Thursday, January 30, 2014

Public Finance Synopses


Synopses 1: Municipal Bonds
James Leigland, a development officer for the US Agency for International Development (USAID), describes how emerging economies can use municipal bonds for development purposes in his journal article “Accelerating Municipal Bonds Market Development Emerging Economies: An Assessment of Strategies and Progress,” published in Public Budgeting & Finance (Blackwell Synergy Press: June 1997 - Vol. 17 Issue 2 Pages 57-79).
In this comparative study, Leigland argues that the US municipal bond market may be used as a guide to compare how local governments in emerging economies stack up in developing this policy instrument for financing local infrastructure projects. Instead of a true comparison between US policies and the emerging economies, the author simply creates a construct based from the US’s 200 years of legal and procedural development to evaluate the local bond markets of Indonesia, the Philippines, Poland and South Africa. Notable is the outlandish task so often exerted by US based academics to make such tricky comparison of the developed and the developing world.
Nonetheless, Leigland evaluates the supply and demand for such municipal bonds by creating criteria so crucial to the US bond market development. After placing his construct in a chart, he later identifies cases in each of the emerging markets and how they stack up to investor and issuer attraction.  Items like freedom to invest, reducing government controls, acceptable return on investment, tax treatments and credit quality, tax supported debt all offer ways to look at the demand for such a policy tool.  Equally, he provides an analysis of tolerable borrowing costs, interest rates/ issuance costs, long term debt amortization, extended maturities, and assistance for small borrows for the demand of municipal bonds in emerging markets, and the list goes on.
Therefore, if Leigland’s main objective was to recreate essential market characteristics for policy makers to assess the municipal bond market in developing countries, he has succeeded. But his analysis is a bit muddled with the US market based comparison. If he had eliminated this comparison and highlighted fewer elements that stressed the importance for the supply (issuer attraction) and demand (investor attraction) for the municipal bond market to thrive, the article would be more readable and user-friendly for other countries to use in assessing this important investment tool for development.
Where as the author has ample knowledgeable about the various elements of municipal bonds, his naivety in comparing the US market with foreign markets is clear.  Strong guidance on how each country could improve their local markets should have been the main point of the piece.  Unfortunately, the article concludes with policy recommendations exclusively valuable to policy makers in Indonesia, the Philippines, Poland and South Africa. Larger lessons of how to develop the municipal bond market in emerging economies still needs further review.

Synopses 2:  Cost Effective Measures for Municipal Bonds
Craig Johnson agues to increase Indiana’s local income taxes, instead of its property taxes, to provide more cost effective municipal bonds, with lower interest rates.  In his article “Alternative Debt Financing Mechanisms for Economic Development,” published in State and Local Review (Vol. 28, No. 2, Spring 1996: 78-89), Johnson provides an empirical study, of 34 bond issues sold in Indiana, to evaluate the risks/benefits and trade-offs for policy makers when contemplating issuing municipal bonds for economic development.
Unfortunately, the author does not define economic development until the fourth page of the article. It is not just capital improvements one expects but more broadly defined as “projects that are expected to promote long-term employment for citizens, benefit community welfare and be consistent with neighborhood development,” which somehow also includes a shopping center mall in downtown Indianapolis. Johnson evaluates three mechanisms used to finance economic development in Indiana: economic development income tax (EDIT), property tax increment (PTI) and economic development lease rental (EDLR) bonds. Through a positive and significantly significant multivariable equation, Johnson infers that property tax increments are more expensive than economic development income tax to pay back government obligated bonds.
The author provides various policy recommendations suggesting that the government should think of lower interest costs to finance project with property taxes. He also recommends that bonds issued by third party signatories are less expressive than unrated bonds. Finally, competitive bid is the appropriate method of sale; it is even less expensive to sell securities that are negotiated and sold on competitive bids.
Interestingly, Johnson provides a background on Indiana’s Constitution, which allows approval for sub-national level to be indebted and local governments to sell general obligation bonds. A municipality must 1) not exceed two percent net assets value of tax property; 2) have citizen signatures or be approved by the Indiana State Board of Tax Commissioners; and 3) have a competitive bid, which are not allowed to negotiable.  Regrettably, the state’s additional requirements for each of the three financing mechanisms mentioned above make this study not generalizable to the larger policy debate.  It is virtually impossible to implement similar recommendation in another state, aside from another country, where property and income taxes are almost non-existent.
The article provides a good statistical analysis for comparing financing mechanisms for municipal bonds. However it does not provide generalizable policy recommendations, nor is there a sufficient debate regarding what constitutes economic development. Finally, additional attention should be paid to the fact that property taxes are more regressive than the income tax, which allocates more of a burden on the rich than the poor. Without further explanation of what the economic development projects constituted, suggesting to increase local income taxes to lower interest rates for the bonds is somewhat premature and irresponsible.

