OECD Tax Policy Studies No. 02: Tax Burdens: Alternative Measures

Economics: Taxation
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Contents:

  • Global Taxes for Global Priorities
  • Introduction
  • Economic Roundup Spring 2004
  • International trends and comparisons
  • Introduction

    • He argues that annual data, at least at the state level, suffers from measurement error and misspecification of lagged effects and may prevent findings of a robust relationship between taxes and growth:. My analysis suggests that tax policies take time to work its full effects on the economy. When the specification is sufficiently general to pick up these effects, a negative relationship between taxes and income growth emerges.

    However, the tax burden measure does not include federal taxes, the burden of which is twice as large as the burden of state and local taxes. Also, the federal burden is extremely progressive, such that taxpayers in high income states face a much larger federal tax burden than do taxpayers in low income states. As mentioned, most recent studies distinguish between different types of taxes on the basis that they have different effects on the economy. Corporate and shareholder taxes should mainly affect investment and capital formation, while income taxes affect labor and saving by individuals as well as investment by non-corporate business owners.

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    3. Economic Roundup Spring 2004?
    4. 1. Introduction.
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    Corporate and personal income taxes are not neutral, as they represent essentially additional, double taxes on future consumption. These empirical studies typically find that corporate and personal income taxes are the most damaging to economic growth, followed by consumption taxes and property taxes. Mertens and Ravn do a Romer-style narrative analysis of post-war tax changes in the U. Particularly, they find a 1 percentage point cut in the average personal income tax rate raises real GDP per capita by 1.

    They find a 1 percentage point cut in the average corporate income tax rate raises real GDP per capita by 0.

    Global Taxes for Global Priorities

    The effect of the corporate tax is actually larger per dollar of revenue than that of the personal income tax, since the corporate tax raises about one-quarter of the revenue that the personal income tax does. They find that corporate taxes are the most harmful, followed by personal income taxes, consumption taxes, and, finally, property taxes, particularly property taxes levied on households rather than corporations.

    They look at twenty-one OECD countries from to and control for various factors including measures of physical and human capital accumulation, population growth, and time and country specific effects. They also control for the overall tax burden in each country as a share of GDP. This allows them to isolate the effect of different types of taxes based on the share of tax revenue that comes from each tax on a revenue- and spending-neutral basis. They also find progressivity of personal income taxes reduces economic growth.

    They find corporate taxes, both in terms of the statutory tax rate and depreciation allowances, reduce investment and productivity growth. Thus reducing top marginal tax rates may help to enhance economy-wide productivity in OECD countries with a large share of such industries…. Barro and Redlick construct a time series of average marginal income tax rates AMTR from one year prior to the advent of the federal income tax to , including federal and state income taxes as well as the social security payroll tax on employers and employees.

    In terms of multipliers, the tax multiplier is This implies that defense spending financed by additional tax revenue reduces GDP.

    Introduction

    Lee and Gordon look at seventy countries over the period to and find corporate taxes are robustly associated with lower economic growth, while other taxes do not have a robust statistical association. The high end of these estimates comes from the use of instrumental variables to control for reverse causality economic growth causing changes in tax rates. The authors also estimate the effects using panel data, which includes the variation over time as well as across countries, providing many more observations.

    Rather than using year by year variation, the authors average over five year periods, so as to smooth out business cycle effects and account for longer term effects of the variables. For the panel data they use ordinary least squares OLS regression as well as a fixed effects model that controls for country-specific factors. Their results suggest that a cut in the corporate rate of 10 points would raise annual GDP growth per capita by about 0. Again, the high end of these estimates comes from the use of instrumental variables.

    Specifically, they use neighboring tax rates as an instrumental variable to control for the effect of local economic growth on local tax rates.

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    7. International trends and comparisons.

    Lee and Gordon also provide some evidence that corporate taxes reduce growth by reducing entrepreneurial activity. Ferede and Dahlby update and confirm the results of Lee and Gordon, using data on statutory tax rates in the Canadian provinces over the period to , averaging over five year periods.

    Literature Review

    The authors note that this is a temporary boost, as their specification is based on a Neo-classical growth model which eventually returns to a steady state rate of growth determined by technological change. Non-intuitively, they find raising the sales tax rate increases growth, apparently because it tends to replace taxes on investment. While most growth studies compare countries, Ferede and Dahlby argue that subnational state comparisons make it easier to identify the effects of taxes on growth since states are more similar than nations. Canadian provinces also use similar tax bases, unlike many countries.

    Finally, Gemmell et al. This review of empirical studies of taxes and economic growth indicates that there are not a lot of dissenting opinions coming from peer-reviewed academic journals. More and more, the consensus among experts is that taxes on corporate and personal income are particularly harmful to economic growth, with consumption and property taxes less so. This is because economic growth ultimately comes from production, innovation, and risk-taking. This review of empirical studies also establishes some standards by which a tax system may be judged. If we apply these standards to our national tax system, the U.

    We have the highest corporate tax rate in the industrialized world. If it came down 10 points—still higher than most of our trading partners—it would add 1 to 2 points to GDP growth and likely not lose tax revenue, because the tax base would expand from in-flows of foreign capital as well increased domestic investment, hiring, and work effort.

    The preponderance of evidence is such that virtually everyone agrees that the corporate rate should come down, although many continue to claim, opposite the evidence, [29] that such a move would lose revenue. We are also threatened with a fiscal cliff that would give us the highest dividend rate and nearly the highest capital gains rate in the industrialized world.

    Economic Roundup Spring 2004

    Most studies do not look separately at shareholder taxes, due to the fact that they raise relatively little revenue and many countries have no such taxes. The fiscal cliff would also push the top marginal rate on personal income to over 50 percent in some states, such as California, Hawaii, and New York—higher than all but a few of our trading partners. The OECD finds such steeply progressive taxation reduces productivity and economic growth.

    In sum, the U. Lucas, R. McDaniel, C. Mendoza, E. Razin, A. Seater, J. Ege Academic Review , 11 1 , Ege Academic Review. Full Text File. Publication Date : February 1, David Byrne Sally Ruane.

    OECD Tax Talks #9 - Centre for Tax Policy and Administration

    Taxing Africa Coercion, Reform and Development. Darrin Grimsey Mervyn K. The Euro and the Battle of Ideas. Markus K. FBT Compliance Guide The Debt Age. Research and Development Tax Reliefs. A-Z of Business Tax Deductions. Annette, Moore, Nicola Morley. Roy Bahl Richard M. Lasser's Your Income Tax J.

    International trends and comparisons

    Lasser Institute. Cost-Benefit Analysis Concepts and Practice. Anthony E.

    Introduction

    It measures financial interests, not investment in new factories, services and business. Future US developments The United States has not participated in the trend of declining statutory company tax rates for nearly two decades. Still, U. However, since the s they have remained fairly stable Griffith and Klemm , pp. Advocates have proposed fines, to be imposed on those who dump — very severe fines that would make dumping extremely expensive, even if only sporadically discovered. As the rate rises, revenue is likely to fall because use of the taxed item will decline. There is not a clear justification for this effective subsidy, which may arise as an accident of the policy design rather than from an active design decision.

    Boardman David H. Greenberg Aidan R.

    Introduction

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