The theory and practice of tax reform in developing countries. Etisham Ahmad and Nicholas Stern, Cambridge University Press, 1991, 344 pp.
| Date | 01 February 1993 |
| Author | David Collard |
| DOI | http://doi.org/10.1002/pad.4230130112 |
| Published date | 01 February 1993 |
Book
Reviews
85
children. Some detailed studies of how male bias operates in the family might provide a
worthwhile further volume. Overall, however, this is an excellent collection which provides
a useful marker for the achievements in gender and development
so
far, and a tool for further
analysis and practical action.
SARAH
C.
WHITE
School
of
Development Studies, University
of
East Anglia
THE THEORY AND PRACTICE OF TAX REFORM IN DEVELOPING COUNTRIES
Etisham Ahmad and Nicholas Stern
Cambridge University Press, 1991,344 pp.
Is
VAT suitable for Pakistan?
Is
land tax the best way of taxing agriculture? Should commodity
taxes be uniform? Can tax receipts be pushed to more than a miserable 12-13% of GDP?
These are just
a
few of the questions addressed in this comprehensive book in which Etisham
Ahmad and Nicholas Stern combine a presentation of up-to-date tax theory (including some
slightly off-putting mathematics) and a review of Pakistan’s tax system. The combination
is admirable, as country studies are often little more than descriptive.
There is a comprehensive introduction to the relevant economic theory, intended not
for
beginners but for economics graduates and professionals. This is just as well as gremlins
have wrecked the important technical exposition on p.55: any reader trying to make sense
of it should skip it. The introduction contains a useful discussion of the circumstances under
which uniform commodity taxation is strictly justified and of the more general circumstances
(simplicity, convenience, paucity of data) in which it may be more loosely justified.
A
handy
summary of ‘guiding principles’ is found at the end of chapter
3.
The principles do indeed
lead to applicable results. For example, chapter
4,
on agriculture, suggests world prices for
outputs, marginal social costs for inputs and land taxation. The theory of optimal taxation
utilizes the proposition, familiar to economists but surprising to others, that the calculation
of shadow prices, taxes and subsidies is part and parcel of the same exercise; the theory
of tax reform is less ambitious (and less demanding in its data requirements), as it takes
shadow prices as given and equal to marginal social costs.
Chapters 6-8 are about Pakistan. Chapter
6
prepares the ground by calculating effective
taxes and shadow prices. Chapters
7
and 8 then analyse indirect tax and land tax reform.
1
recommend chapter
7
as illustrating the interplay between advanced theory and data: as
the authors note, to do the calculations we need to know consumption patterns, demand
responses, effective taxes, shadow prices and welfare weights. Various VAT packages are
analysed and discussed and the tax is advocated up to the wholesale stage; many
of
the
arguments for it are independent
of
the sophisticated analysis
of
this chapter but the analysis
is useful in showing that ‘progressive’ VAT packages can be designed and that we do not,
of course, have to restrict ourselves to constant revenue reforms. Thus, one of the likely
scenarios for reform would be a standard VAT rate
of
20% but a
10%
rate
on
edible oils,
tea, housing, fuel, light and clothing and would bring
a
revenue increase of 22%. In the
discussion of land tax reform in chapter 8, two points are worth picking up. First, the tax
itself should be based on potential output; second,
ushr
payments, made because
of
religious
obligation, should be deductible. This latter point illustrates how tax reform has to take
into account tax history, particularly when it is ancient history dating back to the Moghuls.
Chapter
9,
headed ‘International contrasts’, is mainly a comparison with India for which
it is shown that the conditions
for
a uniform commodity tax do not apply and that distributional
weights greatly affect the desired indirect tax mix: in India there
is
also a political problem
about VAT in that sales taxes are allocated to the states.
Any reader with time to read only a single chapter should read chapter
10,
which is, in
effect, a summary. The authors are right to spend the greater part
of
their efforts on indirect
taxes as they constitute the more important part of revenue in developing countries.
I
am
less enthusiastic than they are about ‘presumptive’ methods of assessment, which can lead
to arbitrary use of authority and resentment; but
I
can see why they favour them.
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