Tax Policy Reform and Economic Growth
In the wake of the recent financial and economic crisis, many OECD countries face the challenge of restoring public finances while still supporting growth. This report investigates how tax structures can best be designed to support GDP per capita growth.
The analysis suggests a tax and economic growth ranking order according to which corporate taxes are the most harmful type of tax for economic growth, followed by personal income taxes and then consumption taxes, with recurrent taxes on immovable property being the least harmful tax. Growth-oriented tax reform measures include tax base broadening and a reduction in the top marginal personal income tax rates. Some degree of support for R&D through the tax system may help to increase private spending on innovation.
But implementing pro-growth tax reforms may not be easy. This report identifies those public and political economy tax reform strategies that will allow policy makers to reconcile differing tax policy objectives and overcome obstacles to reform. It stresses that with clear vision, strong leadership and solid tax policy analysis, growth-oriented tax reform can indeed be realised.
Annex A
The 2010 Tax Reform Process in Denmark
In the spring of 2009 the Danish Parliament adopted a major tax reform with the main goal of reducing the relatively high top marginal personal income tax rates. The reform is fully financed by offsetting tax increases and it is expected that both tax cuts and tax increases will have positive structural effects, to a wide extent, on labour supply, savings, the allocation of capital and the environment. It is estimated that the Gini coefficient will increase by 0.45 as a result of the tax reform.