27 March 2007 Centre for Tax Policy and Administration Organisation for Economic Co-operation and Development Reforms of Personal Income Tax in OECD Countries

27 March 2007 Centre for Tax Policy and Administration Organisation for Economic Co-operation and Development Outline of the presentation Main trends in OECD countries Main types of PIT systems Issues when choosing a PIT system Making Work Pay Policies Conclusion

27 March 2007 Centre for Tax Policy and Administration Organisation for Economic Co-operation and Development Main Trends in the OECD Reduced share of PIT revenues since 1990 Continued reduction of PIT rates and flatter rate schedules Move towards semi-dual income tax systems Increased use of tax credits and “Making Work Pay Policies” Continued move towards individual taxation, but family benefits delivered through the tax systems in some countries

27 March 2007 Centre for Tax Policy and Administration Organisation for Economic Co-operation and Development Main types of PIT systems Comprehensive Income Tax * Progressive rate schedule on income above basic allowance *Often combined with extensive tax expenditures Dual Income Tax * Single tax rate on income above basic allowance, combined with progressive taxation of labour and pension income *Combined with a limited number of tax expenditures Flat Income Tax * Single tax rate on net income above basic allowance *Very limited number of tax expenditures

27 March 2007 Centre for Tax Policy and Administration Organisation for Economic Co-operation and Development The choice of a PIT system EfficiencyNeutrality Vertical equityTax incentives Horizontal equity Compliance costs ?

27 March 2007 Centre for Tax Policy and Administration Organisation for Economic Co-operation and Development The choice of a PIT system The key issues are: Simplicity Efficiency Equity Tax Compliance

27 March 2007 Centre for Tax Policy and Administration Organisation for Economic Co-operation and Development Simplicity *Complexities mainly due to definition of tax bases, not rate schedules *Complexities from differences in rate schedules due to income shifting opportunities *Withholding at source reduces actual complexity for personal taxpayers * Compromised by non-tax objectives (e.g., earned- income tax credits)

27 March 2007 Centre for Tax Policy and Administration Organisation for Economic Co-operation and Development Efficiency *Tax distortions due to high tax rates and non- neutralities in the tax base *Uncertain effect of move from progressive to single rates schedule, if reform is revenue-neutral *Base-broadening will (normally) increase economic efficiency, and even more so if combined with lower rates

27 March 2007 Centre for Tax Policy and Administration Organisation for Economic Co-operation and Development continued 2 Equity -Horizontal equity requires equal treatment of equals -Progressive rates in theory better for vertical equity for a given tax base, but tax expenditures also matter -Base broadening increases horizontal equity, and may also increase vertical equity

27 March 2007 Centre for Tax Policy and Administration Organisation for Economic Co-operation and Development Tax Compliance -Incentives for tax avoidance increase with the tax rate -Opportunities for tax avoidance increase with tax expenditures and income shifting possibilities - Withholding at source reduce opportunities for tax avoidance

27 March 2007 Centre for Tax Policy and Administration Organisation for Economic Co-operation and Development Making Work Pay Policies Main objectives: To increase employment To increase incomes of disadvantaged groups  Positive effects on employment (entrance into the labour market) and incomes of low-income households  Potentially negative effect on the number of hours worked over certain earnings ranges

27 March 2007 Centre for Tax Policy and Administration Organisation for Economic Co-operation and Development Conclusion Simplicity, in the form of a broad base with a basic exemption but few other deductions, is the key for any type of income tax system. It promotes: Efficiency Equity Compliance