Tax Policy Reform and Economic Growth

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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.



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.


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