Transcript Tax systems and growth

Tax and Economic
Growth
Chris Heady
Economics Department
University of Kent
GES Summer School
University of Kent
13th-15th July 2009
www.kent.ac.uk
Today’s presentation
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How the tax system affects growth
Different dimensions of tax policy
Empirical results on the tax mix
Empirical results on income tax design
The tax and growth ranking
Other key policy issues
The trade-off between growth and equity
‹#›
Tax systems and growth
Determinants
(Drivers of growth)
Proximate sources
(growth accounting)
Quantity
Labour
Economic
growth
Capital
Multi-factor
productivity
Markets and institutions;
policies
Quality
Hours
worked
Skill
composition
Machine
hours
Asset
composition;
embodied
technology
Efficiency; disembodied
technology;
organisational innovation
Participation decision (E)
Working time (H)
Investment in human capital (HK)
-- Investment in fixed capital (K)
-- Investment in innovation (e.g.
R&D)
-- Exposure to trade FDI
-- Allocative efficiency (Alloc)
Entrepreneurship (Entr)
Corporate taxes
Personal income taxes
Social security contributions
Consumption taxes
Taxes on property and
wealth
Benefit systems
Education and training
Labour market regulation
Product market regulation
Barriers to trade and
investment
Public funding of business
R&D & R&D tax subsidies
Financial system regulation
Others
‹#›
Growth or level effects?
• It is hard to distinguish between effects of
taxes that increase the level of GDP from
those that increase the growth of GDP
• Even changes that only increase level of
GDP have a short- run effect on growth
• Tax effects on long-run growth are most
likely through productivity (TFP) and
investment – endogenous growth theory
‹#›
20
20
20
20
07
06
05
04
03
02
01
00
99
98
97
EU15 average
20
20
20
20
19
19
96
95
94
93
92
91
90
United States
19
19
19
19
19
19
19
89
88
87
86
85
Denmark
19
19
19
19
19
84
83
82
81
80
79
78
77
76
75
Australia
19
19
19
19
19
19
19
19
19
19
19
Tax-to-GDP Ratios
60
OECD average
50
40
30
20
10
0
‹#›
Revenue Shares in Selected Countries,
2006
Personal Income
Property
Corporate Income
General Consumption
Social Security
Specific Consumption
Payroll
Other
100%
80%
60%
40%
20%
he
rla
nd
ew
s
Ze
al
an
d
N
or
w
ay
Po
rtu
ga
l
Sp
ai
n
Sw
e
Sw den
itz
U
er
ni
la
te
nd
d
Ki
ng
U
do
ni
m
te
d
St
O
EC
at
es
D
av
er
EU
ag
15
e
av
er
ag
e
N
M
ex
ic
o
N
et
pa
n
Ja
Ita
ly
Au
st
ra
lia
C
an
ad
a
Fr
an
ce
G
er
m
an
y
H
un
ga
ry
Ire
la
nd
0%
‹#›
Statutory Corporate Tax Rates
Top CIT rate 2000
50
Top CIT rate 2008
OECD average in 2000 and 2008
40
30
20
10
JPN
US
FRA
BEL
CAN
LUX
GER
AUS
NZL
SPA
MEX
NOR
SWE
UK
ITA
KOR
PRT
FIN
NLD
AUT
DNK
GRC
SWI
CZE
HUN
TUR
POL
SVK
ICL
IRL
0
‹#›
Overall Statutory Rates on Dividends
Overall top tax rate on dividend income 2000
Overall top tax rate on dividend income 2008
80
70
OECD average in 2000 and 2008
60
50
40
30
20
10
DNK
FRA
US
SWE
CAN
KOR
GER
IRL
NOR
HUN
AUS
UK
JPN
NLD
LUX
BEL
AUT
ITA
SPA
SWI
PRT
FIN
NZL
POL
TUR
CZE
MEX
GRC
ICL
SVK
0
‹#›
Decline in Imputation
• European countries have reduced shareholder relief,
which is not based on corporate taxes paid.
• Belgium has introduced an ACE system.
• However, US has introduced shareholder relief for both
dividends and capital gains.
• Small country model implies that imputation does not
reduce cost of capital – simply a subsidy for domestic
shareholders – but might do for SMEs.
• US is a large country, so perhaps shareholder relief is
rational for them.
‹#›
Top statutory personal income tax rates on
wage income
‹#›
Tax wedge for single individual at
average earnings
2000
2007
60
OECD average tax wedge single taxpayer at 100% AW
(0 children) in 2007 (reduction of 0.2 pct. point since 2000)
50
40
30
20
10
BEL
HUN
GER
FRA
AUT
ITA
SWE
NLD
FIN
CZE
POL
TUR
GRC
DNK
SPA
SVK
LUX
NOR
PRT
UK
CAN
US
SWI
JPN
ICL
AUS
IRL
NZL
KOR
MEX
0
‹#›
Design Trends in Personal Income Tax
• Dual or ‘semi-dual’ income tax systems that tax some
or all capital income at lower rates than labour income.
