ADB: Asia needs more taxes

Agence France-Presse

Posted at Jul 12 2011 07:40 PM | Updated as of Jul 13 2011 03:40 AM

MANILA, Philippines - Asian countries need to increase taxes and improve their collection systems if they want to raise enough funds for much-needed social welfare programmes, an ADB study released Tuesday said.

The Manila-based Asian Development Bank report said the "tax burdens" in the region were lower than the European Union, the Americas, Australia, New Zealand and Africa.

"The review of tax policy... makes it clear that there is ample margin for higher tax levels in Asia through more direct taxation, especially private income tax," the report by economics professor Jorge Martinez-Vazquez said.

Martinez-Vazquez, a professor at Georgia State University commissioned by the ADB, conceded that there was a wide variety of tax systems in Asia and that there was not one "Asian model" of taxation.

But he said there were clear trends for the region.

Although Asian economies were integrated like in North America and Western Europe, they were not homogenous and had no "supranational authority" to coordinate and harmonize their policies, resulting in different tax systems.

Vietnam was cited as having one of the highest tax-to-GDP (gross domestic product) ratios in Asia. But its ratio was still about half of most European Union countries.

At the other end of the scale, Pakistan and Nepal had the lowest tax-to-GDP ratios.

The low tax burden was credited with creating a more "business-friendly environment" that attracted foreign investment.

But it could also result in a lack of government resources for vital services such as education, health and infrastructure, which could bring about a less equitable society, the report said.

The report also found that many Asian countries still had a huge "underground economy", indicating that tax evasion was common.

In Thailand for example, the underground economy accounted for almost 53% of the gross national product (GNP). The average for the whole region was 26%.

Asian countries also relied more heavily on indirect taxes such as value-added and sales taxes, and even taxes on foreign trade, according to the report.

It also found that Asian countries still ranked far below the standards of developing countries in regards to tax administration costs and practices, indicating there was much room for improvement.

"Tax administration reform and modernization should become part of the policy agenda of many countries in Asia," the report said.

The report also warned that "the effectiveness of tax enforcement and voluntary compliance depend critically on the perception that evaders are likely to be caught and if so, punished".

The study recommended tougher measures to combat tax evasion, such as increased and improved tax audits, and tougher penalties for cheating on taxes, including using the media to publicly shame violators.