The OECD report Tax Policy Reform and Fiscal Consolidation notes that taxes can be a disincentive to work, invest and innovate, with adverse effects on economic growth and welfare. However, it argues that those effects can be minimised even when additional revenues must be raised.
Across OECD countries, the report advocates for:
- the tax structure to raise additional revenue from consumption and residential property tax rather than an increase in personal or corporation tax;
- a broadening of the tax base to enable rates to be kept low;
- a ‘greening’ of the tax system in order to achieve environmental targets; and
- measures to counter offshore non-compliance so that all citizens pay a fair share of taxes.
The report stresses that tax reforms only work if taxpayers agree that the reforms are fair and that reforms which recycle some of the additional revenue to assist poorer households can be helpful. In a tax policy document, it notes that the final decision on taxation measures is a political one but an economic analysis is a useful tool that can help garner the political and social support needed for a particular base-broadening measure.
It argues for the periodic assessment of tax reliefs to evaluate whether their benefits outweigh their costs and notes that data suggest a wide range of tax concessions are still available in many countries particularly on personal income tax and VAT. It considers that tax provisions in many countries are not cost-effective ways of achieving either fairness or efficiency objectives. The major tax expenditures consist of provisions for owner-occupied housing, retirement savings, children and families, social benefits, food and necessities, small businesses and R&D expenditures.
It argues that the design of tax reliefs, timing considerations and the tax treatment of close-substitute goods/services play a key role on the cost effectiveness of targeted tax provisions. It notes that obstacles to reform include the lobbying of influential interest groups, and the presentation of policy discussions on the abolition of a given tax relief in isolation rather than as part of a wider package. Presenting reform measures in isolation to one another means that those who would lose the tax relief may lobby on the issue while members of the more diffuse wider population who would benefit from the abolition of a tax relief are more inclined to silence.