Tax Reform: An International Perspective OECD-IEF seminar on Tax Reform Trends Madrid May, 16, 2005 By Jeffrey Owens Organisation for Economic Cooperation and Development

2 OECD Member Countries OECD Member countriesCountries which engage in Tax Dialogue

3Outline Introductory Comments Introductory Comments Overview of OECD Tax Systems Overview of OECD Tax Systems Recent Tax Reform Initiatives Recent Tax Reform Initiatives Alternatives of taxing income Alternatives of taxing income Concluding Comments Concluding Comments

4 Note: countries have been ranked by their total tax to GDP ratios. *) 2002 figures Tax Revenue as % GDP (2003)

5 Change in tax as % of GDP 1975 to 2003 Tax as % GDP Hungary (*) Czech Republic Netherlands Slovak Republic (*) Poland (*) United States United Kingdom Germany Ireland Canada Switzerland Mexico Luxembourg Norway Japan (*) Australia (*) Belgium Austria New Zealand Finland France Sweden Denmark Iceland Korea Portugal (*) Greece (*) Turkey Spain Italy

6 Source of tax revenue, 2003 *) 2002 figures

7 Top personal and corporate tax rates Slovak Republic Czech Republic Mexico Hungary Luxembourg New Zealand Korea Portugal Greece United Kingdom Poland Turkey United States Ireland Switzerland Iceland Spain Italy Canada Germany Norway Australia Austria Japan Netherlands Finland Belgium France Sweden Denmark % Top CIT RateTop 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

8 The tax wedge – income tax and social security contributions as % of labour costs 2004 Single individual at average earnings

9 Top statutory personal plus corporate tax rates on dividend income (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 Iceland Norway Finland Mexico Greece Slovak Republic Poland New Zealand Czech Republic Belgium Luxembourg Italy Portugal Turkey United Kingdom Australia Ireland Korea Sweden Spain Austria United States Netherlands Switzerland Germany Hungary Canada France Denmark Japan % EU15 Avg 47.9 OECD Avg 46.4

10 R&D Tax Treatment of Large Firms, 2001/2002 Spain Portugal Australia Canada Austria Korea Denmark United Kingdom Netherlands United States France Mexico Japan Ireland Belgium Finland Switzerland Iceland Greece Sweden Norway New Zealand Germany Italy Comparative R&D tax incentives calculated as one minus B-index

11 VAT – tax rates and revenues (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

Australia Austria Belgium Canada Czech Republic Denmark Finland France Germany Greece Hungary Iceland Ireland Italy Japan Korea Luxembourg Mexico Netherlands New Zealand Norway Poland Portugal Slovak Republic Spain Sweden Switzerland Turkey United Kindom United States Weighted average Arithmetic average Per cent of GDP Revenues from environmentally related 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

13 Since mid 1980s a Wave of Tax Reform in All OECD Countries Driven by: A fairer tax system A fairer tax system similar treatment for similarly placed taxpayers (horizontal equity)similar treatment for similarly placed taxpayers (horizontal equity) achieve desired allocation of tax burden by income level (vertical equity) achieve desired allocation of tax burden by income level (vertical equity) improved complianceimproved compliance An efficient and competitive tax system An efficient and competitive tax system promoting a competitive and flexible fiscal environment promoting a competitive and flexible fiscal environment making work, savings and investment pay making work, savings and investment pay A simpler tax system A simpler tax system reduce compliance costs for taxpayersreduce compliance costs for taxpayers reduce administrative costs for tax authoritiesreduce administrative costs for tax authorities The need for revenues The need for revenues Protecting the environment through tax and related measures Protecting the environment through tax and related measures Balance between revenues and expenditures of each level of government Balance between revenues and expenditures of each level of government Dealing with the restraints imposed by the ECJ Dealing with the restraints imposed by the ECJ

14 Main Characteristics of Tax Reform in OECD Countries Lower tax rates; broader tax bases Lower tax rates; broader tax bases Move towards flatter personal income taxes Move towards flatter personal income taxes Move towards dual income taxes (lower rates on capital than on labour) Move towards dual income taxes (lower rates on capital than on labour) Integrate social benefits into the tax system (earned income tax credits) Integrate social benefits into the tax system (earned income tax credits) Relief for taxation of dividend income Relief for taxation of dividend income Change in mix of income and consumption taxes (VAT) Change in mix of income and consumption taxes (VAT) Reduction of complexity Reduction of complexity Introduction of market based environment instruments Introduction of market based environment instruments

15 Three Approaches to Taxing Income Comprehensive income taxes Comprehensive income taxes Dual income taxes Dual income taxes Flat taxes Flat taxes

16 Flat Tax Rate Systems Gross income (Y) Basic income Single rate with refundable tax credit (basic income) Basic allowance Single rate with basic tax allowance Single rate, no basic tax allowance No tax (Y=YD) Disposable income (Y D )

17 Successful Tax Reform Requires Administrative Reform Tax administrations face challenges due to globalization Tax administrations face challenges due to globalization 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 administrations The response of OECD tax administrations move to integrated tax administrationsmove to integrated tax administrations administration by segment/function rather than by type of taxadministration by segment/function rather than by type of tax 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 effective enforcement Good compliance requires good taxpayer service and effective enforcement Putting tax compliance on the good corporate governance agenda Putting tax compliance on the good corporate governance agenda

18 Key Elements for successful tax reform: Experience of OECD Countries Political champions who can mobilize popular support Political champions who can mobilize popular support Clear and well-articulated principles Clear and well-articulated principles A package approach, with gains and pains intricately linked A package approach, with gains and pains intricately linked Policy reform matched by administrative reform Policy reform matched by administrative reform Limited time between announcement and full implementation Limited time between announcement and full implementation Transition rules matter Transition rules matter Education and guidance package available from Day One Education and guidance package available from Day One