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Choosing a Broad Base - Low Rate Approach to Taxation

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Many countries will likely face the need to increase tax revenues, as part of fiscal consolidation, during the next few years. But how is this best done? And what are the considerations when choosing between raising tax rates and broadening the tax base by scaling back or abolishing targeted tax provisions (such as allowances, exemptions and preferential rates)? This report aims to answer such questions by taking a close look at the economic and political factors that influence governments’ tax decisions. 

Although many countries have broadened their tax bases over the past 30 years, targeted tax provisions, notably tax expenditures, continue to be significant.  Like public expenditure, targeted tax reliefs mean that (other) tax rates need to be higher in order to finance these reliefs. This report therefore discusses whether such tax provisions continue to be worthwhile. It includes an annex covering country-specific revenue forgone estimates of tax expenditures for selected OECD countries.  

This report also identifies political factors, including the lobbying of influential interest groups, as the main obstacles to base-broadening reforms, and it considers how reforms can be best packaged and presented to overcome such obstacles.

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Introduction

Over the past 20-30 years, many countries have implemented tax reforms that have broadened tax bases and lowered rates. In general, such reforms should reduce the extent to which tax systems distort work, investment and consumption decisions, increasing output and enabling improvements in social welfare. Nevertheless, targeted tax provisions, notably tax expenditures, continue to be significant in many countries and in some countries may be increasing in number and significance. This report discusses the various economic and political considerations that drive governments’ decisions when considering the choice between broadening the tax base and using targeted tax reliefs.

English

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