Synopses 3: The Retirement Crisis, Social Security, Public Retirement Systems
Chile is the leading country in the hemisphere to privatize its pension system.  In “The Structural Pension Reform in Chile: Effects, Comparisons with other Latin American Reforms, and Lessons,” Oxford Review of Economic Policy, (Vol.22 No. 1) authors Albert Arenas de Mesa and Carmelo Mesa-Lago provide evidence to that fact.  Unfortunately the authors, when providing such a lofty title, disappoint the reader, who would expect a true comparison with the rest of Latin America. The article instead—although it includes an excellent statistical analysis of how the pension reform has affected macroeconomic, microeconomic and social affects of the privatized system—is just another analysis of Chilean reforms. The authors simply add anecdotal evidence from the nine other Latin American countries with pension system reforms, without a true comparative analysis.
While under military rule in 1981, Chile was the first country in the region to reform its pension system.  So revolutionary for its time, Chile is often cited as an example even for the US states to copy.[1] Washington analysis may have used some results data to set up its own Thrift Savings plan (private) from the federal FERS program (public). As cited in the article, Chile reformed its pensions to decrease fiscal costs, increase national savings and capital accumulation, create capital markets and promote competition by creating many numbers of administrators (AFPs).  The program aimed to increase coverage to more men and women and the poor (indigent), contribute more density of funds while increase the levels of contributions. Arenas de Mesa and Mesa-Lago concluded with their 25-year analysis, that the Chilean system has developed confidence in the stock market, stimulate growth and help reduce debt and promote external investments.  But the private system has not met its social aims: less people are now coved with the private system (total coverage in 1972 was 79 percent compared to 2004 with 75 percent, even after adjusting for self employed); there are high gender inequalities—women, with longer life expectances, contribute less and allowed to retire sooner, receive less of a benefit; and the redistribution of funds to the lower tiers of society hasn’t happened.
The article does go into defining the reforms of the other Latin American countries highlighting that Chile (1981), along with Bolivia and Mexico (1997), El Salvador (1998) and the Dominican Republic (2003-6) have substituted reforms transforming public to privates systems; where Peru (1993) and Colombia (1994) created a parallel public system, where the public system is not closed but competes openly with the private investment firms; and Argentina (1994), Uruguay (1996) and Costa Rica (2001) developed a mixed public and private system where the first pillar is paid by the state and the second supplemented by the worker. (The US federal government uses the last option with its Thrift Savings Plan reformed in 1983). Unfortunately, the article does not use adequate data sets to evaluate the macroeconomic, microeconomic and social affects in a proper way.  Again this article would be more useful if its aim were more focused, by only analyzing the Chilean model, providing a policy analysis and recommendations and leaving out the comparison.

Synopses 4: Tax Incentives
In “Governance and Urban Revitalization: Lessons from the Urban Empowerment zones Initiative,” prepared for the conference on “A Global look at Urban Regional Governance: The State-Market-Civic Nexus” in Atlanta, Georgia, January 2006, Michael Rich and Robert Stoker wrote an ex-post evaluation for one of Americas most recent efforts to promote economic development: the Empowerment zones initiative. Their astute conclusion suggested that “[tax] incentives are important, but market-oriented tolls alone are not enough to spur urban revitalization.”[2] The study highlights the difficulty in measuring economic growth in a region. Even after using sophisticated statistical model, conclusions are tenuous.
Empowerment zones and enterprise communities was a federal policy tool enacted with the Clinton administration to provide special financing mechanisms, tax incentives and regulatory relief for over $100 million block grants to support local governance programs. The Round I grant authorized funding programs in Atlanta, Baltimore, Chicago, Detroit, New York and Philadelphia/Camden in 1993.  Highly contested, the program has been evaluated to death with a project component called Performance, Monitoring, Review and Management (PERMS) managed out of Housing and Urban Development office (HUD) and independently studied by the Government Accounting Office (GAO). EZ differentiated from Round II grants for Enterprise Communities, its subsequent program, which focused exclusively tax credits.
Rich and Stoker provide a comparative evaluation to the PERMS, GAO and Oates and Tsao (2006) studies arguing EZ were “not your typical federal program” but rather were tailored to the specific needs to the community. They quantitatively evaluated three factors: jobs production, poverty and unemployment rates, while qualitatively evaluate governance factors.  The “program” evaluation is not your typical, because local program outcomes varied between and within each of the empowerment zones (their emphasis provided.) Therefore they performed a quasi-experimental design with group comparisons, including a control group based on census data, but the treatment group included some of the control so therefore they also included propensity scores, to offset the covariates and dimensionality problem.  The authors concluded that the empowerment zones were not a success, measuring few statistically significant variables. Yet, they concluded some subprograms created measurable effects across cities with relatively strong associations with various in governance and civic capacity.
The last section focused exclusively to this point. It compared Atlanta to Baltimore qualitative results of the various governance factors. Since the federal program had no governance measurable or requirements, Rich and Stoker do an excellent job at identifying the various strengths of each of the cities programs, but this isn’t sufficient to explain why they feel that the EZ program effected measures of empowerment but not growth. Therefore more work in performance measures needs to be done in this area.  In addition to providing policy recommendations would have been helpful since the Round II EZ/ECs are currently being debated in Washington. 