• ‘Flat taxes’ – these have typically taxed both capital
and labour income at the same rate and have an
exemption limit, after which the single rate applies.
• ‘Making work pay’ policies that involve in-work tax
credits and/or reductions in employer social security
contributions for low-paid workers.
‹#›
Standard rates of Value Added Tax and
share of total tax revenues
VAT revenue as % of total tax revenues (2006)
VAT standard rate (2007)
30
OECD average rate (2007) and revenues (2006)
25
20
15
10
5
US
DNK
NOR
SWE
ICL
FIN
POL
BEL
IRL
PRT
AUT
HUN
ITA
FRA
CZE
GER
GRC
NLD
SVK
TUR
UK
SPA
LUX
MEX
NZL
AUS
KOR
SWI
CAN
JPN
0
‹#›
VAT Revenue Ratios (VRRs)
Difference
Standard VAT
rate (2005)
1976
1980
1984
1988
1992
1996
2000
0.47
0.60
0.51
0.52
0.44
0.60
0.61
0.50
0.60
0.48
0.53
0.58
0.64
0.45
0.70
0.65
0.68
0.31
0.60
1.00
0.67
0.42
0.62
0.46
0.53
0.52
0.78
0.59
0.50
0.57
2003
0.56
0.59
0.47
0.51
0.42
0.60
0.60
0.49
0.55
0.48
0.46
0.53
0.62
0.41
0.68
0.74
0.72
0.32
0.57
1.09
0.56
0.43
0.56
0.54
0.53
0.53
0.75
0.63
0.50
0.57
2005 1996-2005
0.10
0.57
0.02
0.60
0.03
0.50
0.04
0.52
0.15
0.59
0.04
0.62
0.06
0.61
0.00
0.51
-0.06
0.54
0.04
0.46
0.05
0.49
0.08
0.62
0.15
0.68
0.00
0.41
0.00
0.72
0.10
0.71
0.24
0.81
0.07
0.33
0.04
0.61
0.04
1.05
-0.03
0.58
0.07
0.48
-0.10
0.48
0.07
0.53
0.11
0.56
0.05
0.55
0.05
0.76
-0.02
0.53
-0.02
0.49
0.04
0.58
10.0
AUSTRALIA (b)
0.58
0.59
0.61
0.63
0.65
0.65
20.0
AUSTRIA
0.47
0.49
0.53
0.50
0.61
0.57
21.0
BELGIUM
0.48
0.44
7.0
CANADA (c)
0.44
19.0
CZECH REPUBLIC
0.58
0.55
0.60
0.60
0.61
0.64
25.0
DENMARK
0.54
22.0
FINLAND
0.51
0.53
0.61
0.62
0.69
0.64
19.6
FRANCE
0.60
0.62
0.50
0.52
0.57
0.56
16.0
GERMANY
0.42
0.45
0.44
18.0
GREECE
0.43
0.30
25.0
HUNGARY
0.54
0.63
24.5
ICELAND
0.53
0.46
0.43
0.45
0.21
0.30
21.0
IRELAND
0.40
0.39
0.42
0.40
0.43
0.46
20.0
ITALY
0.72
0.70
5.0
JAPAN
0.62
0.66
0.54
0.56
0.53
10.0
KOREA
0.57
0.47
0.57
0.56
0.56
0.60
15.0
LUXEMBOURG
0.26
0.34
0.28
0.30
0.36
15.0
MEXICO
0.57
0.59
0.56
0.51
0.54
0.49
19.0
NETHERLANDS
1.00
0.98
0.91
12.5
NEW ZEALAND
0.60
0.52
0.69
0.63
0.66
0.66
25.0
NORWAY
0.41
22.0
POLAND
0.57
0.51
0.44
19.0
PORTUGAL
19.0
SLOVAK REPUBLIC (d)
0.45
0.57
0.59
16.0
SPAIN
0.50
0.40
0.42
0.38
0.41
0.45
25.0
SWEDEN
0.70
7.6
SWITZERLAND
0.55
0.56
0.59
18.0
TURKEY
0.50
0.49
0.54
0.50
0.46
0.47
17.5
UNITED KINGDOM
0.54
0.53
0.54
0.51
0.52
0.54
17.7
Unweighted average
Source: OECD (2008c)
(a) VAT Revenue Ratio = (VAT revenue)/([consumption - VAT revenue] x Standard VAT rate)
(b) For Australia the differencial VRR is calculated on the period 2000-2005 since GST was introduced in 2000
(c) Calculation for Canada is for federal VAT only
(d) For Slovak Republic, the differential VRR is calculated on the period 2000 - 2005 since data is not available for 1996
‹#›
US
UK
TUR
SWI
SWE
SPA
SVK
PRT
POL
NOR
NZL
2000
NLD
MEX
LUX
1995
KOR
JPN
ITA
IRL
ICL
HUN
GRC
GER
FRA
FIN
DNK
CZE
CAN
BEL
AUT
AUS
Per cent of GDP
Revenues from environmentally-related
taxes
2005
6
5
4
3
2
1
0
‹#›
The evolution of property taxes
(as a percentage of GDP)
2.0%
1.8%
1.6%
Taxes on f inancial and capital
transactions
1.4%
1.2%
Estate, inheritance and gif t
taxes
1.0%
Recurrent taxes on net wealth
0.8%
0.6%
Recurrent taxes on
immovable property
0.4%
0.2%
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
1979
1978
1977
1976
1975
0.0%
‹#›
Au
st
ra
l
Au ia
st
Be ria
lg
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C
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ch na
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Fi rk
nl
an
Fr d
a
G nce
er
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G y
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H ce
un
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Ic r y
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Lu Ko
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bo
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M g
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N erla o
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Ze ds
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N d
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Po y
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Sl
