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.
Few people like to pay tax and even fewer like to see their existing tax burdens rise further. Many governments have thus found that the most propitious time for tax reform is when the state public finances allows an overall reduction in taxes or, failing this, a revenue-neutral reform that allows some compensating cuts for politically sensitive groups of taxpayers. At present, many countries are not in such a fortunate position. The need to undertake fiscal consolidation strategies over the medium term leaves little room for manoeuvre to finance any tax reductions. In many cases, countries’ assessment of the appropriate balance between cutting public expenditure and raising taxes means that tax revenues will need to be increased.