Synopses 5: Tax Structures
Its hard to create an effective tax structure in a developing country was the general conclusion from “Financing Decentralized Development in a Low-Income Country: Raising Revenue for Local Government in Uganda,” written by Ivan Livingstone and Roger Charlton in Development and Change, Vol. 32 (2001). In this explanatory paper, the authors review Uganda’s decentralization laws and its efforts to provide effective taxing authority to finance social programs at the local level.  Without a full understanding of Uganda’s economy or political history, its decentralization efforts seem very progressive. Yet when once looks beyond this cursory evaluation, it is questionable how they have been able to effectively accomplish so much in such a short amount of time.
The first third of the paper describes how this country of 28 million people created 45 sub-national districts with political, administrative and fiscal authority since enacting laws in 1997. Most impressive is the right for municipalities to keep 50 cents per dollar of taxes raised for local consumption. Next the authors describe the three types of block grants available to municipalities: unconditional, conditional and equalizing. While Uganda is primarily a rural economy, it has very progressive laws to allow local governments to administer program and to raise their own revenues for programs. Next the paper describes the types of taxes and potential problems. Overwhelmingly there are compliance issues with the whole tax system, which exacerbates the delivery of services to the poor.
While the national government collects a graduated tax, market dues and licensing frees; and the municipal governments collects property taxes and land tax. With independence, Uganda collected a poll tax (like a head tax), which was eliminated and replaced with the graduated personal tax (GPT).  Initially suggested by the international finance institutions (IFI) in order engage peasant farmers into the cash economy, the poll tax was rather regressive in nature. The GPT is very complex—with six tax grades, administratively burdensome, and has unequal collection rates between jurisdictions. Most problematic is the harassment from local tax collectors, concluding killings and beatings for those who don’t pay.  The market dues are equally complex due to the lack of a real market mechanism to evaluate the real estate costs, which is made worse with high administrative weakness in some districts.  Additionally, there is lots of tax shifting and evasion from the business income tax. Apparently, local governments are more successful with the licensing and fees of business permits for operation, construction and development.  Property taxes are not evaluated at a proper market price and therefore are again hard to administer.  So much so that the system collapsed at the local level and is now limited managed at the national level. Finally land tax was proposed as an alternative to the GPT as a rural development charge related to the number of acres held. Yet there is a national and cultural hostility to pay tax on the land that is used so many skirt the payment.
Therefore, it maybe concluded that the tax system in Uganda is complex and sees many of the same problems a developed country faces in terms of tax shifts, indirect vs. direct costs, evasion, administrative burden and the like. Although the laws are in place, meeting them is more than complex.

