OECD Tax Policy Studies

1990-0538 (online)
1990-0546 (print)
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This series consists of studies analysing the effects of tax policies that have occurred in the past or might be considered for the future. Its primary purpose is to assist policy makers in designing tax policies that are suited to their objectives.

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Tax Policy Reform and Economic Growth

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03 Nov 2010
9789264091085 (PDF) ;9789264091078(print)

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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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  • Foreword
    This report discusses 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 residential property being the least harmful tax. A revenue-neutral tax reform that shifts the balance of taxation more toward consumption and recurrent residential property taxes could thus strengthen the growth of output over the medium term.
  • Executive Summary
    This tax policy study considers the links between taxes and economic growth and the implications for tax policy. It then discusses the obstacles to fundamental tax reforms that are intended to strengthen economic growth and how they might best be addressed.
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  • Expand / Collapse Hide / Show all Abstracts Taxation and Economic Growth Recommendations and Reforms in OECD Countries

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    • Growth-oriented Tax Policy Reform Recommendations
      Tax systems are primarily aimed at financing public expenditures.1 Tax systems are also used to promote other objectives, such as equity, and to address social and economic concerns. They need to be set up to minimise taxpayers’ compliance costs and government’s administrative cost, while also discouraging tax avoidance and evasion. But taxes also affect the decisions of households to save, supply labour and invest in human capital, the decisions of firms to produce, create jobs, invest and innovate, as well as the choice of savings channels and assets by investors. What matters for these decisions is not only the level of taxes but also the way in which different tax instruments are designed and combined to generate revenues (what this chapter will henceforth refer to as tax structures). The effects of tax levels and tax structures on agents’ economic behaviour are likely to be reflected in overall living standards. Recognising this, over the past decades many OECD countries have undertaken structural reforms in their tax systems. Most of the personal income tax reforms have tried to create a fiscal environment that encourages saving, investment, entrepreneurship and provides increased work incentives. Likewise, most corporate tax reforms have been driven by the desire to promote competition and avoid tax-induced distortions. Almost all of these tax reforms can be characterised as involving rate cuts and base broadening in order to improve efficiency, while at the same time maintain tax revenues.
    • How Do Trends in the Composition of Tax Receipts and in Tax Rates Compare with the "Tax and Growth" Recommendations?
      The level and mix of taxation vary markedly across OECD countries but there have been a number of common trends.Many countries have cut personal and corporate tax rates while broadening the tax base and increasing social security contributions. Meanwhile, there has been an increased use of value-added taxes and a general trend to higher VAT rates. The data presented in this chapter shows to which degree countries have followed strategies with regard to the composition of tax revenues and changes in statutory tax rates that are similar to the "tax and growth" recommendations. The analysis also helps to identify the most severe "tax and growth" obstacles.
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  • Expand / Collapse Hide / Show all Abstracts Making Growth-oriented Tax Reforms Happen

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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.
    • Strategies for Successfully Implementing Growth-oriented Tax Reforms
      Policy makers can follow certain strategies to make growth-oriented tax reform happen. These strategies help them overcome or circumvent obstacles to tax reform and allow policy makers to reconcile the different efficiency, fairness and wider tax policy objectives. Even though these strategies do not offer a menu that automatically can be applied to all possible tax reforms in OECD countries, the analysis that follows will offer insights that policy makers may find useful in facing the challenging task of implementing growthoriented tax reforms.
    • Tax Design Considerations
      Chapter 5 discusses in more detail to which degree it is optimal to implement the "tax and growth" recommendations discussed in the first chapter of this report. The chapter mainly focuses on the implementation of tax-cut-cum base broadening reforms with respect to property, consumption, personal and corporate income taxes. The discussion in this chapter clarifies that the "tax and growth" recommendation to broaden the different tax bases does not necessarily imply that it would be optimal to abolish all tax expenditures. The growthoriented VAT base broadening recommendation, for instance, does not exclude that some goods and services receive a different tax treatment, either by taxing them at reduced rates or by not including them in the tax base. Note, however, that this analysis is not an attempt to undermine the "tax and growth" recommendations. On the contrary, a nuanced analysis of the pros and cons of specific growth-oriented tax reforms might reduce some of the (mainly political) obstacles against these reforms. In addition, the analysis will present and discuss also tax-specific strategies that might help overcoming the obstacles against the implementation of the "tax and growth" recommendations.
    • Taxation, Economic Growth and Sustainable Tax Revenues
      The tax and growth recommendations as well as the strategies to overcome the growthoriented tax reform obstacles are of special interest because of the global financial and economic crisis. On the one hand, it is sometimes argued that the crisis might facilitate tax reform. The political economy obstacles against fundamental tax reform might be easier to overcome during a crisis, especially because of the increased pressure to raise more tax revenue in order to restore public finances and because of the pressing need to tackle the economic problems and to put the economy back on a high-growth path.
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  • References
  • Annex A
    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.
  • Annex B
    This annex shows Section 3 and 4 of the joint ECO/CTP Tax and Economic Growth Study. The first section of that Working Paper is included as Chapter 1 and Section 2 is used as input for Chapter 4 of this report.
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