, the IMF consistently pushed for fewer exemptions, as well as wage bill ceilings for government employees, which increased corruption. Mozambique’s experience has shown that the VAT and its refund system can have negative consequences for poor countries without sufficiently evolved administrative systems to implement such a complex tax.

The Fund should be advising developing countries on how to tackle the issues of inequity related to fiscal policy recommendations. However, it appears that the IMF had and continues to have little thought about the distributional consequences of rushed VAT implementation, and that consulting with actors outside the government has been neglected. At the very least the Fund needs to be more transparent about their taxation advice, particularly that given through technical assistance. (full text).

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