OECD Tax Policy Studies: Tax Policy Reform and Economic Growth

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.



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.

Table of Contents
Executive Summary
Part I Taxation and Economic Growth Recommendations and Reforms in OECD Countries
Chapter 1. Growth-oriented Tax Policy Reform Recommendations
1.1. Broad policy options for reforming the overall tax mix
1.2. Possible avenues for tax reforms to enhance the performance of labour utilisation, investment and productivity
Chapter 2. How Do Trends in the Composition of Tax Receipts and in Tax Rates Compare with the “Tax and Growth” Recommendations?
2.1. The level of taxation.
2.2. The tax mix
Part II Making Growth-oriented Tax Reforms Happen
Chapter 3. Obstacles to Fundamental Tax Reforms
3.1. Obstacles to fundamental tax reforms: issues of tax policy design
3.2. Tax administration issues
3.3. Political economy and institutional factors
Chapter 4. Strategies for Successfully Implementing Growth-oriented Tax Reforms
4.1. A clear strategic vision and solid tax policy analysis
4.2. Framing tax policy debates when equity issues arise
4.3. Advancing reform and ex ante constraints
4.4. Ex post evaluation and international dialogue
4.5. The proper timing of reform
4.6. “Bundling” reforms into comprehensive packages
4.7. Incremental growth-oriented tax reform approaches.
4.8. Transitional arrangements
4.9. The quality of the institutions charged with reform design and implementation.
4.10. Communication and the transparency of tax reform processes
4.11. Co-ordination of reform across levels of government
4.12. Strong leadership
Part III Further Analysis of the “Tax and Growth” Tax Policy Recommendations
Chapter 5. Tax Design Considerations
5.1. Tax base broadening versus the use of tax expenditures
5.2. VAT base broadening
5.3. Recurrent taxes on immovable property
5.4. Corporate income tax reform strategies
5.5. Personal income tax reform strategies
Chapter 6. Taxation, Economic Growth and Sustainable Tax Revenues
6.1. Implemented tax reforms during and after the crisis
6.2. The tax and growth recommendations are unchanged
References
Annex A. The 2010 Tax Reform Process in Denmark
Annex B. The OECD Tax and Growth Study
Tables
2.1. Revenue shares of the major taxes in the OECD area
2.2. The evolution of standard value-added tax rates
2.3. Taxation of residential property, 2002
2.4. Taxes on capital income at the household level in selected OECD countries (2004/2005)
2.5. Standard and reduced (targeted) corporate income tax rate for small businesses (2010)
B.1. Estimated effects of labour taxes on TFP: Industry-level
B.2. Estimated effects of corporate taxes on investment: Firm-level
B.3. Estimated effects of corporate taxes on investment: Industry-level
B.4. Estimated effects of corporate taxes on TFP: Firm-level
B.5. Estimated effects of corporate taxes on TFP: Industry-level
B.6. Estimated cross-country effects of the tax mix on long-run GDP per capita