Background

The global economic recession that was triggered by the financial crisis originated in the United States requires strong counter cyclical government policies to protect the economic growth of their countries and the human development gains achieved in previous year. The contraction of global trade and the restrictions of the global financial system to provide fresh resources for development require an expansion of domestic resources to expand the policy space of governments to activate counter cyclical policies. The objective of this study is to propose a typology of developing countries to assess the opportunities governments have to strengthen the mobilization of domestic resources through a reform of tax systems.
 
Emerging and developing economies, in general, are characterized by large income inequality and difficulties to sustain high economic growth and macroeconomic stability. Insufficient national resources for productive investment are often compounded by insufficient and unstable flows of foreign investment.
 
Governments in developing countries are faced with the challenge of meeting their development objectives subject to a strong budget constraint. The need to guarantee the provision of public goods to foster economic growth (public investment, labour training and human capital formation to name a few) is often at odds with the need to implement comprehensive social programmes towards the most vulnerable groups through investments in education, health, housing, and social security, among others. The feasibility of these programmes will be strongly conditioned by the budget constraints of governments whereby any non-tax financed expenditure will require an expansion of the money or the issuance of public debt. However, these sources of funds are often constrained; financing of public expenditures through the expansion of the money supply runs the risk of causing, or speeding inflationary processes; whereas public debt in most countries is already high with not much room for a substantial expansion.
 
These constraints highlight the importance of analysing various mechanisms to enhance the expansion of genuine fiscal resources as a healthy alternative to increase public investment. Equally important is assessing the impact of different alternatives of tax collection upon the distribution of income.
 
A rigorous assessment of the alternatives available to countries to increase tax revenues will have to consider some of the following questions: i) how to deal with the endemic problem of developing countries characterized by high levels of economic informality and subsequent high levels of tax evasion;  ii) how to modify generally regressive tax structures (based mainly on consumption taxes); and iii) how to modify the tax yield dependence away from taxes whose behaviour is both random and distorting (e.g. export duties, stamp duties, taxes on bank transactions, etc.)
 
This discussion is of particular importance in the context of the present global economic crisis, as uncertainties about international financial flows prevail and countries have to find ways to mobilize domestic resources to continue financing their development priorities.

Duties and Responsibilities

The consultant will develop a conceptual framework for the analysis of the following topics:
  • Feasibility of genuine increases of fiscal revenues in the context of developing economies allowing them to implement counter cyclical policies to sustain higher levels of social and economic spending. The emphasis of this analysis is on efficiency gains.
  • Implications for, and likely changes in the distribution of income stemming from the substitution of some taxes and the inclusion of others, as well as the income distribution implications of reforming the tax administration system aimed at enhancing the tax yields. Here the emphasis will be placed on the analysis of equity implications.
  • Macroeconomic scenarios underlying the alternatives analyzed in the previous items. The emphasis in this case will be on the political economy of fiscal reform.
Approach:
 
The analysis will require typifying emerging and developing countries on the basis of a set of economic features, including among others: total and per capita gross domestic product, the pattern of income distribution, the incidence of direct and indirect taxes in their tax structure, tax yield dependence from a single tax (i.e. export duties or consumption taxes), the size of the informal economy, levels of tax evasion and inflation, quality of cadastre systems, etc.
 
The conceptual framework will respond to the principles of the modern theory of Public Finance, in which the expected outcome of the various proposed alternatives must consider, in addition to demand-side economics versus supply-side approaches, the impact of economic globalization and the current economic crisis. The latter will be particularly important when assessing the real potential for collecting income taxes and capital taxation from firms.
 
The classification of countries will also take into account the space for fiscal reform in economies where the collection of taxes is mainly concentrated within the central government, vis a vis countries where sub national and local governments are constitutionally empowered to raise taxes (fiscal centralization versus fiscal federalism scenarios).  In addition, the study will analyze the progressivity (or regressivity) of different types of taxes to determine the limits of fiscal policy tools and reforms.

The methodological framework will emphasize the need to bring consistency between the expansion of the budget constraint of governments through extra fiscal revenues and the expansion in the provision of public goods to improve the distribution of income and promote economic growth. The study will also examine the incentive effects of alternative tax regimes.  The proposed methodology should be grounded in the context of the stimulus packages adopted by governments in response to the financial crisis by incorporating an explicit discussion of the tradeoffs between the different sources of revenue generation, preferred patterns of expenditure, and the implications for long-run budget balance.

Products:
 
The consultant will produce a working paper for publication with an expected length of 25-30 pages. The paper should provide a conceptual and methodological framework to facilitate drawing global and regional conclusions and recommendations, with a focus on the following aspects:
  • Realistic opportunities of reforming the existing tax systems, the feasibility of carrying out such reforms and a summary of experiences in countries that have already introduced tax reforms in recent years.
  • Macro and microeconomic insights of the various alternatives.
  • Actual margin for increasing the yield of taxes in emerging and developing economies and the expected impact upon the equity-efficiency trade-off.
  • Reforms in national and local tax administrations that should accompany suggested changes in tax systems.
  • Sustainable financing options for economic and social programmes.
The research and presentation of findings in this document should be relevant to policy makers. It should provide some parameters to discuss alternative sources of revenue through domestic resource mobilization. In addition, it should provide suggestions on issues that require further policy relevant research.

Competencies

  • Solid analytical knowledge of public resource management and macroeconomic issues. Strong research skills, developed in universities or research institutions, on general topics of fiscal policy, macroeconomics, and political economy;
  • Demonstrated academic and policy analysis experience in public resource management issues, especially fiscal issues
  • Ability to work independently

Required Skills and Experience

  • Advanced degree in Economics, preferably with a specialization in fiscal policy, macroeconomics, public finance or political economy.
  • At minimum of 7-10 years of relevant experience, including direct experience in development-related research.
  • Demonstrated academic and policy analysis experience in public resource management issues, especially fiscal policy
  • Proficiency in English