Tax policy for sustainable development in Asia and the Pacific Tientip Subhanij Shuvojit Banerjee Zheng Jian Editors Shamshad Akhtar Executive Secretary Hongjoo Hahm Deputy Executive Secretary Hamza Ali Malik Director, Macroeconomic Policy and Financing for Development Division This publication was coordinated by Tientip Subhanij, Chief of Financing for Development, Shuvojit Banerjee and Zheng Jian, Economic Affairs Officers of the Macroeconomic Policy and Financing for Development Division of the Economic and Social Commission for Asia and the Pacific (ESCAP). The editors would like to thank external reviewers Govinda Rao, Stefan Speck, Miranda Stewart, Eric Zolt, and internal reviewers Laura Altinger, Stefanos Fotiou and Aneta Nikolova, for their constructive comments on preliminary versions of the different chapters. The editors also would like to acknowledge Mary Ann Perkins for editing the manuscript, and the following colleagues for supporting the production of the book: Patchara Arunsuwannakorn, Trung Dang, Pannipa Jangvithaya, Sukanitt Jarunveshsuti, and Gabriela Spaizmann. Disclaimer The views expressed in this document are those of the authors and do not necessarily reflect the views of the Economic and Social Commission for Asia and the Pacific (ESCAP).The designations employed and the presentation of the materials in this publication also do not imply the expression of any opinion whatsoever on the part of the Secretariat of the United Nations concerning the legal status of any country, territory, city or area or of its authorities or concerning the delimitation of its frontiers or boundaries. This publication follows the United Nations practice in references to countries. Where there are space constraints, some country names have been abbreviated. Mention of a commercial company or product in this publication does not imply endorsement by the Economic and Social Commission for Asia and the Pacific. United Nations publication Sales No. E.18.II.F.7 Copyright © United Nations 2018 All rights reserved Printed in Bangkok ISBN: 978-92-1-120767-5 e-ISBN: 978-92-1-362942-0 ISSN: 2522-798x ISSN (online): 2522-7998 ST/ESCAP/2806 Cover design: Achara Jantarasaengaram Cover photo credit: Shutterstock (234775651) This publication should be cited as: Tientip Subhanij, Shuvojit Banerjee, and Zheng Jian, eds. (2018). Tax policy for sustainable development in Asia and the Pacific. United Nations Publication ST/ESCAP/2806. Bangkok: United Nations Economic and Social Commission for Asia and the Pacific (ESCAP). This publication may be reproduced in whole or in part for educational or non-profit purposes without special permission from the copyright holder, provided that the source is acknowledged. The ESCAP Publications Office would appreciate receiving a copy of any publication that uses this publication as a source. No use may be made of this publication for resale or any other commercial purpose whatsoever without prior permission. Applications for such permission, with a statement of the purpose and extent of reproduction, should be addressed to the Secretary of the Publications Board, United Nations, New York. Contents Foreword .......................................................................................................... viii Author profiles ............................................................................................... xi Abbreviations and acronyms ....................................................................... xv 1. Tax Policy for Sustainable Development: Key Issues and Asia-Pacific Challenges Tientip Subhanij, Shuvojit Banerjee, Zheng Jian...................................... 1 1. Introduction ....................................................................................... 1 2. The tax challenge and a new strategy to finance the 2030 Agenda ............................................................................................... 2 3. City finance: addressing urbanization challenges in Asia and the Pacific ........................................................................................... 5 4. Tax incentives in Asia and the Pacific: what does the local experience say? ................................................................................. 10 5. Progressive tax policy: prospect for a greater role in addressing growing income and wealth inequality ................... 13 6. Environmental taxes: the environmental dimension of tax policy .................................................................................................. 15 7. Conclusion: setting the right reform ............................................. 19 References ................................................................................................. 22 iv Tax policy for sustainable development in Asia and the Pacific 2. Metropolitan City Finances in the Asia and Pacific Region: Issues, Problems and Reform Options Roy Bahl ..................................................................................................... 25 1. Introduction ....................................................................................... 25 2. Urbanization and the fiscal challenge of financing large cities 27 3. Directions for reform in Asia and the Pacific: towards a metropolitan fiscal strategy ............................................................ 32 4. Metropolitan fiscal strategy and the question of governance structure of metropolitan areas ...................................................... 35 5. Financing metropolitan development: revenue options and reforms ............................................................................................... 42 6. Recommendations on the way forward ....................................... 63 References ................................................................................................. 69 3. Tax Incentives and Tax Base Protection in Developing Countries Joosung Jun ................................................................................................ 73 1. Introduction ....................................................................................... 73 2. Enforcement difficulties and the second-best policy.................. 77 3. International capital mobility and the corporate tax base ......... 83 4. The cases of Hong Kong, China; Singapore and the Republic of Korea .............................................................................................. 86 5. Policy implications ........................................................................... 94 6. Conclusions ....................................................................................... 102 Appendix .................................................................................................. 106 References ................................................................................................. 120 4. Prospects for Progressive Tax Policies in Asia and the Pacific Zheng Jian, Daniel Jeongdae Lee ............................................................... 123 1. Introduction ....................................................................................... 123 2. Inequality in Asia and the Pacific .................................................. 128 3. The role of taxes in reducing inequality ....................................... 131 4. Where does Asia stand in tax collection and composition? ...... 136 5. Personal income tax in Asia and the Pacific ................................ 139 6. The potential of taxes on wealth and property ........................... 144 7. Conclusion ......................................................................................... 148 References ................................................................................................. 151 Tax policy for sustainable development in Asia and the Pacific v 5. Environmental Taxation in Asia and the Pacific Jacqueline Cottrell, Damian Ludewig, Matthias Runkel, Kai Schlegelmilch, Florian Zerzawy, assisted by Sebastian Hienzsch ..... 155 1. Introduction ....................................................................................... 155 2. Transition to an environment-friendly economy and the rationale for environmental taxes in Asia and the Pacific ......... 158 3. Similarities and differences of environmental taxes in OECD and developing countries in Asia and the Pacific ....................... 167 4. Fossil fuel subsidy reform ............................................................... 168 5. Strategic considerations and political economy .......................... 170 6. Recommendations for tax design in Asia and the Pacific ......... 185 7. Outlook for environmental taxes in Asia and the Pacific .......... 201 References ................................................................................................. 206 Figures Figure 3.1. Shadow economy and tax revenue, 2013 .............................. 79 Figure 3.2. Shadow economy and Corruption Perceptions Index, 2013 .............................................................................................. 96 Figure 3.3. Statutory corporate tax rates in selected Asia-Pacific countries, 2013 (per cent) ......................................................... 101 Figure 4.1. Changes in consumption share for different income quintiles of the population since the 1990s ........................... 129 Figure 4.2. Wealth distribution by deciles in selected economies ......... 130 Figure 4.3. Income Gini before and after taxes and transfers