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Taxation in Developing Countries: Six Case Studies and Policy Implications resources

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INTRODUCTION 5 that countries have the opportunity to reduce tax rates and yet gain reve- nue on net. For example, India has reduced its personal and corporate in- come tax rates dramatically in recent years, yet its income tax revenue has doubled as a fraction of GDP. Similarly, Korea reduced its eff ective corpo- rate tax rate from 53 to 27 percent, while corporate tax receipts doubled as a fraction of GDP. Th ese governments have also pursued a variety of other means to deal with enforcement problems. To limit the revenue loss from fi rms under- reporting sales under the VAT, for example, several chapters emphasize that governments are not willing to provide cash rebates to fi rms report- ing negative value- added and instead require fi rms to carry forward these credits to use against future tax liabilities. Yet fi rms that export a sizeable fraction of their output, as well as fi rms that have large new investments, would legitimately have negative value- added. Th e restriction preventing rebates then leads to an eff rms exceeding the ective tax rate for these fi statutory tax rate. According to the chapter on Kenya (Chapter 6), when fi rms sell to the government the government directly withholds the VAT due on these sales, and yet is very slow (at best) to rebate the VAT already paid by these fi ective tax rate rms on inputs they purchased, yielding an eff much above the statutory tax rate. To reduce the attractiveness of using cash as a means of tax evasion, several of these countries (Argentina, Brazil, India, and Korea) impose a tax on bank debits.12 In part, information on these withdrawals also pro- vides information that is helpful in locating evading fi rms. In addition, Korea has created a subsidy to use credit cards, presumably hoping to shift transactions to a form that can be monitored and taxed more easily. Another approach for lowering tax evasion, emphasized by the chapter on India, is government control over key fi e chapter reports that rms. Th 38 percent of the income tax revenue and 42 percent of VAT payments come from public enterprises. Similarly, in Korea a large fraction of reve- nue originates from a few large fi rms, which have incentives to cooperate with the government in exchange for easy access to credit and implicit loan guarantees. Eff ective tax rates can also vary from statutory tax rates due to un- checked enforcement powers of the tax authorities. When tax offi cials are given incentives simply to collect more revenue, it is not surprising that they do so even beyond what the statutes would allow. When offi cials have such unchecked powers, of course, corruption is inevitable. Several

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