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Tax Policy Reform and Economic Growth

image of 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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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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