Tax policy should be used to fight inequality, says OECD

21 Jul 16

Governments should use tax policy to boost growth and ensure the benefits of taxation are more equitably shared among citizens, the OECD has said.

A report by the OECD’s Centre for Tax Policy and Administration, published today, stressed that tax systems can be used to counter inequality and drive inclusive growth, at a time when incomes are polarised to historic levels. It also urged for the removal of tax policies that benefitted the wealthy.

Angel Gurría, secretary-general of the OECD, said tax policy has a “clear role to play” in helping to achieve “strong, sustainable and balanced growth”.

He added the think-tank’s latest research could be part of a new tax policy contribution to the G20 agenda moving forward.

It outlined a variety of ways tax systems can be designed to generate greater equity and meet their efficiency goals more effectively.

One suggestion is to design a system that maintains a broad tax base and low tax rates, while removing elements that are not well-targeted at redistributing wealth, in particular those that disproportionately benefit the wealthy.

Another is to strengthen the overall progressivity of the system beyond personal income tax. The aim would be take to into account the overall progressivity of the tax and benefits system, as opposed to the progressivity of individual taxes.

The OECD said that while personal income tax is by far the most progressive tax in OECD tax systems, this progressivity could be shifted to another part of the system where it has more limited disincentive and distortive effects.

It recommended low, progressive rates on personal capital income as one example that could enhance both efficiency and equity.

The report also highlighted efforts to increase equality of opportunity and “pre-tax behaviours”, such as an individual’s decision to work in the formal or informal economy.

This could be achieved by tax policy packages that raise the cost of remaining in the informal sector and promote the benefits of joining the formal economy, it said. Another example would be to provide tax incentives to undergo education or training, or to strengthen inheritance tax to limit intergenerational inequality.

Other measures include strengthening “value for tax money” by reducing administration inefficiencies, tackling tax avoidance and evasion, and embedding intergenerational and gender equity. 

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