Ways to Design Tax Systems to Enhance Social Protection

Effective tax policies are essential for achieving greater income equality and improving social welfare. Photo credit: ADB.

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Innovative reforms can play a role in helping tax systems to contribute to improved social protection and reduced inequality in Asia and the Pacific.


Asia and Pacific economies have enjoyed remarkable achievements over the past few decades but face serious challenges. The tax share in the developing economies of the region remains lower than is necessary to support adequate public services (Highfield and Chooi, 2022). The region is falling behind on all 17 Sustainable Development Goals (SDGs)[1] and social safety nets and social insurance systems are inadequate.  Tax systems in the region’s developing economies have many weaknesses, and the tax share in the economy remains too low and is often volatile. There is considerable scope to reform tax systems to strengthen revenues and contribute to stronger systems of social protection.

Income inequality is a phenomenon throughout the world, though with an uneven pattern (IMF, 2017). Recent estimates suggest that inequality in developing Asia, when measured by that produced by market forces alone, remains below that of advanced economies and Latin America (Clements, Gupta, and Jalles, forthcoming 2022). However, compared to advanced economies, fiscal redistribution has contributed relatively little to reducing inequality in the region’s developing economies.

This inequality challenges the region’s economies to reassess the trade-off between economic growth and equity and to consider the degree to which the fiscal systems in place are adequate to sustain both growth and redistribution. Today, policy makers continue to emphasize the traditional growth and efficiency arguments but are also placing greater emphasis on social protection and redistribution (de Mooij et al, 2020). In this view, social protection is necessary for strong and sustained growth.


Countries can redistribute income both through spending systems as well as revenue systems, including taxation and nontax revenues. A recent focus on net fiscal incidence (the combined impact of taxation and government spending) reflects in part that there is a degree of arbitrariness in how fiscal policies are structured, generally reflecting key political economy rather than equity or efficiency considerations. For instance, there is an equivalence in key respects between subsidy programs structured as direct spending and those that are structured as forgone taxes or tax expenditures.

Therefore, one can help the poor in two (equivalent) ways (a) by reducing their tax burden and (b) through public spending on goods and services targeted at the poor. Which one is more effective? One line of thinking suggests that the role of the tax system in providing social protection is limited and that direct transfers and the provision of public goods and services has a greater impact on reducing inequality. This implies that providing relief to the bottom of the income distribution through tax exemptions and preferences that reduce revenue collections is less effective than a policy that collects more revenue and uses it to provide social protection to those that need it. This view emphasizes effective revenue mobilization through a broad-based tax system with minimal tax preferences supported by a strong spending program, rather than providing tax relief indiscriminately.  

Most countries, especially the most advanced in the region, have tax systems that tend to be progressive in design, even if the actual progressivity is often less than might be presumed based on structures of taxation. Developing economies in the region tend to have some degree of progressivity but rarely that found in advanced countries. This difference reflects several factors, including variation in preferences, the weakness of revenues overall, and the administrative difficulties developing countries have in capturing income, especially capital income, in the personal income tax, usually the most or one of the most progressive components of the tax system.  

Asia and Pacific developing economies have considerable scope to improve personal income taxes by broadening the base of taxation. They also have the scope to increase the use of property taxes by improving registries and valuation of property. Both of these measures would strengthen revenues and contribute to a more equal distribution of income and wealth. Judicious tax and spending reforms can also contribute to important social goals like gender equality (Stotsky, 2020).


Key ideas on design of direct taxes on income and payroll to enhance equity

  • Individualize the tax because this form of taxation is generally more efficient than joint taxation.
  • Set an appropriate threshold below which the taxpayer pays no tax on income, either through a general exemption or zero-bracket amount or a general tax deduction or tax credit.
  • Use a progressive marginal rate schedule, which contributes to vertical equity, but not excessively high marginal tax rates, which contributes to efficiency.
  • Use credits for low-income workers to support equity but also to encourage their labor market participation.
  • Limit inefficient exemptions, deductions, and credits.
  • Tax different forms of capital income in a similar manner and more like labor income to avoid distorting markets and creating economic inefficiency.
  • Under payroll taxes, tax labor income broadly.
  • If payroll taxes are limited to a ceiling, ensure that this ceiling increases over time with inflation.
  • Set a corporate income tax rate that fosters a competitive environment for businesses, when compared to the rates and key provisions in other countries.
  • Avoid granting most tax incentives in the corporate income tax. If tax incentives are used, they should be accounted for, evaluated on a regular basis, and publicly reported.