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ak rtu
R gal
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ub
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Sp
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Sw in
Sw ed
itz en
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T
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r
d
K ke
U ing y
ni
te do
EU d S m
ta
1
O 5 a tes
EC ve
D rag
av e
er
ag
e
The pattern of property taxes as a share
of GDP, 2006
5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
Immovable
Transactions
Other
‹#›
Aims of the OECD study
• Does the tax structure, as opposed to the
level of taxes, matter for GDP per capita
and its rate of growth?
• To what extent do different tax provisions
affect investment and productivity (TFP)?
• Does the industry/firm structure matter
for the impact of taxes?
‹#›
Empirical results: Tax mix
Macro findings suggest a “ranking” of
taxes in terms of their negative impact on
GDP per capita: property taxes
(particularly recurrent taxes on
residential property) < consumption
taxes < personal income taxes
(including social security contributions) <
corporate income taxes.
‹#›
Personal income taxes
• Progressive personal income taxes reduce
growth
• High top marginal personal income tax rates
reduce productivity growth, especially in
industries with industries characterised by high
entry rates of new firms
• High social security contributions reduce
productivity growth, especially in labour
intensive industries.
‹#›
Corporate taxes: industry level
• Corporate taxes reduce investment by
increasing the user cost of capital.
• Corporate taxes reduce productivity and
seem to matter more in highly
profitable/risky industries.
• R&D tax incentives seem to increase
productivity and seem to matter more in
R&D intensive industries.
‹#›
Corporate taxes: firm level
• Statutory corporate taxes seem to have a
smaller negative impact on productivity
growth in firms that are both young and
small.
• Statutory corporate taxes seem to have a
stronger negative impact on productivity
growth in ‘dynamic’ firms, that are profitable
and experiencing rapid productivity growth.
‹#›
The tax and growth ranking 1
• Recurrent taxes on immovable property
can offset other tax preferences and
improve capital allocation
• Taxes on property transactions also
offset other tax preferences but discourage
reallocation of housing – and labour
• Other property taxes can also distort
capital allocation and savings
‹#›
The tax and growth ranking 2
• Consumption taxes can affect labour
supply but are mainly otherwise neutral,
especially VAT
• Personal income taxes are more harmful
because they are more progressive
(marginal tax > average tax) and because
they discourage savings
‹#›
The tax and growth ranking 3
• Corporate taxes are most harmful as they
discourage investment and productivity
improvements. They also reduce foreign
direct investment and increase compliance
costs. Finally, corporate taxes often have a
large number of distortionary tax
preferences for particular activities,
distorting the allocation of resources
‹#›
Other key policy issues
• Broadening the base of consumption taxes is
better for growth than increasing the rate.
• There is limited scope to improve growth by
using multiple consumption tax rates, and their
equity effects are best achieved by other
means.
• In-work tax credits can promote growth by
increasing participation rates, but care is
needed to contain costs and minimise adverse
effects on hours worked.
‹#›
Growth and equity
• Move from income to consumption taxes
generally seen as regressive
• Reducing progressivity, including cuts to
top rates of personal income tax, is
regressive
BUT:
• Residential property tax need not be
regressive
• Corporate income tax may fall on workers
‹#›
CONCLUSIONS
• Growth can be increased, at least in the
short-to-medium terms, by shifting away from
income taxes
• Recurrent taxes on immovable property are
the least harmful to growth
• It is necessary to design individual taxes well
in order to benefit most from any tax shift
• There is likely to be a trade-off between
growth and equity, but there may be
exceptions
‹#›