illustration for the drivers of inequality

Driver Category 4.7

Lack of progressivity of tax system and tax avoidance and evasion

This driver covers all aspects related to the tax system, how taxes are levied (or not) on income and wealth (eg. wealth tax, land and property taxes, inheritance taxes, capital gains taxes) and how well the tax system is used as a tool to redistribute income.

Aspects of political capture that impact how tax policy is developed and aspects of audit and enforcement are covered under this driver category.

Guiding Questions

General questions

  • What is the level of tax collection in the country - in absolute terms and as a share of GDP? How has it evolved over time? Are there studies on the overall progressivity of the tax system (that is, whether the tax system overall decreases or increases income inequality?)
  • What indirect taxes are in place? Do they contribute more or less revenue than direct taxes?
  • Is the contribution from indirect taxes increasing or decreasing compared to direct taxation?
  • Are sales, trade and excise taxes designed progressively, with the correct exemptions, zero-rating or low rating to protect the poor and with higher tax rates on luxury goods?
  • What direct taxes are in place?
  • Are rates (eg. personal income tax and corporate income tax rates) increasing or decreasing and is the contribution from each direct tax increasing or decreasing over time?
  • Is there evidence that large company owners and wealthy individuals lobby the government about tax and exert influence on tax policy decisions?

Personal income tax and wealth taxation

  • Are the thresholds in place for the payment of personal income tax equitable?
  • Is the lower threshold high enough to exempt very low-earners?
  • Is the top marginal rate high enough to ensure the rich pay their share?
  • What is the status of wealth taxation in the country?
  • Does the tax system include taxes on land and property, capital gains and inheritance?
  • Are there any other forms of wealth taxes in existence?
  • Are these taxes set at appropriate levels and properly enforced?

Corporate income tax and tax avoidance and evasion

  • What corporate income tax incentives and exemptions are in place?
  • Is information on the fiscal cost of these (tax expenditure statements) published annually?
  • Is there evidence that corporate tax incentives and exemptions are linked to an effective industrial development strategy?
  • Is there evidence that corporate tax incentives and exemptions are being abused by firms or associated with political favours and corruption?
  • Is there analysis available on the levels of tax avoidance and evasion with regard to both corporate and personal income tax?
  • What evidence is available regarding monitoring and enforcement efforts by the revenue authority against companies and high net worth individuals?
  • What strategies are in place to combat tax avoidance and evasion and the use of tax havens?
  • Is the revenue authority taking active steps to investigate aggressive tax avoidance strategies, audit high risk individuals and companies, and to prosecute tax evasion?
  • What is the status of taxation of the financial sector in country?
  • Are the profits created via trading in financial instruments (currencies, derivatives, share and other transactions) taxed?
  • How are financial sector workers' bonuses taxed (and can they be offset against profits for tax purposes)?

Extractives taxation

  • What is the contribution of the extractives sector to domestic revenue raising?
  • Is detailed information publicly available on the specific revenue contributions of the sector?
  • Is extractives revenue ring-fenced to fund specific social programmes nationally or to fund local governments investments in certain locations?
  • Is the country receiving its fair share of income from its natural resource sector when compared to companies’ revenues and profits and international benchmarks in this area?

Taxation of the informal economy

  • What is the status of taxation of the informal economy?
  • What licenses, fees, and taxes are currently applied to small, informal businesses, traders and vendors and how do these compare to profitability levels?
  • What effort is the government making to increase the tax coverage of the informal economy?
  • Is there evidence of firms using the informal economy to evade taxes?
  • In which sectors/industries is this a problem?
  • What is the ownership profile of these firms?
  • What is the revenue loss impact of these firms taking advantage of informality in terms of loss of payroll taxes, corporate income taxes, VAT and unpaid social security contributions?
  • What is the government doing to oblige these firms to register and pay taxes?

Indicators

Potential indicators to monitor the drivers of inequalities in this main driver category

  • % tax/GDP ratio
  • % of tax revenue collected from indirect and direct taxes and breakdown by tax category
  • Amount of tax expenditure (amounts and % of GDP lost due to corporate tax incentives and exemptions)
  • Revenue estimates of ‘tax gaps’ and amounts lost due to tax evasion (on VAT, personal and corporate income taxes)
  • Number of staff in specialised revenue units (eg. audit unit, transfer pricing unit, high net worth individuals unit); amount of budget dedicated to these units; numbers of audits and prosecutions carried out and amounts recovered

Candidate Policies

To see related Candidate Policies in this main driver category please click here.