Tax Reform: An International Tax Reform: An International PerspectivePerspective

OECD-IEF seminar on Tax Reform TrendsOECD-IEF seminar on Tax Reform TrendsMadridMadrid

May, 16, 2005May, 16, 2005ByBy

Jeffrey OwensJeffrey OwensOrganisation for Economic Cooperation and Organisation for Economic Cooperation and

DevelopmentDevelopment

22

OECD Member CountriesOECD Member Countries

OECD Member countries Countries which engage in Tax Dialogue

33

OutlineOutline

Introductory CommentsIntroductory Comments Overview of OECD Tax SystemsOverview of OECD Tax Systems Recent Tax Reform InitiativesRecent Tax Reform Initiatives Alternatives of taxing income Alternatives of taxing income Concluding CommentsConcluding Comments

44Note: countries have been ranked by their total tax to GDP ratios.

*) 2002 figures

0

10

20

30

40

50

Mexico

United

Stat

es

Korea

Japa

n *

Switzerl

and

Irelan

d

Austra

lia *

Poland

*

Turkey

Slovak

Rep

ublic

*

Canad

a

Portug

al *

New Zea

land

United

King

domSpa

in

Greece

*

German

y

Hunga

ry *

Netherl

ands

Czech

Rep

ublic

Icelan

d

Luxe

mbourg

Austria Ita

ly

Norway

France

Finlan

d

Belgium

Denmark

Sweden

OECD AVG 36.5

EU-15 AVG 40.6

Tax Revenue as % GDP (2003)Tax Revenue as % GDP (2003)

55

Change in tax as % of GDP Change in tax as % of GDP

1975 to 2003Tax as % GDP

Hung

ary

(*)Cz

ech

Repu

blic

Ne

ther

land

sSl

ovak

Rep

ublic

(*)

Pola

nd (*

)Un

ited

Stat

esUn

ited

King

dom

Ger

man

yIre

land

Cana

daSw

itzer

land

Mex

ico

Luxe

mbo

urg

Norw

ayJa

pan

(*)Au

stra

lia (*

)Be

lgiu

mAu

stria

New

Zea

land

Finl

and

Fran

ce

Swed

enDe

nmar

kIc

elan

dKo

rea

Portu

gal (

*)G

reec

e (*)

Turk

ey S

pain

Ita

ly

-8-6-4-202468

1012141618

66

Source of tax revenue, 2003Source of tax revenue, 2003

*) 2002 figures

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Canad

a

France

Irelan

d

Japa

n (*)

Mexico

Poland

(*)

Slovak

Rep

. (*)

Spa

in Unit

ed K

ingdo

mUnit

ed S

tates

OECD

EU-15

Personal income Corporate income Social security contributions & payroll General consumption Other

77

Top personal and corporate tax ratesTop personal and corporate tax rates

0.0

10.0

20.0

30.0

40.0

50.0

60.0

Slovak

Rep

ublic

Czech

Rep

ublic

Mexico

Hunga

ry

Luxe

mbourg

New Zea

land

Korea

Portug

al

Greece

United

King

dom

Poland

Turkey

United

Stat

es

Irelan

d

Switzerl

and

Icelan

d S

pain

Italy

Canad

a

German

y

Norway

Austra

lia

Austria

Japa

n

Netherl

ands

Finlan

d

Belgium

France

Sweden

Denmark

%

Top CIT Rate Top PIT Rate

Countries ranked by top PIT Rate

2004

CIT – OECD average = 30

CIT – EU average = 31

PIT – OECD average = 44

PIT – EU average = 48

Includes Central, State and Local Taxes

88

The tax wedge – income tax and social The tax wedge – income tax and social security contributions as % of labour security contributions as % of labour costscosts

2004Single individual at average earningsSingle individual at average earnings

0

10

20

30

40

50

60

%

Mexico

Korea

New Zea

landIre

land

Japa

n

Austra

lia

Switzerl

and

United

Stat

es

Icelan

d

United

King

dom

Luxe

mbourg

Canad

a

Portug

al

Greece

Norway

Spa

in

Denmark

Slovak

Rep

ublic

Turkey

Poland

Netherl

ands

Czech

Rep

ublic

Finlan

d

Austria Ita

ly

Hunga

ry

France

Sweden

German

y

Belgium

Personal Income Tax Employee Social Security Contr. Employer Social Security Contr. and payroll taxes

99

Top statutory personal plus Top statutory personal plus corporate tax rates on dividend corporate tax rates on dividend incomeincome(1)(1), 2003, 2003

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.

