Fiscal rules and tax policy cyclicality

The paper presents, in the synthetic way, the issue of the rationality of the tax system and taxation principles in relation to the clearly visible fiscal crisis in the 21st century caused by, among others, COVID-19 pandemic. The analysis which is theoretical (descriptive, comparative) was carried out by using tools indicated in the area of New Institutional Economics (NIE). Attention was devoted primarily to the importance of specific institutional arrangements, broadly understood as the “rules of the game” applicable in the political and economic spheres, and related to the problems of public finances. Research has shown that the appropriate design of tax rules may contribute, to some extent, to limiting the fiscal crisis. Tax policy, and even more broadly, fiscal policy, may determine the formula in which the economic achievements regarding compliance with tax principles and fiscal rules can be implemented. What is primarily important is the legal framework (one of the most important formal institutions) within which state policy in the field of public finances should be implemented.

Fiscal policy decisions – in particular, those related to tax policy – have real impact on private sector activity. A central result from studies on taxation is that taxes affect behaviour and result in distortions on the choices of companies, workers and investors; thus, a country's tax system - and, therefore, variations in that system - reflects on the nation's economic growth. In Brazil, changes in tax legislation bringing about revenue losses at federal level must obey the fiscal neutrality rule, assuring compensation equivalent to the estimated decrease in revenue. Consequently, it becomes mandatory measure the corresponding revenue loss, so that the task of scorekeeping gains special contours in the fiscal control framework which aims to promote the balance of public accounts. This paper demonstrates that the static technique of estimating budgetary effects, coupled to the legal design that requires prompt compensation of the effects on revenue, discourages the production of tax rules seeking to promote efficiency and economic growth. The result was reached using a general equilibrium model stylized and calibrated for the Brazilian economy, by simulating permanent shocks on the average tax rates on consumption, labour, and capital income. Comparing the different methodologies, we concluded that the static scoring overestimate revenue losses in face of tax cuts, in parallel to results produced from dynamic estimations. The latter, in turn, allow to capture and differentiate – according to the tax base – the positive effects stemming from cuts in the tax burden on capital stock, labour supply, consumption and aggregate investment, ultimately identifying higher long-term economic growth. Dynamic scoring offers clarity about the extra-fiscal consequences on the economy that may yield from changes in the tax system, and provides a more accurate measurement of the normative change's budgetary effect, qualifying the debate and the political decisions in the country.
 Keywords: Taxation. Growth. Budgetary effect. Dynamic scoring.

A common dilemma facing governments around the world is how to meet the sizeable fiscal costs of providing and maintaining infrastructure networks. Over the past decade, developed and developing countries have looked to fiscal rules, budgetary reforms, tax policy and administration measures, public-private partnerships and other innovative financial instruments to raise additional finance for infrastructure investment. This paper looks at the range of options for raising the financing to meet Tanzania's infrastructure needs. It begins with a brief survey of the evidence on the relationship between infrastructure, public investment, and economic growth, and then goes on to consider the case for additional infrastructure investment in Tanzania. The second part of the paper looks at five broad options for mobilizing additional resources to meet Tanzania's infrastructure needs: (i) direct private investment and PPPs, (ii) expenditure reprioritization and efficiency, (iii) domestic revenue mobilization, (iv) external grants and concessional financing, and (v) sovereign borrowing on domestic or international credit markets. The paper concludes with some general recommendations on what combination of the above approaches might be suitable for Tanzania.