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

OECD Member Countries OECD Member countries Countries which engage in Tax Dialogue

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

Tax Revenue as % GDP (2003) Mexico United States Korea Japan * 10 20 30 40 50 Mexico United States Korea Japan * Switzerland Ireland Australia * Poland * Turkey Slovak Republic * Canada Portugal * New Zealand United Kingdom Spain Greece * Germany Hungary * Netherlands Czech Republic Iceland Luxembourg Austria Italy Norway France Finland Belgium Denmark Sweden OECD AVG 36.5 EU-15 AVG 40.6 Note: countries have been ranked by their total tax to GDP ratios. *) 2002 figures

Change in tax as % of GDP 1975 to 2003 18 16 14 12 10 8 6 4 2 -2 -4 -6 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 -8 -6 -4 -2 2 4 6 8 10 12 14 16 18 1975 to 2003 Tax as % GDP

Source of tax revenue, 2003 *) 2002 figures Canada France Ireland 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Canada France Ireland Japan (*) Mexico Poland (*) Slovak Rep. (*) Spain United Kingdom United States OECD EU-15 Personal income Corporate income Social security contributions & payroll General consumption Other *) 2002 figures

Top personal and corporate tax rates 0.0 10.0 20.0 30.0 40.0 50.0 60.0 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 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

The tax wedge – income tax and social security contributions as % of labour costs Single individual at average earnings 2004 10 20 30 40 50 60 % Mexico Korea New Zealand Ireland Japan Australia Switzerland United States Iceland United Kingdom Luxembourg Canada Portugal Greece Norway Spain Denmark Slovak Republic Turkey Poland Netherlands Czech Republic Finland Austria Italy Hungary France Sweden Germany Belgium Personal Income Tax Employee Social Security Contr. Employer Social Security Contr. and payroll taxes

Top statutory personal plus corporate tax rates on dividend income(1), 2003 70.0 65.0 60.0 EU15 Avg 47.9 55.0 OECD Avg 46.4 50.0 45.0 40.0 % 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 Italy Iceland Spain Norway Finland Mexico Greece Poland Belgium Turkey Korea Portugal Australia Ireland Sweden Austria Japan Germany Hungary Canada France Denmark New Zealand Luxembourg Netherlands Switzerland Slovak Republic Czech Republic United Kingdom United States 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.

R&D Tax Treatment of Large Firms, 2001/2002 0.6 0.4 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 0.2 0.0 -0.2

VAT – tax rates and revenues (1) 5 10 15 20 25 30 DENMARK HUNGARY (2) SWEDEN ICELAND NORWAY CZECH REPUBLIC FINLAND POLAND BELGIUM IRELAND AUSTRIA ITALY SLOVAK REPUBLIC (2) FRANCE NETHERLANDS PORTUGAL (3) GREECE (2) TURKEY UNITED KINGDOM OECD GERMANY SPAIN LUXEMBOURG MEXICO NEW ZEALAND AUSTRALIA (2) KOREA SWITZERLAND CANADA JAPAN (2) UNITED STATES VAT/sales tax revenues as % of total tax revenues VAT standard rate 2003 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

Revenues from environmentally related taxes in per cent of GDP 5.0 1994 2001 4.5 4.0 3.5 3.0 Per cent of GDP 2.5 2.0 1.5 AUS BEL CZE FIN GER HUN IRL JAP LUX NET NOR POR ESP SWI UK 1.0 AUT CAN DEN FRA GRE ISL ITA KOR MEX NZE POL SVK SWE TUR US 0.5 0.0 Italy Austria Belgium Canada Finland France Japan Korea Greece Poland Denmark Hungary Iceland Ireland Mexico Norway Spain Portugal Sweden Turkey Australia Germany Luxembourg Netherlands New Zealand Switzerland United States Czech Republic Slovak Republic United Kindom Weighted average Arithmetic average

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

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

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

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

Successful Tax Reform Requires Administrative Reform Tax administrations face challenges due to globalization proliferation of tax shelters and abuse of tax havens changing attitudes towards compliance The response of OECD tax administrations move to integrated tax administrations administration by segment/function rather than by type of tax move to cumulative withholding and information reporting improved risk management better access to information Use of new technologies Good compliance requires good taxpayer service and effective enforcement Putting tax compliance on the good corporate governance agenda

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