Applying Tax Policy Models in Country Economic Work: Bangladesh, China, and India

General principles can guide the design of the overall contours of a tax reform package to a considerable extent. This paper reports on the use of three tax policy models to analyze issues in the course of undertaking economic work with the regional departments in the World Bank's Operational Complex. The first model, that for Bangladesh, is used to demonstrate how the relative attractiveness of different revenue-raising options depends sensitively on the workings of labor markets and substitution relationships in production. The second model, that for China, emphasizes the importance of taking a system-wide view of taxation in a decentralizing socialist economy, where the coexistence of administered and free market prices for the same commodities can make standard tax reform prescriptions most inappropriate. The third model, that for India, examines the kinds of domestic tax adjustment that would be necessary in the wake of reductions in import tariffs in order to allow the government to continue to meet its real expenditures wihout any change in foreign borrowing, but taking into account changes in the prices of intermediates and capital goods resulting from tariff reform. The paper also discusses the costs involved in constructing and implementing tax policy models and summarizes the principal finding of the paper.