Developed Countries Need Tax Reforms

December 9, 2010 International Tax Cooperation

Four more countries commit to OECD tax standardsThe Organization of Economic Cooperation and Development is urging governments to carry out tax reforms in order to improve economic performance and raise tax revenues without sacrificing future growth potential.

On December 8th the Organization for Economic Cooperation and Development (OECD) released its latest Tax Policy Brief, which outlines a series of potential steps that could be taken by governments around the world to improve their respective economic performances and address the historically high levels of debt and ever increasing budget deficits. According to the OECD, governments are increasingly investigating the feasibility of raising corporate income and personal income taxes to boost tax revenues. However, hiked tax rates are a potential disincentive for workers’ productivity or for the investment processes. To alleviate the distortions caused by increased taxes, the OECD is suggesting that governments follow a number of reform steps that ensure sustainable and healthy revenue growth.

The OECD suggests that governments alter their tax focus to raise more revenues from taxes on consumption and residential property. This move would allow personal income and corporate income taxes to be maintained at low levels, encouraging economic growth. The OECD specifically suggests governments to concentrate on maintain low corporate income tax rates.

National tax bases should be broadened, to raise revenues from a wider net of activities, allowing all tax rates to be kept at low levels. A reevaluation of the tax base will also allow a government to reconsider and restructure its current set of tax rates, while creating a more concise and efficient system. Further monetary savings could be made during the restructuring by allowing the government to withdraw some targeted tax relief schemes that are no longer applicable or economically worthwhile.

Governments were also recommended to examine their approaches to environmental taxation, with the OECD insisting that a “green tax system” is essential to an environmental growth strategy. Additionally, “green” taxation has the potential to raise enough revenues to supplement any other reforms that a government may wish to carry out.

The Tax Policy Brief also suggested that governments concentrate on improving tax compliance. Decreased tax evasion would allow tax authorities to lower tax rates even further, improve budgetary standings, and result in a fairer tax system for all taxpayers. The brief claimed that through the use of several OECD tax compliance initiatives tax authorities round the world have been able to recover billions of euros in tax revenues.

Photo by OECD