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Tax Reforms to Improve Economic Performance

Tax reforms to improve economic performance

Many governments are facing historic high levels of deficit and debt. Public spending has risen and they are taking in less money as tax revenues fall - more than 10% in some countries.

Governments are attempting to consolidate their budgets, looking for the appropriate balance between expenditure cuts and revenue increases. The OECD's "Tax Policy Reform and Fiscal Consolidation" says that for tax regimes to support sustainable economic growth, governments must decide the right way to raise additional tax revenues.

Taxes can be a disincentive to work, invest and innovate, with adverse effects on economic growth and welfare. But these such distortions can be minimised: * Change the overall tax structure to raise more revenue from taxes on consumption and residential property tax and less from personal and corporate income taxes; * Broaden tax bases to enable rates to be kept as low as possible; * A "green" tax system, crucial to a Green Growth strategy, will achieve environmental objectives and the additional revenues raised may facilitate wider growth-oriented tax reforms; * Ensuring that all citizens pay their fair share of taxes contributes to fiscal consolidation. OECD initiatives to counter offshore non-compliance are yielding billions of euros in extra tax revenues.

These arguments are further explored in two Tax Policy Studies.

Tax Policy Study No. 19 details the rationale for tax breaks, asks whether they are still justified, and cites case studies such as VAT reduced rates and tax reliefs for house buyers. It notes that "tax expenditures" are often entrenched in tax regimes and urges countries to evaluate whether they are worthwhile.

Tax Policy Study No. 20 recommends ways to make taxes less distortive and more growth-friendly. It also looks at the "political economy" of tax reform - why governments are able to design, legislate and implement growth-oriented tax reforms in some circumstances and not others and how to overcome obstacles.

Tax reforms will only work if taxpayers agree they are fair. For example, reforms that recycle some of the additional revenues to poorer households can be helpful. Governments must consider the distributional impact of the whole tax reform package - balancing the impact on taxpayers against future growth prospects and ensuring that all taxpayers continue to pay their fair share.

More information about these publications, including executive summaries, is available at The OECD will release new data on tax revenues and tax-to-GDP ratios on Wednesday 15 December in the 2010 edition of the annual "Revenue Statistics".


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