Across the world, tax effort has been increasingly based on regressive consumption and payroll taxes, which depress consumption and employment.
The current tax system is obsolete. It under-taxes financial wealth and transactions as well as negative externalities such as pollution and short-term capital flows, while simultaneously over-taxing the manufacturing sector, public services and, in some cases, real estate.
In the developing world, tax effort is often insufficient to fund development needs due to declining income taxation, unfairly low returns on natural resources, growing tax exemptions and poor tax compliance and administration.
Rosa argues for an overhaul of the tax system that would increase employment and the disposable incomes of the bottom 50 percent of the population. That would increase consumption, investment and economic growth; reduce income inequality; and support competitive markets and democratic governance.
This piece is intended to encourage an open discussion about the need to reform tax policy for increased employment and income, reduced inequality, and growth generation. The views are the author’s own and do not necessarily reflect the opinions and positions of the World Bank.