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Tax Reform: An International Perspective

Tax Reform: An International Perspective. OECD-IEF seminar on Tax Reform Trends Madrid May, 16, 2005 By Jeffrey Owens Organisation for Economic Cooperation and Development. OECD Member Countries. OECD Member countries. Countries which engage in Tax Dialogue. Outline.

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Tax Reform: An International Perspective

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  1. Tax Reform: An International Perspective OECD-IEF seminar on Tax Reform Trends Madrid May, 16, 2005 By Jeffrey Owens Organisation for Economic Cooperation and Development

  2. OECD Member Countries OECD Member countries Countries which engage in Tax Dialogue

  3. Outline • Introductory Comments • Overview of OECD Tax Systems • Recent Tax Reform Initiatives • Alternatives of taxing income • Concluding Comments

  4. Tax Revenue as % GDP (2003) 50 EU-15 AVG 40.6 40 OECD AVG 36.5 30 20 10 0 Italy Spain Korea France Turkey Austria Ireland Canada Norway Japan * Finland Mexico Iceland Poland * Belgium Sweden Germany Denmark Greece * Hungary * Australia * Portugal * Switzerland Luxembourg Netherlands New Zealand United States Czech Republic United Kingdom Slovak Republic * Note: countries have been ranked by their total tax to GDP ratios. *) 2002 figures

  5. Change in tax as % of GDP 18 16 14 12 10 8 6 4 2 0 -2 -4 -6 -8 Italy Spain Korea France Mexico Ireland Austria Turkey Iceland Finland Norway Canada Belgium Sweden Japan (*) Germany Denmark Greece (*) Poland (*) Australia (*) Portugal (*) Hungary (*) Switzerland Netherlands Luxembourg New Zealand United States Czech Republic United Kingdom Slovak Republic (*) 1975 to 2003 Tax as % GDP

  6. Source of tax revenue, 2003 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Spain EU-15 OECD Ireland France Mexico Canada Japan (*) Poland (*) United States Slovak Rep. (*) United Kingdom Personal income Corporate income Social security contributions & payroll General consumption Other *) 2002 figures

  7. Top personal and corporate tax rates 2004 60.0 Countries ranked by top PIT Rate Top CIT Rate Top PIT Rate PIT – EU average = 48 50.0 PIT – OECD average = 44 40.0 CIT – EU average = 31 % 30.0 CIT – OECD average = 30 20.0 10.0 0.0 Italy Spain Korea Japan Turkey France Austria Poland Ireland Greece Norway Iceland Mexico Finland Canada Hungary Belgium Sweden Denmark Portugal Australia Germany Netherlands Switzerland United States Luxembourg New Zealand Czech Republic United Kingdom Slovak Republic Includes Central, State and Local Taxes

  8. The tax wedge – income tax and social security contributions as % of labour costs 60 50 40 % 30 20 10 0 Italy Spain Korea Japan Turkey France Austria Poland Ireland Greece Iceland Norway Mexico Canada Finland Hungary Sweden Belgium Portugal Denmark Australia Germany Netherlands Switzerland United States Luxembourg New Zealand Czech Republic United Kingdom Slovak Republic Personal Income Tax Employee Social Security Contr. Employer Social Security Contr. and payroll taxes Single individual at average earnings 2004

  9. Top statutory personal plus corporate tax rates on dividend income(1), 2003 70.0 65.0 EU15 Avg 47.9 60.0 OECD Avg 46.4 55.0 50.0 45.0 40.0 % 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 Italy Spain Korea Japan Turkey Poland Ireland Iceland Austria France Finland Greece Mexico Norway Canada Sweden Belgium Hungary Portugal Australia Germany Denmark Switzerland Luxembourg Netherlands New Zealand United States Czech Republic United Kingdom Slovak Republic 1) This is the overall (corporate plus personal) top marginal tax rate on distribution of domestic source profits to a resident individual shareholder, taking account of imputation systems, dividend tax credits etc.

