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.
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Obstacles to Fundamental Tax Reforms
Countries often succeed in implementing fundamental tax reforms. Sometimes, however, tax reform proposals never leave the drawing boards of studies departments or ministries of finance. In other cases, the tax reforms that are implemented have been revised to such an extent during the reform process that they no longer – or only partially – serve the original tax reform objectives. It also happens that the initial reform objectives are scaled down “pre-emptively”, as policy makers anticipate the obstacles that will have to be overcome and conclude that the cost would be too high or the prospects for success too uncertain to justify risking their political capital. In order to make growth-oriented tax reforms happen, policy makers have to be aware of the major challenges they are likely to face during the tax reform process. This chapter therefore explores the most important environmental factors that influence the reform process, focusing on the circumstances that explain when these objectives and environmental factors may become an obstacle to the design and implementation of tax reforms.
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