 My topic is building up tax systems and lessons from the Nordic countries. The purpose of this talk is to briefly review some of the key features of the Nordic economies, especially the tax structures and tax systems. This is done in order to try to gain some understanding on if some of these Nordic institutions could be of any help for other countries when they try to develop their tax systems, especially now we are interested in developing and emerging economies. In particular if and when they try to actually increase the tax stake, the overall share of tax burden out of the total economy, because the Nordics are in a sense having the world record levels of taxis, and the question is then how can the economies operate with so high level of taxis. When preparing this presentation I was lucky to come across with a survey article on the very same topic by Henry Cleven who is a professor of economics at the London School of Economics and he has a forthcoming survey article on the Scandinavian tax system in the Journal of Economic Perspectives, which is the material I have here draws extensively on this paper by Cleven. So this talk tries to convey four central messages. The first one is that the building up a broad tax base is really essential when we actually increase the tax rates, because high tax rates are tolerable and don't necessarily harm the economic activity that much if we have a broad tax base, which makes it very difficult for people to avoid taxis by utilizing loop holes of the tax code. The second message is that in the Nordic countries we have extremely extensive third party reporting on many of the items which are part of the tax bill. So it's not only the labour income which is typically reported by the employers, but also many parts of capital income are subject to third party reporting. So with third party reporting I mean that somebody else rather than the tax payer reports to the tax authority what is the tax do. And then there are much less scope for the tax payer himself to avoid taxis or to evade taxis illegally. And the third message is that the effects of taxation are not independent on what is used with the money. This is a very simple point. But often economies concentrate on the tax distortions. But of course the overall distortions also depend on what the money is used for. And in many Nordic countries much of the tax revenues is actually used on activities which then counteract some of the harmful impacts of taxis, like services which make it easy for people to participate in the workforce. And finally I want to say something regarding the dual income tax reform which many of the Nordic countries had in the beginning of 1990s and whether that has any potential for the developing countries. So some background. Why would Nordic countries be interesting for people outside of them? They certainly are very small so why should we care? Well, one answer is that they have been very successful in terms of combining relatively high levels of overall well-being to very equitable division of the well-being. And they certainly have record high tax rates. So it's interesting for the economists to analyze these countries because we typically think that taxis are problematic. They distort incentives for employment and savings. And yet these countries are able to operate. And we also think that redistribution might actually be harmful for efficiency if for redistribution we need very high tax levels so then the economists are used to think about an equity efficiency trade-off. But yet we don't seem to experience a very drastic trade-off between these two aims in the Nordic countries. And according to the basic economic theory because of the high tax rates and high distribution these should be troubled economies but they are not. Well Finland might be at the moment but not the old Nordic countries are. So the question arises is that which features in the tax systems in the public sector more generally make this success possible? And is there something specific to the Nordic countries which couldn't be exported to other countries or are there some generic features that could be useful for the other countries as well? So let me now start to go through the actual tax systems in these countries. And before going that I want to bring in some theory because Kausik was also asking for some more theory background. So here's my small theory background. In the modern public finance academic literature there's a broad consensus that this notion of elasticity of taxable income, ETI, is a very good measure of the overall distortions the tax system creates. And what is this thing? As all elasticity, as the percentage change in the taxable income when the take home part, so that's defined as the one minus the marginal tax rate of pay is increased by one percent. And there's some work by Rajetti that says that this is in a sense a sufficient statistic. So if you know the ETI parameter you then have information about the overall distortions the tax system creates and then they can be then compared to potential benefits of extending public provision of services or making the distribution more egalitarian. Notice, however, that this parameter is not something which couldn't be affected by government policy. So for example I'm going to show you that the broad tax base tends to lower elasticity of taxable income and if we have a lower elasticity of taxable income that means that other things being equal the tax system creates less distortions so you can have the same level of distortions and increase a bit the tax take or get a bit more egalitarian tax system. So that's the one way to get around this FEC equity trade which otherwise would make it more difficult, would make life more difficult. So what do we know about this parameter? Well, much of the evidence builds on the US estimates and typically they fall in the range of 0.2 or 0.5. So that means that if the take home part of the pay increases by ten percent then the taxable income the government can have its disposal increases by two to five percent. And then there's also evidence that the response of the broad income. So broad income meaning everything before tax allowances and tax deductions. So the elasticity of broad income is typically much smaller than the elasticity of