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Chapter two: Means of agricultural taxation
There are two broad types of agricultural taxation in developing countries, namely explicit and implicit taxes. Explicit taxes involve charges on land, taxes on inputs such as water, fertilizer, etc., and taxes on output. Income taxes, which belong to the category of explicit taxes, are almost impossible to implement in the context of a country with undeveloped bureaucracy and information system and are rarely used. Implicit taxes involve taxes and/or subsidies of the non-agricultural sector, which change the terms of trade for agriculture.
Land taxes have always been considered efficient and equitable. Efficient in the sense that they do not distort relative output prices within agriculture, and do not diminish production incentives. They are equitable because those with larger pieces of land, and hence wealthier, pay more. In early stages of development, and in countries where land rights were well established or land quality was relatively homogeneous, they have been quite important as a source of public revenue. Thus in 1940 agricultural land taxation as a fraction of central government revenue in Egypt was 23 percent, in India 19 percent, and in Chile 5 percent (Bird, 1974). However, in the late eighties in none of these countries did land taxes account for more than 1 percent of central government revenue.
Land taxes in principle are relatively simple. In order to implement them one needs only four facts: the area of the property, its location, its classification, and the owner or the name of the person to whom to send the tax bill. This information, as Newbery (1987) suggests, might not be too costly to collect. A simple presumptive tax structure could be designed, based on some easily identified characteristics of the land, such as the availability of water, fertility, and proximity to a market.
One might argue that in countries where land ownership rights are not well formalized, such as in land-extensive countries of sub-Saharan Africa, land taxes might be difficult to implement. However, even there the ownership problem might be dealt with by levying land taxes on the communities, and let them apportion the tax among those with customary land tenure rights.
Despite all the advantages of land taxes, it is a fact that their importance as a source of fiscal revenue has declined substantially. The reasons for this have been recently explored by Hoff (1991) and Skinner (1991). Hoff makes the point that land taxes are riskier than output taxes, and hence in the absence of complete insurance against production risks, they will tend to be less favoured compared with output taxes. That land taxes are riskier than output taxes is easy to see. If production is uncertain, then a fixed land tax will make net producer income more variable than an equivalent output tax. However, as Newbery (1987) suggests, this problem could be taken care of by indexing the land tax to an index of regional output, and Hoff shows this to be formally correct.
Skinner (1991), however, shows that the risk aspects of the land tax are not as large as casual thinking first suggests. Through empirical simulations he finds that ''the degree of uncertainty about farm income must be very large, and (in general), the level of taxation low, before an export tax is preferred to a land tax" (op. cit. p. 130). Skinner suggests that the most crucial problem with land taxation is the problem of administration. In the absence of efficient land markets which will indicate land prices, there will be incentives to mar-assess the value of land. These problems, however, could be dealt with by using simple characteristics to assess a presumptive value of land.
The above arguments still do not explain why the tendency has been away from land taxes and toward output and implicit taxes. Skinner offers two suggestions. One is political, namely organized opposition by landowners. The second is that implicit taxes are easier to implement than explicit taxes such as land taxes.
Taxes on agricultural output could be levied on gross output or marketed surplus. While for cash crops the two are largely the same, for food crops this is not the case, especially in developing countries. Newbery (1987) shows that a tax on gross output is superior to a tax on marketed surplus because the former leaves both relative producer and relative consumer prices unchanged, while the latter changes relative consumer prices, albeit it leaves relative producer prices unchanged. This conclusion, however, is largely academic. In practice in developing countries it is impossible to tax gross output as one would have to get involved in household consumption decisions. Hence only marketed surplus can be feasibly taxed.
Taxing of marketed surplus, however, cannot easily be done for non-traded commodities such as staple food, because it implies that the government would have to monopolize all domestic marketing, to ensure that all marketed commodities are subjected to the tax. In cases where this was done on a large scale (e.g. Tanzania), experience shows that it failed because of sheer administrative complexity.
On the other hand taxing exportable or other traceable cash crops has had a long and successful history as a fiscal instrument in many countries. The key to the success of export taxation of agricultural commodities is the technological need to organize along monopolistic lines to exploit economies of scale involved in marketing of these commodities. Even in cases where the government has not been involved in monopolistic export marketing boards, producers have organized in cooperatives to exploit economies of scale in world marketing. This natural tendency towards centralized organization, of course, makes taxation quite easy from an administrative viewpoint. It is thus no coincidence that export taxation has been quite crucial as a source of revenue at early stages of development. Helleiner (1964) in fact concludes:
"The principal ground for heavy taxation of exports is its convenience. In a country where per capita income is very low, administrative personnel are scarce, modern accounting practices are non-existent and much of the population is self-employed or engaged in "traditional" (and therefore unrecorded) economic activity, recourse must be had to maximum revenue collection in the few sectors where it is possible. In that it must pass through only a very few ports, foreign trade is easily measured, controlled and taxed" (p. 599).
It is thus no coincidence that trade taxes (export and import) account for the bulk of fiscal revenue in the poorest developing countries. Tanzi (1987) shows that trade taxes account for an average of 39.3 percent of all tax revenue for the poorest developing countries, with export duties alone accounting for 8.4 percent. By contrast they accounted for only 15.4 percent in the richest among the 86 developing countries covered in his sample, with export taxes making up only 2.1 percent.
Taxes on purchased inputs are another possible form of explicit taxation of agriculture. It is easy to show (Newbery, 1987) that if all inputs except land are subsidized, and outputs are taxed at the same rate, then the effect is equivalent to a rent tax. However, labour input cannot easily be taxed or subsidized, and most fiscal interventions in agricultural inputs take the form of subsidies on "modern" purchased inputs such as seeds, fertilizer, tractors, chemicals etc.
Explicit taxation of agricultural commodities has taken the form of taxation of traded agricultural commodities and especially exportables. Krueger, Schiff and Valdes (1988) show that the direct nominal protection rate for the main exportable agricultural product in sixteen developing countries averaged -11 percent in 19751979 and -11 percent in 1980-1984. For the main agricultural importable in turn the average direct nominal protection was 20 percent in 1975-1979 and 21 percent in 1980-1984. This illustrates that the internal terms of trade in those countries through direct interventions were turned against the exportable products. Direct interventions in their methodology include explicit tariffs on non-agricultural products.
However, it turns out that indirect and implicit taxation through exchange rate overvaluation play a much more important role in agricultural taxation. Krueger, Schiff and Valdes indeed show that if the effects of overvaluation and trade protection of industry are taken into account, then the total nominal protection rate of agricultural exports declined to an average of -36 percent for 1975-1979, and -40 percent in 1980-1984, while for agricultural imports, the nominal protection rate from positive turned negative at -5 percent for 1975-1979, and -6 percent in 19801984.
Exchange rate overvaluation has played a substantial role as a source of invisible public revenue in many developing countries through the lower cost of government imports. It is only in the last few years that the detrimental role of this essentially macroeconomic distortion on microeconomic incentives has been analyzed. Structural adjustment programs by trying to correct these distortions at the macro as well as the micro level, have in essence tried to strip many governments of large sources of explicit and implicit fiscal revenue. This, of course, requires drastic cuts in government expenditures, and puts enormous pressures on governments for tax reform, and finding other ways to generate revenues.