Musharraf Rasool Cyan

Tax Assignment: Does the Practice Match the Theory?

This paper builds on the existing literature to better explain the tax assignment choices made by countries in different economic circumstances. In particular, we explain why the degree of tax autonomy given to subnational governments is significantly greater in industrial than in developing countries, even when adjustment is made for differences in income level. We consider several arguments for this disparity. First, electoral regimes are not in place for the accountability gains to be fully captured. Second, tax decentralization may result in unacceptable fiscal disparities, and, third, tax administration costs are higher for subnational governments and there is not enough incentive to take steps to lower them. Finally, and contrary to expectations, we do not find empirical evidence that giving more discretionary powers to subnational governments in developing countries will lead to a crowding out of central revenues, but we do find this result for industrial countries.

A Computational General Equilibrium Approach to Sectoral Analysis for Tax Potential: An Application to Pakistan

This study develops a dynamic general equilibrium model, applied to Pakistani data, in which optimizing agents evade taxes by operating in the underground economy. The cost to firms of evading taxes is that they find themselves subject to credit rationing from banks. Our model simulations show that in the absence of budgetary flexibility to adjust expenditures, raising tax rates too high drives firms into the underground economy, thereby reducing the tax base. Aggregate investment in the economy is lowered because of credit rationing. Taxes that are too low eliminate the underground economy, but result in unsustainable budget and trade deficits. Thus, the optimal rate of taxation, from a macroeconomic point of view, may lead to some underground activity. We note, in particular, that incorporating a VAT without any other tax reductions greatly reduces the tax compliance of the service sector. We have applied our model to Pakistan, and have calibrated our model to an 8 year period from 2004-2011. We note that it gives a reasonable approximation of Pakistani macro data. We then use a sectoral breakdown of tax data generated by the model to estimate tax gaps on a sector by sector basis. We note that certain sectors are currently paying taxes below their potential, while others may be above their tax potential. These sectoral gap estimates may be used as indicators of where greater tax enforcement efforts should be directed.

Fiscal Architecture-A Fetter on New Local Governments in Pakistan?

Abstract Pakistan has created a new system of local government. It has three tiers and brings in a larger participation of people through elected councils and local political executive. This has been a major change from the old system of administration predicated on the concepts of public administration. The change provides for definitions of subsets of public policy that can align better with local preference and correspond to diversity of choices. However, the fiscal architecture as it has evolved does not provide sufficient wherewithal to local governments to provide a wider range of services or to change existing patterns in accordance with local preference. It is a constraint on local governments, which despite administrative and political change, are not being able to respond to the diversity of needs. Objectives of decentralization like improvement of service delivery cannot be achieved unless fiscal arrangements are congruous with political and administrative structures set up by decentralization.

New approaches to measuring tax effort

Taxation and Development highlights the importance of better understanding the ways in which taxes and expenditure are linked. Focusing on developing countries, the book argues for a broader approach to the topic, with a secondary focus on developing and applying new modeling techniques to country-specific data.