Taxation and Economic Growth - where will the crisis take us? Jens Lundsgaard Deputy Chief Tax Economist – OECD – Centre for Tax Policy and Administration jens.lundsgaard@oecd.org, tel. +33 1 45248737 International Tax Conference European Tax Systems Coordinated for Growth? Confederation of Swedish Enterprise Stockholm, 15-16 June 2009

Public debt is rising rapidly above historic norms Public debt as % af BNP

A challenge for OECD ministers Truly, the need to restore sound public finances after the crisis will present policymakers with tough trade-offs. Considerable expenditure cuts or additional revenue will be needed, but the consolidation measures will have to be designed in ways that do not hamper the recovery and longer-run economic growth.

Despite ”green shoots” economies will be below full capacity for years Output gap for the OECD area: difference between actual and potential GDP

Restoring sound public finances challenging with weaker potential growth The deep recession is likely to weaken economic capacity: Weak investments and capital destruction when sound companies go down Higher risk aversion may raise capital costs in the future Unemployment may become structural Growth-enhancing structural reforms will be essential to boost investment and make work pay

Have taxes contributed to excessive risk-taking and leverage?

Have taxes contributed to excessive risk-taking and leverage? Is tax system complexity – and tax havens – reducing financial market transparency? Were tax systems nurturing the expansion of stock options as executive remuneration? Are tax systems favouring capital gains over income? Corporate income taxes give advantage to debt over equity finance – and this may be exploited internationally

A challenge for OECD ministers The crisis has raised new questions about fairness and the role of tax systems in achieving a fair sharing of the costs and benefits of globalization. The answers will be about redistributing in ways that do not hold back job search, complicate business life or weaken the economy’s ability to restructure.

A case: Ireland Higher income taxation (raises over 2% of GDP): From 2009: Income Levy of 2% for gross income from € 15 000, 4% from € 75 000 and 6% from € 175 000 The Health Levy doubled to 4% up to € 75 000 and 5% above that Personal income tax base is broadened (a bit) by reducing interest deductibility Higher tax rates on capital gains and inheritance VAT rate up from 20% to 21.5% and diesel and tobacco up But! Corporate income tax maintained at 12.5% and R&D tax credit increased from 20% to 25% of increment A Commission on Taxation is to report later in 2009

Green tax reforms? Will the simultaneous fiscal problems and concern for climate and environmental challenges create a wave towards higher green revenues? With synchronised hikes in all countries competitiveness concerns are less important OECD starts work on tax treatment of tradable permits – meeting in Paris 16-17 September

Summary Growth-oriented tax reforms will be important to restructure and grow out stronger from crisis Raising sustainable revenues Concerns about social equity and fairness The need for sound policy advice is pertinent!