Trevor Manuel Reflects on South Africa's Lost Decade
When the apartheid regime ceded power following South Africa’s first democratic elections in 1994, the economy was in shambles. Debt service costs as a share of GDP were crippling. Trevor Manuel—a veteran of the anti-apartheid struggle and appointed minister of finance—revamped the budgeting process and set a stringent deficit reduction target. By 2006, the economy was growing at its fastest pace in more than two decades. In this podcast, Manuel looks back at what drove the country's longest phase of economic growth and how he believes the ruling party he helped establish has lost its way.
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We just published a new blog—please find the full text below. Translations coming soon.
Getting Back to Growth
By Lone Engbo Christiansen, Ashique Habib, Margaux MacDonald, and Davide Malacrino
Producing and consuming more goods and services for the same amount of work sounds too good to be true. In fact, it’s entirely possible. Higher productivity is one of the key ingredients to higher economic growth and incomes. It’s all about how workers become more productive.
For many of us, the COVID-19 pandemic has changed the way we work and spend. The question is how these changes will affect our productivity, both now and into the future.
While it’s difficult to forecast long-run productivity, particularly in the current environment, there are two key channels through which the pandemic might influence productivity: accelerated digitalization and a reallocation of workers and capital (e.g. machines and digital technologies) between different firms and industries. Our recent note examines how all this works.
Productivity boost
The pandemic accelerated the shift toward digitalization and automation, including through e-commerce and remote-work—and these trends seem unlikely to reverse.
These changes are likely to impact productivity. Recent investments in digital tools—ranging from video conferencing and file sharing applications to drones and data-mining technologies—can make us more efficient at our work. As shown in the chart below, for a sample of 15 countries over 1995–2016, a ten percent rise in intangible capital investment (which is where assets like digital technologies are captured in the national statistics) is associated with about a 4½ percent rise in labor productivity—likely reflecting the role of intangible capital in improving efficiency and competencies.
In comparison, a boost in tangible capital (such as buildings and machinery) is associated with a slightly smaller rise in productivity. As COVID-19 recedes, the firms which invested in intangible assets, such as digital technologies and patents may see higher productivity as a result.
However, the benefits will likely not accrue evenly to everyone. Because investment in intangibles is sensitive to credit conditions, intangible investment may decelerate if financial conditions tighten or firms’ balance sheets worsen as a result of the crisis. Such developments, along with the fact that many large, dominant firms (especially in digital services sectors) performed better than peers during the crisis, could contribute to a rise in market power, which could stifle innovation over time.
Additionally, some jobs vulnerable to automation may never come back, which could mean job losses, prolonged unemployment, and workers having to search for work in different sectors where their existing skills may not be well-suited. This would be the other, darker side of the coin of productivity gains through further digitalization.
Reallocation during the pandemic
With sectors impacted very differently by the pandemic, some degree of ‘resource reallocation’ is likely occurring—for example, shifts in workers across firms as they are laid off or hired. This is occurring for at least two (possibly related) reasons: (i) the churn of businesses entering and exiting the market and (ii) changes in consumer demand.
First, the flow of labor and capital toward more productive firms normally lifts productivity and can help cushion the blow of a recession (for example, if laid-off workers are re-hired by more productive firms). As shown in the chart below, an analysis based on firm-level data from 19 countries over 20 years shows that sectors with greater resource reallocation tend to experience a significantly smaller decline in total factor productivity during recessions and recover faster.
Policy actions may influence how much reallocation there is between firms, and thus productivity growth, but the direction is uncertain. For instance, broad-based fiscal support during a crisis could support productivity if it helps firms with the most potential to survive. However, it may also keep resources locked in less productive firms, which could hold back overall productivity growth. The degree to which these forces offset one another is not yet known and depends on how much labor and capital flow to firms that are most productive.
Second, the shift in demand away from in-person services where output per worker tends to be relatively low (e.g. restaurants, tourism, brick-and-mortar retail) toward digital solutions and sectors where output per worker is higher (e.g. e-commerce, remote work) suggests that resource reallocation across sectors may have lifted overall productivity. Yet, the lasting effects of all the shifts that have taken place during the pandemic are highly uncertain, with some sectors likely to rebound (e.g. tourism) and others likely to see more permanent changes (e.g. retail).
Policies can help
Ensuring an efficient reallocation of resources while protecting vulnerable groups can support a strong recovery. This can be achieved in multiple ways, including by:
Ensuring that capital in failed firms is quickly put to more efficient use, through policies such as improved insolvency and restructuring procedures.
Promoting competition to enable the exit and entry of firms to help curb market power.
Supporting displaced workers, by gradually refocusing policy support from retention to reallocation, to facilitate adjustment to the new normal as the recovery gains speed. Efforts to reskill workers, including through on-the-job training, will also help support inclusiveness as well as boost human capital and strengthen potential growth.
Finally, to reap the benefits for productivity of investment in intangibles, ensuring adequate access to financing for viable firms is essential.
Despite the economic damage caused by the COVID-19 pandemic, investments in technology and know-how could help lift productivity. However, for this to materialize and be broadly shared, policies have a key role to play.
Lone Engbo Christiansen is a Deputy Division Chief in the Multilateral Surveillance Division of the IMF’s Research Department.
Ashique Habib, Margaux MacDonald, and Davide Malacrino are economists in the IMF's Research Department.
Thank you again for your interest in IMF Blog. Read more of our latest content here.
Take good care,
Glenn Gottselig
Blog Editor, IMF
GGottselig@IMF.org
Dear maria,
We just published a new blog—please find the full text below. Translations coming soon.
