WASHINGTON, Oct 5 (Reuters) - Governments can improve revenue growth without raising tax rates by improving the design of their tax systems, the International Monetary Fund said on Monday, arguing that avoidable distortions in tax systems are restraining economic growth.
Here are some findings of IMF research highlighted in its Fiscal Monitor publication ahead of IMF-World Bank annual meetings in Bangkok next week.
Value-added taxes that are not fully credited to business inputs can quietly become a tax on production, raising costs that cascade through supply chains. Poorly designed employment taxes can discourage people from entering the workforce.
Typical corporate income taxes raise the cost of capital by 15% to 20% on average across country groups, partly because investment costs are not fully recovered for tax purposes. This discourages investment, the IMF said.
Reforms that reduce tax distortions can materially strengthen growth. Restoring VAT neutrality by limiting exemptions and fully crediting input taxes can yield welfare gains — improvements in well-being on the same amount of resources — of up to 0.8% of GDP, with an average gain of 0.26%.
Corporate tax systems that allow immediate deduction of investment costs while preserving the taxation of economic rents produced by those investments can increase long-term capital stock by 6.4% in advanced economies and 8.2% in low-income developing economies, which could raise GDP output by 2.1% to 2.7%.
Stronger tax administration can mobilize more revenue without increasing statutory tax rates by narrowing compliance gaps. Countries at the 67th percentile of tax administration strength collect 1.7 percentage points more revenue as a share of GDP than countries at the 33rd percentile.
Reporting by David Lawder Editing by Rod Nickel