taxable income because people can use these loop holes in the tax system to reduce the tax bill. Now we have some evidence from the Nordic countries that convey two messages. First of all in the Nordic countries the elasticities are smaller than in the US and the second that there's the difference between the elasticity of the broad income and the elasticity of taxable income is really minor. So that already suggests that the Nordic countries really have a very, very wide tax base as least in terms of labor income. I skip the actual table because I realize it's too small. Let me now go to my second point in more detail which is the role of the third party reporting. As I mentioned we have extensive third party reporting in the Nordic countries and there's a marvelous study by Henrik himself, Henrik Kleven, which was published in Econometrica a couple of years ago, which actually shows that there's virtually no tax evasion for items that are third party reported. So often there's been a puzzle in tax analysis, which this goes again back to Kausik Basuk's talk that because of the small probability to get caught if evading taxes, people should evade taxes more than we actually observe. And we observe that people don't, well there's some tax evasion, but the tax evasion is less than a conventional economic theory would suggest. But Kleven and his co-authors provide an answer to that. They basically show that there's no puzzle. People just can't evade taxes in the many items because there's no evades for that. All the tax bill is reported by somebody else. So here's a figure which is borrowed from there. And on the horizontal axis there's a fraction of income which is self-reported. And on the vertical axis there's the evasion rate. And the black line gives the extent of evasion out of the third party reported income. So as you can see it's almost always zero. So people don't cultivate taxes. But they do actually evade quite a lot of taxes. So this gives the total evasion rate out of items which are not third party reported. So in a sense when they have to scope for behaving as the conventional economic theory says, they actually take some advantage of that, even in Denmark. Yes, thank you. Of course the evasion rate is not 100 percent. So other things also matter than constant benefits of getting caught. But the basic take-home message from this is that really what matters is the, whether income is third party reported or not. There's also some cross-country evidence saying that the higher is the share or the fraction of self-employed and employees in evasive jobs, evasive jobs referring to jobs that are at the consumer sector, serving consumers rather than firms. And the lower is the tax to GDP ratio in a cross-section of countries. Again suggesting that because the self-employed have more leeway in terms of reducing the tax bill, then the overall tax rate goes down. Now the third point I had was to how to achieve the high employment rate we have in the Nordic countries with such a heavy tax burden. And again this goes back to the point that this depends on the way the tax revenues are used. Because the Nordic countries spend a large fraction of the tax revenues on items such as, which directly make it easier for people to participate in the labor force. So these are services to the, such as, state care centers and services which take care of elderly people. And also indirectly via universal healthcare and education policies which build up the skills and the skills are then fostering the overall development of the taxable income. And it has been nowadays both theoretically and empirically verified that this policy can actually reduce the distortions of taxation on employment. So here's again some sort of graphical evidence on this because when the participation subsidies, so these are the share of that sort of services that help to promote participation in the workforce, go up the average employment rate here on female workers goes up in countries. And Nordic countries are the world record level provisions of, yes I try to speed up, of those services. And finally a point about the dual income tax. So the dual income tax is the system to which many Nordic countries moved in the beginning of 1990. So that's an alternative to a comprehensive income tax. And the dual income tax is a system where the tax base is divided into labor income and into capital income. And labor income is taxed on a progressive scale whereas the capital income is subject to a flat tax. So there's no redistribution in terms of capital income. And this system combined with base broadening and rate cutting actually probably led to increased performance of the tax system within each tax base. But it also led to problematic income shifting. So people who had an option of either reporting part of their taxes as a labor income or capital income clearly wanted to take advantage of the system so that they started to report more capital income rather than labor income because they could save on their tax bills. So tax income shifting is a problematic feature of the dual income tax. So let me now conclude and try to come up with some conclusions regarding the guidance for developing tax institutions in middle income and poor countries. Regarding broad tax base. Well, in principle that's relatively easy to implement because if there are a lot of loops holes you just close them down. You just modify the tax rule in that sense. Might be politically different but in principle it's doable even in a low country setting. The third party reporting part is a more problematic. It requires probably new sort of information technology and paper trails use of credit cards and the utilization of VAT chains. Regarding the expenditure side the labor supply may not be a particularly pressing concern in low income countries but on the other hand we know that many other policies are key and policies that foster skills also can reduce the tax distortion at least over a longer term. And finally the dual income tax system might actually be a more suitable tax system for developing countries than it is for its countries if the alternative is to have virtually no tax on capital income because this is flat taxes easy to implement by withdrawing. And I stopped there. I'm sorry for taking the moment.