ISLAMABAD: Asia and Pacific region as a whole has one of the world’s lowest tax-to-GDP ratios compared with the developing country average of 20.2 per cent and the developed country average of 25.1pc, according to a new study released by the United Nations.

“If the Central Asia and the Pacific sub-regions are excluded, the average tax-to-GDP ratio in developing countries in the region would be even lower, at 14.2pc. Recent estimates suggest that many developing countries in Asia-Pacific region only achieve less than or around 50pc of their maximum tax potential, says the study, titled “Taxing for shared prosperity” prepared jointly by the UN Economic and Social Commission for Asia and the Pacific (ESCAP) and international NGO, Oxfam.

The study says the overall tax mix in Asia-Pacific developing countries remains highly skewed towards indirect taxes, while progressive direct taxes, such as the personal income tax, remain small in most cases. Direct taxes account for only 36.1pc of the total tax revenue in the region, while for OECD countries, 55.8pc is mobilised from direct taxes.

In particular, personal income tax averages only 2pc of GDP in Asia-Pacific, less than one-quarter of revenue mobilised by personal income tax in OECD countries.

Revenue generated from property tax is also very small in developing countries of the region, accounting for less than 0.5pc of GDP in most cases. Wealth taxes are largely missing, in sharp contrast with the region’s level of wealth concentration and wealth inequality. Such under-utilisation of key progressive direct taxes not only jeopardises revenue mobilisation, but also undermines the effectiveness of these taxes in adjusting income and wealth distribution, warns the report.

Today, Asia’s ‘super-rich’ outstrip their North American and European peers in both headcount and wealth, while the share of the bottom income groups in the growing economic pie stagnates, points out the study.

The study warned that the increase in inequality in several economies of Asia-Pacific, if left unchecked, could undermine long-term economic growth, diminish the prospects for further reduction in poverty and threaten social cohesion.

Measured by any metric, evidence shows the income gap between the rich and poor in several economies of the region has widened considerably in recent decades. The study notes that the population-weighted income Gini co-efficient, based on household income estimates, increased from 37 to 48 between 1990 and 2014; a spike of almost 30pc in less than three decades. At the same time, private wealth concentration has made the region the most unequal in terms of wealth distribution, it says.

The study suggests strengthening of revenue mobilisation in a more progressive manner that could be achieved through five channels. The regressive impact of indirect consumption taxes, VAT could be reduced through targeted measures.

These include setting lower VAT rates or provide zero-rating or exemptions on food and necessities, as well as goods or services with positive externalities for the public good. As long as share of direct taxes remain small in developing countries of the region, these measures are likely to remain ‘second best’ solutions to minimise the regressive VAT burden on the poor, suggests the study.

Personal income tax could be strengthened as the backbone of the progressive tax system. A comprehensive personal income tax with moderate progressivity in rate structure, that captures capital income and is manageable, accountable and with fewer loopholes that the rich could exploit, would outperform an overambitious design that is only better on paper.

Third, property and wealth taxes could be better explored to reduce wealth inequality. Taxes on wealth and inter-generational transfer of wealth are highly progressive, targeting only the richest group in most cases. More importantly, they are essential to prevent excessive concentration of wealth and power in the hands of a few, and to ensure greater equality of opportunity across generations.

The obstacles for better use of these tax tools reset in tax administration challenges like asymmetric information and valuation, in addition to social and cultural resistance to these taxes. Wealth and property taxes are often prone to loopholes that the rich could exploit, resulting in the middle class shouldering a large part of the tax burden.

Corporate income tax (CIT), which is the largest direct tax in most Asia-Pacific developing countries, mobilised 3.6pc of GDP in revenue in these countries in 2015, which is even higher than the average level mobilized in OECD countries. Given such weight of the CIT in the overall tax mix in the region, ensuring that large corporations, especially the multinationals, pay their fair share of tax through enhanced international and regional cooperation would be very important.

Lastly, the implications of tax policies on gender inequality should also be taken into account. Gender inequality is part of the broad socio-economic inequality that is specifically highlighted in Sustainable Development Goal 5. Tax systems, by virtue of their design, could either alleviate or reinforce gender inequality, study notes.

The study suggests regional countries to encourage public participation in tax reforms, saying that transparency and public awareness are important measures to overcome the difficulties of revenue mobilisation associated with deploying progressive taxes. Engaging in continuous dialogue with citizens and stakeholder groups and conducting research on the costs and benefits of proposed tax reforms would help governments to calibrate their proposed policies with public preferences and secure people’s understanding of reforms for the common good.

Published in Dawn, December 10th, 2017