As part of our preliminary research for the next Monitoring Report, I read OECD’s publication on Tax Design for Inclusive Growth. The publication can be regarded as an update of sorts to Tax and Economic Growth, which was published in 2008. The new publication places a greater emphasis on “inclusive growth”, in view of growing economic inequality. The authors define inclusive economic growth as “economic growth that delivers progress to society as a whole”. This is emphasised throughout the paper as growth considerations are supplemented by a concern for equitable distribution and constant reference is made to managing the trade-off between equity and efficiency.
The authors claim that four broad pillars will help governments to reconcile the issues mentioned above: (1) broadening tax bases; (2) strengthening the overall progressivity of the fiscal system; (3) affecting pre-tax behaviours and opportunities; and (4) enhancing tax policy and administration.
Broadening tax bases – while removing most VAT exemptions should be considered, it is particularly important to remove those that give a proportionately larger tax saving to the rich than to the poor; taxing capital and its returns in efficient and equitable ways can also be considered.
Strengthening the overall progressivity of the fiscal system – the paper stresses the importance of going beyond the design of individual taxes and of taking into account interactions between a wide range of factors within tax systems. In particular, progressivity could be strengthened by moving beyond a progressive personal income tax (PIT) rate. For example, improving the quality of social services (good education, basic health care and decent living standards) may help, as social services also play a redistributive role. Financing social security through a progressive PIT and taxes that bear on capital income, property and/ or consumption, could help reduce the tax burden for low income earners, increase employment, while also ensuring the financing of social security systems.
Affecting pre-tax behaviours – ultimately, this means incentivising people operating in the informal economy to join the formal economy. Low income earners may be forced into the informal sector as a result of tax changes, but informality can also be limited by strengthening the link between the taxes paid and the benefits received across the lifecycle. Furthermore, there is a growing understanding of the negative economic effects of tax complexity and tax uncertainty.
Enhancing tax policy and administration – tax evasion and tax avoidance must be tackled, but tax administration itself must be made more efficient. Revenues should be collected at low administrative costs. Tax policy must be sensitive to the structure of the economy, population density at various income levels and the public’s inequality aversion. Furthermore, the quality of tax statistics and tax policy analysis should be improved.
As with most such papers, one is left with the impression that most of the ideas seem intuitive and mesh well with “common sense”. Let’s see how the Government of Latvia fares this year, as a growth- and equality- friendly tax system is something that we want as well.