  10. R&D Tax Treatment of Large Firms, 2001/2002 0.6 0.4 Spain Portugal Australia Canada Austria Korea Denmark United Kingdom Netherlands United States France Mexico Japan Ireland Belgium Finland Switzerland Iceland Greece Sweden Norway New Zealand Germany Italy Comparative R&D tax incentives calculated as one minus B-index 0.2 0.0 -0.2

  11. VAT – tax rates and revenues (1) 30 25 20 15 10 5 0 OECD SPAIN ITALY KOREA FRANCE TURKEY MEXICO CANADA POLAND SWEDEN AUSTRIA ICELAND NORWAY IRELAND FINLAND BELGIUM GERMANY DENMARK JAPAN (2) GREECE (2) HUNGARY (2) PORTUGAL (3) LUXEMBOURG NETHERLANDS NEW ZEALAND SWITZERLAND AUSTRALIA (2) UNITED STATES CZECH REPUBLIC UNITED KINGDOM SLOVAK REPUBLIC (2) VAT/sales tax revenues as % of total tax revenues VAT standard rate 2003 • Countries ranked from highest VAT standard rate to lowest rate. The comparisons include all levels of government • 2) 2002 revenue figure 3) 2001 revenue figure

  12. Revenues from environmentally related taxes in per cent of GDP 5.0 1994 2001 4.5 4.0 3.5 3.0 Per cent of GDP 2.5 2.0 1.5 AUS BEL CZE FIN GER HUN IRL JAP LUX NET NOR POR ESP SWI UK 1.0 AUT CAN DEN FRA GRE ISL ITA KOR MEX NZE POL SVK SWE TUR US 0.5 0.0 Italy Japan Korea Poland France Spain Iceland Finland Ireland Mexico Sweden Canada Greece Austria Turkey Norway Belgium Portugal Hungary Denmark Germany Australia Switzerland Netherlands Luxembourg New Zealand United States United Kindom Czech Republic Slovak Republic Weighted average Arithmetic average

  13. Since mid 1980s a Wave of Tax Reform in All OECD Countries Driven by: • A fairer tax system • similar treatment for similarly placed taxpayers (horizontal equity) • achieve desired allocation of tax burden by income level (vertical equity) • improved compliance • An efficient and competitive tax system • promoting a competitive and flexible fiscal environment • making work, savings and investment pay • A simpler tax system • reduce compliance costs for taxpayers • reduce administrative costs for tax authorities • The need for revenues • Protecting the environment through tax and related measures • Balance between revenues and expenditures of each level of government • Dealing with the restraints imposed by the ECJ

  14. Main Characteristics of Tax Reform in OECD Countries • Lower tax rates; broader tax bases • Move towards flatter personal income taxes • Move towards dual income taxes (lower rates on capital than on labour) • Integrate social benefits into the tax system (earned income tax credits) • Relief for taxation of dividend income • Change in mix of income and consumption taxes (VAT) • Reduction of complexity • Introduction of market based environment instruments

  15. Three Approaches to Taxing Income • Comprehensive income taxes • Dual income taxes • Flat taxes

  16. Flat Tax Rate Systems Disposable income (YD) No tax (Y=YD) Single rate, no basic tax allowance Single rate with basic tax allowance Single rate with refundable tax credit (basic income) Basic income Basic allowance Gross income (Y)

  17. Successful Tax Reform Requires Administrative Reform • Tax administrations face challenges due to globalization • proliferation of tax shelters and abuse of tax havens • changing attitudes towards compliance • The response of OECD tax administrations • move to integrated tax administrations • administration by segment/function rather than by type of tax • move to cumulative withholding and information reporting • improved risk management • better access to information • Use of new technologies • Good compliance requires good taxpayer service and effective enforcement • Putting tax compliance on the good corporate governance agenda

  18. Key Elements for successful tax reform: Experience of OECD Countries • Political champions who can mobilize popular support • Clear and well-articulated principles • A package approach, with gains and pains intricately linked • Policy reform matched by administrative reform • Limited time between announcement and full implementation • Transition rules matter • Education and guidance package available from Day One

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