0.05.0

10.015.020.025.030.035.040.045.050.055.060.065.070.0

Icelan

d

Norway

Finlan

d

Mexico

Greece

Slovak

Rep

ublic

Poland

New Zea

land

Czech

Rep

ublic

Belgium

Luxe

mbourg Ita

ly

Portug

al

Turkey

United

King

dom

Austra

lia

Irelan

dKore

a

Sweden

Spa

in

Austria

United

Stat

es

Netherl

ands

Switzerl

and

German

y

Hunga

ry

Canad

a

France

Denmark

Japa

n

%

EU15 Avg 47.9OECD Avg 46.4

1010

R&D Tax Treatment of Large Firms, R&D Tax Treatment of Large Firms, 2001/20022001/2002

Spa

in

Por

tuga

l

Aus

tralia

Can

ada

Aus

tria

Kor

ea

Den

mar

k

Uni

ted

Kin

gdom

Net

herla

nds

Uni

ted

Sta

tes

Fran

ce

Mex

ico

Japa

n

Irela

nd

Bel

gium

Finl

and

Sw

itzer

land

Icel

and

Gre

ece

Sw

eden

Nor

way

New

Zea

land

Ger

man

y

Italy

0.6

0.4

0.2

0.0

-0.2Com

para

tive

R&

D ta

x in

cent

ives

cal

cula

ted

as o

ne

min

us B

-inde

x

1111

VAT – tax rates and revenues VAT – tax rates and revenues (1)(1)

1) 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

2003

0

5

10

15

20

25

30

DENMARK

HUNGARY (2)

SWEDEN

ICELA

ND

NORWAY

CZECH REPUBLIC

FINLA

ND

POLAND

BELGIU

M

IRELA

ND

AUSTRIAITALY

SLOVAK R

EPUBLIC (2

)

FRANCE

NETHERLANDS

PORTUGAL (3)

GREECE (2)

TURKEY

UNITED KIN

GDOMOECD

GERMANY

SPAIN

LUXEMBOURG

MEXICO

NEW ZEALA

ND

AUSTRALIA (2

)

KOREA

SWITZERLA

ND

CANADA

JAPAN (2

)

UNITED STATES

VAT/sales tax revenues as % of total tax revenues VAT standard rate

1212

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Aust

ralia

Aust

riaBe

lgiu

mC

anad

aC

zech

Rep

ublic

Den

mar

kFi

nlan

dFr

ance

Ger

man

yG

reec

eH

unga

ryIc

elan

dIre

land Italy

Japa

nKo

rea

Luxe

mbo

urg

Mex

ico

Net

herla

nds

New

Zea

land

Nor

way

Pola

ndPo

rtuga

lSl

ovak

Rep

ublic

Spa

in

Swed

enSw

itzer

land

Turk

eyU

nite

d Ki

ndom

Uni

ted

Stat

es

Wei

ghte

d av

erag

eAr

ithm

etic

ave

rage

Per c

ent o

f GD

P

1994 2001

Revenues from environmentally Revenues from environmentally related taxes in per cent of GDPrelated taxes in per cent of GDP

AUS

AUT

BEL

CAN

NOR

POL

POR

SVK

ESP

SWE

SWI

TUR

UK

US

HUN

ISL

IRL

ITA

JAP

KOR

LUX

MEX

NET

NZE

CZE

DEN

FIN

FRA

GER

GRE

1313

Since mid 1980s a Wave of Tax Since mid 1980s a Wave of Tax Reform in All OECD Countries Driven Reform in All OECD Countries Driven by: by: A fairer tax systemA fairer tax system

