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We read so you don’t have to: Tax policy lessons from the OECD

By Ezra Klein,

I spent some time reading the Organization of Economic Cooperation and Development’s working paper (pdf) on tax lessons drawn from the OECD’s 34 member countries. Here are the parts that caught my eye:

— “Corporate taxes are found to be most harmful for growth, followed by personal income taxes, and then consumption taxes. Recurrent taxes on immovable property appear to have the least impact. A revenue neutral growth-oriented tax reform would, therefore, be to shift part of the revenue base from income taxes to less distortive taxes such as recurrent taxes on immovable property or consumption.”

— “Despite cross-country differences in the tax structure, most OECD countries rely on three main sources of tax revenues: personal and corporate income taxes, social security contributions and taxes on goods and services. During the past three decades there has been a reduction in the share of tax revenues accounted for by personal income tax while the revenue shares of corporate income taxes and social security contributions have increased. The share of consumption taxes in total revenues has declined, with the mix of taxes on goods and services changing noticeably towards greater use of general consumption taxes (mainly VAT) and away from taxes on specific goods and services.

— “Between 1975 and 2006, there has been a persistent and largely unbroken upward trend in the ratio of tax to GDP across the OECD area increasing on average in the OECD by over six percentage points of GDP . . . the increase for the United States was less than three percentage points.”

— “The United States is now the only OECD country that does not use a VAT.”

— “There has also been growing interest in the use of environmentally-related taxes, with several countries introducing new taxes to deal with specific environmental problems. However, there has not been a general upward trend in their revenues as a proportion of GDP.”

— “One of the most marked changes in taxation over the past 25 years has been the steep decline in the top rates of personal income tax in OECD countries. The OECD unweighted average has fallen from 67% in 1981 to 49% in 1994 and 43% in 2006. The largest reductions are observed in Japan (- 43 percentage points), Portugal (- 42.4 percentage points), the United States (- 34 percentage points) and Sweden (- 31 percentage points). However, in general, this has not been matched by a reduction in the average income tax levied on the labour incomes of average production workers, where the OECD unweighted average has fallen by less than five percentage points from slightly below 19% in 1985 to slightly above 14% in 2004.”

— “The concentration of personal income tax cuts at the top of the income distribution has been reflected in a reduction of the progressivity of the personal income tax in most OECD countries. . . . Since 1995, the largest reductions (more than 8 percentage points) are observed in Canada, Iceland, Ireland, France and the Netherlands. This measure does not take into account the impact of tax changes on lower and higher-incomes. In fact in recent years, the tax system has become slightly more progressive when the average tax burden on low and high-income earners is compared. This is mainly the result of the introduction of in-work tax credits in many countries (e.g.Finland, France, the United Kingdom and the United States), which have reduced the tax burden on low-income earners more than the reduction in the tax burden on high-incomes caused by the reduction in top statutory income tax rate.”

— “In the OECD area, the unweighted average corporate tax rate has dropped from 47% in 1981 to 40% in 1994 and 27.6% in 2007. The corporate tax rate reductions have been partly financed by corporate tax base broadening measures in many countries — for instance through the implementation of less generous tax depreciation allowances, the reduction in the use of targeted tax provisions and stricter corporate tax enforcement policies enacted by OECD countries. As the rate cuts were not fully financed by reductions in depreciation allowances, effective tax rates also fell although, as noted earlier, corporate tax revenues have tended to increase reflecting, inter alia, rising corporate profits.”

— “On average, the top marginal tax rate on dividends in OECD countries was reduced by more than 7 percentage points between 2000 and 2007 to 43% (Figure 10). The largest part of this reduction is attributable to the reduction in the corporate income tax rate. The part of the tax that is paid as corporate income tax has decreased by more than 5 percentage points to 27.6% on average in the OECD. A smaller part of the reduction in the statutory tax burden on dividends is due to the decrease in personal income tax rates.”

— “A revenue neutral growth-oriented tax reform would be to shift part of the revenue base from income taxes to less distortive taxes. Taxes on residential property are likely to be best for growth. However, the scope for switching revenue to recurrent taxes on immovable property is limited in most countries both because these taxes are currently levied by sub-national governments and because these taxes are particularly unpopular. Hence, despite the advantages of drawing on an immovable tax base in a period of globalisation, few countries manage to raise substantial revenues from property taxes, with returns on housing generally taxed more lightly than returns on other assets.”

— “In practical policy terms, a greater revenue shift could probably be achieved into consumption taxes. However, with consumption taxes being less progressive than personal income taxes, or even regressive, a shift in the tax structure from personal income to consumption taxes would reduce progressivity. Similarly, shifting from corporate to consumption taxation would increase share prices (by increasing the after-tax present value of the firm) and wealth inequality as well as increasing income inequality by lowering capital income taxation. Such tax shifts therefore imply a non-trivial trade-off between tax policies that enhance GDP per capita and equity. Looking within income taxes, relying less on corporate income relative to personal income taxes could increase efficiency. However, lowering the corporate tax rate substantially below the top personal income tax rate can jeopardize the integrity of the tax system as high-income individuals will attempt to shelter their savings within corporations.“

— “As women tend to be more responsible for child care or other non-market activities (providing therefore a closer substitute for market work than is the case for men) the labour supply decision of women tends to be more responsive to taxes than that of men.”

— “There may also be gains, both in the quantity and the quality of labour supply, from reducing the progressivity of the personal income tax schedule. Estimates in this study point to adverse effects of highly progressive income tax schedules on GDP per capita through both lower labour utilisation and lower productivity (see below) partly reflecting lesser incentives to invest in higher education. Again, this implies a potential trade-off between growth-enhancing tax policies and distributional concerns.”

— “Industry-level evidence covering a sub-set of OECD countries suggests that there is a negative relationship between top marginal personal income tax rates and the long-run level of total factor productivity.”

— “Evidence in this study suggests that lowering statutory corporate tax rates can lead to particularly large productivity gains in firms that are dynamic and profitable, i.e. those that can make the largest contribution to GDP growth. It also appears that corporate taxes adversely influence productivity in all firms except in young and small firms since these firms are often not very profitable.”

— “There is a wide consensus that corporate taxation should avoid discouraging efficiency improvements and aim at ensuring neutrality and consistency, for instance, by not favouring some investment or firms at the expense of other, potentially more productive, investment or firms (e.g., Devereux and Sørensen, 2006). This would imply a reasonably low corporate tax rate with few exemptions. “

— “A widely-used policy avenue to improve productivity is to stimulate private-sector innovative activity by giving tax incentives to R&D expenditure. This study finds that the effect of these tax incentives on productivity appears to be relatively modest, although it is larger for industries that are structurally more R&D intensive. Nonetheless, tax incentives have been found to have a stronger effect on R&D expenditure than direct funding.”

— “Tax policies can do relatively little to enhance innovative activity.”

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