Key ideas on design of property and wealth taxes to enhance equity

  • Improve administrative structures of property taxes, such as registries and valuation, so there is scope for greater use of them.
  • Consider the use of wealth taxes, especially on components like financial assets that are relatively easier to value.

Key ideas on design of indirect taxes (VAT/GST, excise, and trade tariffs) to enhance equity

  • Set a standard ad valorem value-added tax (VAT) rate levied at or below 15% percent.
  • Minimize the number of tax-ed sectors and products.
  • To address equity concerns, judiciously use exemptions or reduced rates of tax on some basic foodstuffs, education, schooling, and other items.
  • Set an appropriate VAT turnover threshold below which firms do not have to pay tax.
  • Establish simplified regimes for small enterprises.
  • Tax alcohol, tobacco, and unhealthy foods with excises because they serve to discourage consumption, even if they tend to be regressive.
  • Tax fuel and carbon to discourage use and offset any regressive effects with transfers or increased progressivity of other fiscal instruments.
  • Use excises on some services and goods, predominantly used or bought by higher-income taxpayers, such as international airfares or luxury automobiles, especially as a supplement to a VAT with a relatively uniform standard rate.
  • In the move toward low and even international trade tariffs, continue to selectively use higher tariffs on luxury goods and services.

This article by Sandeep Bhattacharya and Janet G. Stotsky draws on analysis in an ADB publication, Taxation and Social Protection.

[1] UNESCAP (2021).


B. Clements, S. Gupta, and J.T. Jalles. 2022. Fiscal Policy for Inclusive Growth in Asia. Manila: Asian Development Bank.

International Monetary Fund. 2017. Tackling Inequality. Chapter 1 in Fiscal Monitor. Washington, DC. October.

J.G. Stotsky. 2020. Using Fiscal Policy and Public Financial Management to Promote Gender Equality: International Perspectives. New York: Routledge.

J.G. Stotsky. 2022. Taxation and Social Protection. Asian Development Bank Governance Brief. Manila: Asian Development Bank.

R. De Mooij et al. 2020. Tax Policy for Inclusive Growth After the Pandemic. IMF Special Series on COVID-19. Washington, DC: International Monetary Fund.

R. Highfield and A. Chooi. Forthcoming. A Comparative Analysis of Tax Administration in Asia and the Pacific: 2021 Edition. Manila: Asian Development Bank.

UNESCAP. 2021. Asia and the Pacific SDG Progress Report 2021.

Janet G. Stotsky

Janet Stotsky specializes in applied public policies and women and development. She is a former senior staff of the International Monetary Fund, where she served as a fiscal and macroeconomics expert. She played a pivotal role in developing the IMF’s first work on gender budgeting. Janet also worked for the US Treasury and taught at Rutgers and American universities. She holds a Ph.D. in Economics from Stanford University and a B.A. in Economics from Princeton University. 

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Sandeep Bhattacharya
Senior Public Management Specialist (Tax), Public Sector Management and Governance Sector Office, Sectors Group, Asian Development Bank

Sandeep Bhattacharya has more than 28 years of experience in tax policy and administration, consulting, and academia. Prior to joining ADB, he taught classes in taxation, public economics, statistics, and econometrics, as well as supervised student research at Duke University. He has a PhD in Economics from Georgia State University and has degrees from Duke University (Master of Public Policy), Delhi School of Economics (MA in Economics), and St. Stephen's College, Delhi University (BA Honors in Economics).

Asian Development Bank (ADB)

The Asian Development Bank is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty. Established in 1966, it is owned by 68 members—49 from the region. Its main instruments for helping its developing member countries are policy dialogue, loans, equity investments, guarantees, grants, and technical assistance.

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