• similar treatment for similarly placed taxpayers similar treatment for similarly placed taxpayers (horizontal equity)(horizontal equity)

• achieve desired allocation of tax burden by income achieve desired allocation of tax burden by income level (vertical equity)level (vertical equity)

• improved complianceimproved compliance An efficient and competitive tax systemAn efficient and competitive tax system

• promoting a competitive and flexible fiscal environmentpromoting a competitive and flexible fiscal environment• making work, savings and investment paymaking work, savings and investment pay

A simpler tax systemA simpler tax system• reduce compliance costs for taxpayers reduce compliance costs for taxpayers • reduce administrative costs for tax authoritiesreduce administrative costs for tax authorities

The need for revenuesThe need for revenues Protecting the environment through tax and related Protecting the environment through tax and related

measuresmeasures Balance between revenues and expenditures of each Balance between revenues and expenditures of each

level of governmentlevel of government Dealing with the restraints imposed by the ECJDealing with the restraints imposed by the ECJ

1414

Main Characteristics of Tax Reform Main Characteristics of Tax Reform in OECD Countriesin OECD Countries Lower tax rates; broader tax basesLower tax rates; broader tax bases Move towards flatter personal income taxesMove towards flatter personal income taxes Move towards dual income taxes (lower Move towards dual income taxes (lower

rates on capital than on labour)rates on capital than on labour) Integrate social benefits into the tax system Integrate social benefits into the tax system

(earned income tax credits)(earned income tax credits) Relief for taxation of dividend incomeRelief for taxation of dividend income Change in mix of income and consumption Change in mix of income and consumption

taxes (VAT)taxes (VAT) Reduction of complexityReduction of complexity Introduction of market based environment Introduction of market based environment

instrumentsinstruments

1515

Three Approaches to Taxing Three Approaches to Taxing IncomeIncome

Comprehensive income taxesComprehensive income taxes

Dual income taxesDual income taxes

Flat taxesFlat taxes

1616

Flat Tax Rate SystemsFlat Tax Rate Systems

Gross income (Y)

Basicincome

Single rate withrefundable tax credit(basic income)

Basic allowance

Single rate withbasic tax allowance

Single rate, no basic tax allowance

No tax(Y=YD)

Disposable income (YD)

1717

Successful Tax Reform Requires Successful Tax Reform Requires Administrative ReformAdministrative Reform Tax administrations face challenges due to Tax administrations face challenges due to

globalizationglobalization• proliferation of tax shelters and abuse of tax havensproliferation of tax shelters and abuse of tax havens• changing attitudes towards compliancechanging attitudes towards compliance

The response of OECD tax administrationsThe response of OECD tax administrations• move to integrated tax administrationsmove to integrated tax administrations• administration by segment/function rather than by type of administration by segment/function rather than by type of

taxtax• move to cumulative withholding and information reportingmove to cumulative withholding and information reporting• improved risk managementimproved risk management• better access to informationbetter access to information• Use of new technologiesUse of new technologies

Good compliance requires good taxpayer service and Good compliance requires good taxpayer service and effective enforcementeffective enforcement

Putting tax compliance on the good corporate Putting tax compliance on the good corporate governance agendagovernance agenda

1818

Key Elements for successful tax Key Elements for successful tax reform: Experience of OECD reform: Experience of OECD CountriesCountries Political champions who can mobilize Political champions who can mobilize

popular supportpopular support Clear and well-articulated principlesClear and well-articulated principles A package approach, with gains and A package approach, with gains and

pains intricately linkedpains intricately linked Policy reform matched by Policy reform matched by

administrative reformadministrative reform Limited time between announcement Limited time between announcement

and full implementationand full implementation Transition rules matterTransition rules matter Education and guidance package Education and guidance package

available from Day Oneavailable from Day One