Synopses 6: Tax Structures II
In his 1992 article, Richard Bird provides a comparative historic review of Latin America’s tax reforms entitled “Tax Reform in Latin America: A Review of Some Recent Experiments," published in Latin American Research Review (Vol. 27 No. 1).  Bird focuses his comparison on major “recent” reforms of the 1980s in Mexico, Bolivia, Argentina and Colombia, and describes Guatemala, Venezuela, Paraguay and Peru’s policy agendas in his footnotes. Although the article is outdated, the historic significance is useful for understanding long term tax trends in the region.
Through his analysis, Bird suggests that reforms originated in three ways: 1) macro-economic financial crises, citing Bolivia in 1985 and Argentina in 1989 after public strikes created massive public support for reforms; 2) a gradual process of adaptation to changing circumstances using Mexico and Colombia as examples; and finally 3) he questions possible reforms in counties like Venezuela, which is highly dependent on oil royalties to maintain the government (still an issues today).
According to Bird, Bolivia was most concerned about transforming its tax system into a highly equitable and transparent system.  The transformation was successful because it had widespread political support. It was highly simplified and emphasized effective administration with a broad based value added tax (VAT). In addition, it found sound enforcement mechanisms and an independent administration for managing collection and government disbursements. Interestingly, Bird suggests that administration reform, the management and collection of the taxes, was as important, if not more, as the kind of taxes (VAT, income, property, etc.) the Bolivian population was expected to pay. Major reforms included: the termination of import/export taxes, symbolizing the modernization of the economy; the increased consumption tax through the VAT; a small income tax throughout the country; increase of hydrocarbon tariffs (which are highly contested today); and finally concluded with the little emphasizes on property tax.  Through a footnote, Bird explains that property taxes were seemingly functioning as an effective tax for Latin America until residents of Bogotá revolted after the State tried to revalue of the property tax as an adjustment, which botched the system into termination.
From Bird’s full explanation of Bolivia’s past, he provides a straightforward comparison to the other countries indicated above. Of particular interest includes Argentina’s reforms for an attempt to create a flat-rate income tax at 20 percent and its simplification approach to eliminate loopholes for citizens. In Mexico, Bird explained the rising VAT rate to 15 percent in 1983 to meet additional governmental needs and highlights the countries concerns and possible constrains to tax collection imposed by the openness of the Mexican economy due to NAFTA. Finally Mexicans were also concerned with the equity real or perceived of the apparent system overall, which assisted with reforms. In Colombia, Bird points out there was a group of highly educated technician who assisted to make decisions for the future of their countries tax reforms.  Colombia’s reforms included inflation adjustments, a comprehensive income tax, but unfortunately ignored its own administrative liabilities for its collection.
To conclude, Bird’s history of Latin America’s tax reform uses an outdated writing style creating difficult application of the topics.  He also often lacks structure for his comparison, which aggravates this issue. Regardless, Bird provides the reader with some excellent substantiated information.

Synopses 7: Tax Administration
In this empirical study, Robert Taliercio, Jr. theorizes and tests four counties efforts to make their taxing administration independent from the political body. “Administrative Reform as Credible Commitment: The Impact of Autonomy on Revenue Authority Performance in Latin America” published in World Development Journal, (Vol. 32. No. 2, 2004) is more updated than the previous evaluation, but lacks a practical description of the content that the author is trying to explain. For example, instead of discussing horizontal equity, Taliercio uses the concept of “taxing fairness.” He provides statistical data to gather the perceptions of how people feel about the independence of taxing authorities from its political administration.  But each reader can understand the concept of “fairness” differently, if it is not defined further in the questionnaire, which was also not provided in the article as an annex.
There is no explanation to why the author concentrate on the developing world or why he chooses the counties he does for his analysis. Taliercio evaluates Bolivia, Mexico, Peru and Venezuela because this is where he distributed his survey to more than 100 agencies and taxing stations.  He does not include Organization for Economic Co-Operation and Development’s (OECD) countries in his analysis and randomly selects the four Latin American countries he does compare.  It is not clear to the reader if the same results would have been found for the developed and underdeveloped counties.
But for a more profound criticism, the article uses supercilious descriptions of a rather simplistic reality: in Latin America, as with the rest of the world, citizens value and independent taxing authority for collection, management and distribution of their public resources. Taliercio uses very sophisticated modeling to argue his effortless point. First the paper describes a theoretical framework, applies game theory of compliance for independent vs. co-opted taxing authorities. Then he argues why creditability of the board’s administration will make a more effective, competent and fair taxing authority. Next he tests the politician’s commitment to fairness, effectiveness and competences according to taxing authority’s overall performance through an econometric model. Yet, he does not include the survey in the article and does not explain the meaning for each of his variables. For example, administrative competence, effectiveness and fairness; political context, environment; etc. could mean radically different things for different people in the various countries he evaluates.  Although, Taliercio astutely points out that this perception is exactly what needs to be assessed when analyzing taxation in a developing country.  The perception of these values in the system that is important to measure. Yet, it is difficult to gather what he means by the dependent variable of administrative capacity and its over all quality and compliance of its service.  That “outcome variable” needs to be further defined in order for the reader to understand why a taxing authority is perceived to produce good policy/outcome/widgets, etc. That is the measure of how affective government is or “perceived” at doing its job.
Furthermore, Taliercio does not describe at what level of government, state, local or federal, that citizens perceive government is performing an excellent job. There is not sufficient explanation of how Bolivia, Mexico, Peru and Venezuela currently collect their taxes, what their major budget allocations are, or its effects on unitary vs. federal systems of government. Taliercio seems to test with modern techniques, what Woodrow Wilson explained more than a century ago, public administration and politics should be separate to be effective.


[1] The US comparison is my own. I tried to find an academic peer review journal on the TSP savings plan, but only found Social Security Bulletins on the subject.
[2] Stokers and Rich 2006 expand on this point with an evaluation of Bush administration’s GO ZONES initiatives to revitalize the communities affected by Hurricanes Katrina and Wilma in Aug. 2005.

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