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Despite decades of impressive economic growth, tax revenues in the Dominican Republic (DR) remain well below the regional average. The DR's tax base is extremely narrow, with extensive exemptions, deductions, zero-ratings, and allowances across all major tax categories. Tax expenditures amounted to an estimated 4.8 percent of gross domestic product (GDP) in 2020, of which value-added tax (VAT) exemptions alone accounted for 2.5 percentage points. High levels of tax noncompliance and low tax morale further diminish revenue collection. An excessively complex and overly generous array of tax incentives weakens the performance of corporate income tax (CIT) while doing little to advance the government's economic development objectives. A high eligibility threshold and various exemptions narrow the personal income tax (PIT) tax base. Tax reforms should be phased in over time with broad public support. In the current macroeconomic climate, the sudden withdrawal of the debt-financed fiscal stimulus will have deeply negative repercussions. Tax reform is subject to a variety of political, economic, and administrative challenges that must be addressed as part of a broader fiscal strategy that provides predictability to the private sector and enjoys substantial public support. In parallel, the government must ensure that it has adequate administrative capacity to offset the impact of measures that may adversely affect poor and vulnerable households. The government's fiscal strategy should reflect the lessons of the international experience, and it should be informed by a thorough and detailed analysis of the economic and distributional implications of tax reform.

Macroeconomics and Economic Growth --- Public Sector Development --- Taxation and Subsidies

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Latvia's Ministry of Finance requested the World Bank to collaborate on a review of the country's tax system as input for the design a medium-term tax strategy. The motivation behind the tax review is to find options to increase tax revenues by three percentage points of GDP to reach a target tax-to-GDP ratio of 33 percent in the medium term.1 In Latvia, tax revenues are lower than predicted for its income level and institutional development. Latvia's tax policy needs to be restructured to support economic development and raise living standards. The speed of convergence in Latvia to average income levels in the European Union (EU) was impressive until the 2008-2009 crisis, but since then output recovery has been fast but not rapid enough for real GDP to return to pre-crisis level. A critical challenge then is to boost productivity growth in the economy: the level of productivity is low relative to OECD economies and its growth has slowed notably since the crisis. Increasing labor productivity is particularly important if overall productivity is to rise: informality and inactivity reduce both labor activity and productivity. Increased investment in skills and good health are an important part of the labor productivity and participation story-particularly as Latvia rapidly ages. But reducing the reliance of the tax system on low-skilled labor is also a key policy challenge. Latvia's tax system puts substantially more of a burden on labor compared to capital or consumption. This is all the more concerning given that wages for much of the population are low and so the current flat income tax structure has implications for social inclusion and poverty. Inequality of (after-tax) disposable income in Latvia is one of the highest in the EU, with only Bulgaria, Romania and Lithuania having higher inequality. The tax system entails distributional choices and one of the objectives of the review is to look at options to improve the equity of the system. Here both vertical equity, id est taxing less those of lower income, and horizontal equity, id est taxing the same those in economically similar situations, are of importance. Governments are inevitably confronted with an equity-efficiency trade-off: higher taxes on the richer parts of the population, to raise revenue and to finance benefits for poorer groups, can distort the economic incentives for work, entrepreneurship, saving and risk-taking of middle- and higher-income individuals. At the same time, redistribution to low-income individuals, through tax credits or benefits, could weaken labor supply incentives. On the other hand, fairness, or equity is an important consideration for widespread acceptance and sustainability of the tax system.

Law and Development --- Macroeconomics and Economic Growth --- Public Sector Development --- Tax Law --- Taxation and Subsidies

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Postponement of 2012 VAT Law requires significant early adjustments in the FY18 Budget to tap additional sources of revenue and expenditure saving to increase fiscal space. Automation, process simplification, and dispute resolution may bring additional tax revenues in the immediate future. These are elaborated in an earlier note dated July 22, 2017. This note focusses on developments in non-development capital expenditures, loans and advances, and block allocations in the revenue budget that can generate significant expenditure saving in addition to the usual ADP implementation shortfall. These can be complemented by reforms that will help enhance concessional external financing to ease the pressure on the relatively more expensive domestic financing of the budget deficit.

Finance And Financial Sector Development --- Macroeconomics And Economic Growth --- Public Sector Development --- Taxation And Subsidies

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Over the past two decades, Peru has achieved remarkable economic success. Average annual Gross Domestic Product (GDP) growth has exceeded 5 percent since 2001. Poverty has been consistently reduced, and sustained improvements have been observed in social and human development. The poverty incidence rate fell from 58 to 23 percent between 2004 and 2014, and households' incomes at the bottom 40 percent grew 50 percent faster than the national average. The structural transformation of Peru's economy striking fast and widely shared growth transformed Peru into an upper-middle income and diversified economy. This report analyzes recent trends of the fiscal decentralization process in Peru and presents a set of reform options designed to harvest the envisaged efficiency and equity gains in service delivery that the fiscal decentralization was expected to bring. The analysis and policy options are presented in a conceptually logical order: (i) departing from institutional arrangements in the vertical structure of subnational governments passing to (ii) the need of a clearer definition of spending responsibilities among levels of government that needs to be followed by (iii) a commensurate redefinition of revenue assignments and (iv) enhancing equalization role of the transfer system.

Decentralization --- Governance --- Local Government --- Macroeconomics and Economic Growth --- Public Sector Development --- Taxation and Subsidies

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Governments around the world are designing and implementing rapid responses to the COVID-19 (coronavirus) pandemic. In this effort, they are faced with three extraordinary challenges: (1) a public health emergency to contain the virus including identifying and treating infected populations; (2) widespread food and livelihood insecurity due to mandated stoppage of economic activity and the resulting disruption of food supplies; and (3) adoption of emergency powers to address the crises and maintain public safety. Corruption risks, present in government responses to all these challenges and heightened by the scale and speed of the emergency, undermine the effectiveness of responses. The strains placed on the public sector in responding to emergencies present enormous opportunities for corruption to flourish. Corruption can lead to theft, waste and misuse of scarce resources, resulting in unnecessary suffering and death. It can also entrench elite privilege and inequality and undermine institutions of accountability with lasting consequences. Governments face the additional challenge of maintaining continuity in core functions while dealing with these exceptional circumstances. This note provides guidance on addressing and mitigating corruption risks in the COVID-19 (coronavirus) response, both in the initial response and in the medium term. Over time, and as we learn more about the impact and effectiveness of responses to the crisis, it will be essential to adjust anticorruption efforts to support new governance arrangements and give greater attention to addressing impunity for misbehavior, as well as to shaping norms and standards that affect public sector performance and behavior. The note identifies the broad areas of government response where corruption risks are present and heightened in the context of a pandemic emergency, describes the types of risks that are likely to arise, and provides recommendations for addressing and mitigating them. Guidance provided in this note should be read in combination with the other pieces on the Governance and Institutional Response to the COVID-19 (coronavirus) Pandemic.

Governance --- Health, Nutrition and Population --- Macroeconomics and Economic Growth --- National Governance --- Public Health Promotion --- Public Sector Development --- Taxation and Subsidies