The Benefits of Setting a Lower Limit on Corporate Taxation
By Aqib Aslam and Maria Coelho
On June 5, 2021, Finance Ministers from the Group of Seven major industrialized nations committed to a global minimum corporate tax rate on multinationals of at least 15 percent. While there are a number of details yet to be hammered out in broader global discussions, this historic agreement heralds an important step forward on the road to international corporate tax reform. It also highlights the role minimum taxes can play at the global level to help reverse nearly four decades of falling global corporate tax rates and reduce the incentives for large multinational firms to shift profits to low-tax jurisdictions to reduce their worldwide tax liability. Our new study examines how different types of domestic minimum tax regimes can help countries preserve their corporate tax base and mobilize revenue.
Minimum taxation over the decades
There is an unusual tension in the world of corporate taxation. On the one hand, countries compete vigorously to lure businesses and investors within their borders by offering numerous profit- and cost-based tax incentives, driving their tax rates down. On the other hand, governments decry these multinational enterprises—once they have been successfully attracted to the country—for not paying their fair share of corporate taxes, leaving the burden to fall on often-struggling local firms.
Increasingly, governments are turning to minimum taxes as a means of preserving their tax base. This is particularly true in developing countries with weaker tax administrations, which face major challenges in effectively taxing these large multinationals.
The idea of a minimum tax rate is not new. At the local level countries have been using modern forms of minimum taxation since at least the 1960s, taxing businesses on income generated based on activity undertaken within their territory. The goal of this “local” (domestic) minimum taxation is to prevent erosion of the tax base from the excessive use of what is known as “tax preferences.” These tax preferences take the form of credits, deductions, special exemptions, and allowances and usually result in a reduction in the amount of tax a corporation owes. By instituting a corporate minimum tax rate, governments guarantee a floor on the businesses’ contribution to the public purse.
Minimum taxes are typically computed using an alternative simplified tax base that avoids the complexities of the standard corporate tax base. They are often based on turnover (gross income or receipts) or assets (net or gross). A third alternative uses modified definitions for corporate income that explicitly limit the number of deductions and exemptions allowed.
Using a new database of minimum corporate tax regimes worldwide, we show how minimum taxes have grown in popularity over the past few decades. Turnover-based minimum taxes are the most prevalent and tend to be found in countries with higher statutory corporate tax rates (the rate imposed by law). Countries that levy a minimum tax also tend to report higher corporate tax revenue as a share of GDP.
We study the impact of minimum taxes on revenue and economic activity by combining our new country panel database with firm-level data. What we find is that introducing a minimum tax is associated with an increase in the average effective tax rate—that is, the tax rate actually paid by corporations after taking into account tax breaks—of just over 1.5 percentage points with respect to turnover and around 10 percentage points with respect to profits.
Minimum taxes based on modified corporate income lead to the largest increases in effective tax rates, followed by those based on assets and turnover. Ultimately, the revenue impact also depends on the rate applied.
In addition, we use firm-level data to get a sense of the potential revenue that would result from the introduction of a hypothetical minimum tax of 0.5 percent on turnover and minimum tax of 1 percent on total assets. For the median country, the former could raise an additional 7 percentage points of tax revenue for governments relative to current levels and the latter almost a third more.
This translates into an average of 0.2 and 0.9 percent of GDP in additional revenue—for the median country in our sample—for a turnover-based and an assets-based minimum tax, respectively, on top of a median corporate income tax-to-GDP ratio of 2.7 percent. These results represent a significant revenue potential that merits serious policy consideration.
Fresh momentum
The agreement reached by the G7 countries on minimum taxes has provided fresh momentum to the overhaul of international tax rules led by international organizations. As part of this overhaul, the Organisation for Economic Cooperation and Development (OECD) and the G20 had proposed in late 2020 a global minimum corporate tax that would apply to profits of multinationals. Countries would still set their own local tax rates, but if a multinational company paid less than the global minimum rate in another country, that company’s home or source jurisdiction could supplement its tax liability to ensure it paid the minimum. In this way, the advantages of shifting profits to low-tax jurisdictions would be reduced.
The OECD and G20’s global proposal differs from standard local minimum taxes—it would not focus solely on income generated on activities undertaken within a country. Instead, payments would be triggered only if other countries don’t tax multinationals enough. Furthermore, the use of local minimum taxes could end up increasing as they provide a simpler alternative to the complex provisions of this proposal for a global minimum tax, which many low-income and developing countries may not have the capacity to implement.
Powerful but not perfect
Despite inefficiencies associated with local minimum taxes, they could allow countries to tap significant revenue. In this way, setting a floor on corporate taxation—at least at the local domestic level with moderate tax rates—can be a good option for countries looking to preserve revenue and prevent the erosion of their tax base without severely damaging corporate activity.
However, minimum taxes alone cannot replace reforms that broaden the corporate tax base. The proliferation of multiple rates and all sorts of special preferences within the standard corporate tax system causes costly distortions and low revenues—and encourages tax avoidance and evasion.
Tax incentives to attract multinationals are also likely to persist even after the introduction of a global minimum tax, as countries will continue to do what they can to entice foreign investment for growth and development. But the value of these incentives will decline, as multinationals will only be able to reduce their liabilities to 15 percent and not zero. And so therefore, the first best remains to tackle and remove these head on.
Aqib Aslam is an economist in the World Economic Studies Division of the IMF's Research Department.
Maria Coelho is an economist in the Tax Policy Division of the IMF's Fiscal Affairs Department.
Thank you again for your interest in IMF Blog. Read more of our latest content here.
Take good care,
Glenn Gottselig
Blog Editor, IMF
GGottselig@IMF.org
