Academic journal article International Journal of Labour Research

Progressive Tax Reform in OECD Countries: Opportunities and Obstacles

Academic journal article International Journal of Labour Research

Progressive Tax Reform in OECD Countries: Opportunities and Obstacles

Article excerpt

The substantial increases in the disparity of wealth and income distribution over the last decades, in combination with the need for tax increases due to the budgetary stress experienced since the Great Recession, have led to calls for progressive tax reforms in many OECD countries. However, the dominant economic argument against such reforms is that they would be detrimental to growth and employment and would lead to increased tax avoidance. In our article, we provide a critical assessment of the standard arguments and complement them with a macroeconomic perspective. In our view there is more room for manoeuvre for national governments to increase the progressivity of the tax system and to raise additional revenue than is often suggested. We start with an overview of the regressive taxation trends since the 1980s and show that despite some changes there are no signs of a comprehensive trend reversal, precisely because of the allegedly strong efficiency/equity trade-off that supposedly does not allow for such changes. We then scrutinize the standard wisdom regarding the negative economic effects of progressive tax reform. Finally, we introduce a macroeconomic perspective into our analysis and draw some conclusions concerning future tax policies on the national and international level.

Taxation trends since the 1980s: Traditional standards of tax justice under pressure1

Traditionally, the aims of taxation in the industrialized countries in the area of distribution were (a) to avoid tax privileges for specific sources of income (comprehensive income approach); and (b) to achieve a high degree of progressivity. However, these goals have come under increasing pressure since the 1980s. According to the OECD (2011), market incomes have become more unequal in most OECD countries since the mid-1980s. Additionally, redistribution by the State has on average become less effective, especially since the mid-1990s. It is impossible to establish the extent to which the changes in the tax systems are responsible for this state of affairs. Nevertheless, the general taxation trends as reflected in some important indicators point to a connection. Strong drops in the top marginal income tax rates, in the corporate income tax rates, as well as an increasing of dualization of the income tax (that is, increasing privileges for capital income) demonstrate that the traditional standards of tax justice have come under severe pressure in recent decades.

On average, taxes on personal income used to be the most important source of revenues for OECD countries. They accounted for about 30 per cent of total tax revenues in the 1980s. Since then, their relative importance has declined to about 24 per cent while the weight of social security contributions has increased (OECD, 2012a). In order to evaluate how progressive income tax systems are, top statutory tax rates can be used as an indicator for broad international trends and a proxy for the intended redistributive effects of income tax systems. Since the 1970s, the top income tax rates have declined in nearly all OECD countries. In 1981, the top combined statutory personal income tax (PIT) rate in the OECD countries was on average 65.7 per cent. If we consider only the countries already included in the data set from 1981, the average rate declined to 50.7 per cent in 1990, to 48.9 per cent in 2000, and to 45.8 per cent in 2010 (OECD, 2012b, p. 33). In the meantime other countries have joined the OECD; if we include them the average tax rate in 2010 was 41.7 per cent.

Recently, many European governments have deliberately broken with the comprehensive income approach by subjecting the capital income of individuals to a separate tax schedule with a single tax rate while retaining progressive taxation in the area of labour income. In many OECD countries (for example Austria, Finland, Germany, Ireland, Japan, Spain and Sweden), certain types of capital income of individuals (such as interest, dividends and capital gains) are excluded from progressive income taxation (OECD, 2013a; Deloitte, 2013). …

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