Broadening the Tax Base: The Economics Behind It

This paper discusses the questions of what type of taxation and what type of broadening of the tax base are desirable from the point of economic theory, and evaluates the experiences of Asian countries from a comparative perspective. A country with a larger government expenditure as a ratio to GNP is more likely to run a budget deficit. Trade taxes such as import and export tax are detrimental to development because they distort the market mechanism and lead to import-substitution oriented strategy. Land and property tax are desirable but seldom implemented because of political difficulties. Personal income tax is desirable, but its revenue-creating power is limited. Finally, the VAT, in spite of its regressivity on income distribution, is useful because of its less distortionary effect, encouraging effect on capital accumulation. In Asian countries, tax reforms by way of VAT generally attained revenue-enhancing objectives where alternative revenue sources hardly promise much potential in the immediate future.