TAX POLICY: RECENT TRENDS AND REFORMS IN OECD COUNTRIES FOREWORD

Transcription

1 TAX POLICY: RECENT TRENDS AND REFORMS IN OECD COUNTRIES FOREWORD This publication provides an overview of recent trends in domestic taxation in OECD countries over the period 1999 to 2002, and a summary of recent major tax reforms in a number of countries, which were discussed at meetings of Working Party No.2 of the OECD Committee on Fiscal Affairs. In 1993, the OECD published Taxation in OECD Countries, which provided a review of techniques used to tax personal income and summarised, mostly by the use of tables, some of the more important policy changes in a number of OECD countries during the latter part of the 1980s. Previous to that, in 1986 the OECD published Personal Income Tax Systems Under Changing Economic Conditions, which described and analysed income tax policy choices and country practices between 1975 and Other publications during that period surveyed consumption taxes, capital income and capital gains taxes and taxes on immovable property. This publication may be seen as an extension of these earlier works. The publication is for the most part descriptive. The intention is not to offer tax policy recommendations, but simply to spotlight the most recent trends and to present major tax reforms undertaken by a number of OECD countries. Chapter 1 reports trends in tax revenues, the tax mix, and personal and corporate income tax rates in OECD countries. It also draws attention to measures taken in OECD countries with regard to the taxation of labour. The taxation of dividends, value added taxes, and environmentally-related taxes are also discussed. Chapter 2 reviews tax reforms in selected OECD countries over the period , and in some cases up to The chapter first gives a fairly detailed description of recent tax reforms an tax policy developments in Australia, Belgium, Canada, France, Germany, Italy, Japan, Mexico, the Netherlands, Switzerland and the United States. In addition, it provides less detailed information on selected tax policy developments in Austria, Finland, Iceland, Ireland, Luxembourg, New Zealand, the Slovak Republic, Spain, Sweden and the United Kingdom. The text is mainly based on material presented by Member country Delegates to Working Party No.2. Chapter 3 considers country practices and recent developments in the following four selected tax policy areas of current and ongoing interest: fiscal decentralization, making work pay policies, corporate tax developments, and taxation and research and development. Of course these are by no means the only policy areas of interest to OECD tax policy-makers, but they have been selected because they raise a number of interesting and often difficult policy considerations and trade-offs. 1

2 EXECUTIVE SUMMARY 1. Recent trends in tax revenues and tax rates A clear trend that emerges from the data is a steady increase in the tax-to-gdp ratio across most of the OECD area since Tax ratios in the European Union (EU15), averaging more than 40 per cent of GDP, are found to generally exceed those observed elsewhere. Provisional data suggest, however, that this upward trend has largely come to an end, partly as a consequence of reductions of taxes on personal and corporate income in a number of Member countries. The analysis of the composition of tax revenue or tax mix shows that the vast bulk of tax revenue raised in the OECD area, indeed more than 90 per cent, comes from three main sources: income taxes, taxes on goods and services, and social security contributions. However, countries vary considerably in their reliance on these revenue sources with. One clear trend that emerges is increased reliance on value added taxation, with the United States now being the only OECD country without a value added tax/general sales tax. A second trend is growth in social security contributions, which now nearly raise as much revenue in the OECD area as the personal income tax. While tax rates alone clearly do not fully reflect tax policy developments in OECD countries, they do offer one indication of certain trends in recent tax reforms. An example is the lowering of the OECD- and EU-country average all in (i.e. including local taxes and employees social security contributions) marginal personal income tax rate by more than 2 percentage points for high-income earners between 2000 and The general trend towards reduced tax rates is even more pronounced in respect of corporate income tax rates, with the average statutory corporate income tax rate in OECD Member countries dropping by almost 3 percentage points between 2000 and 2003, and by 3.4 percentage points in the EU15. There have also been interesting trends across OECD countries in the total tax wedge on labour, or the difference between what employers pay out in wages and social security charges and what employees take home after tax and social security deductions plus any cash benefits for which they may be eligible. Analysis of this wedge, based on the OECD s Taxing Wages methodology, suggests that some countries with the highest labour tax wedges, as well as other countries with more moderate tax wedges, have been reducing them. The analysis covers all in marginal tax rates which may influence decisions over how many hours to work, as well as all in average tax rates which may influence decisions on entry to (or exit from) the labour market. Both measures include income tax plus employee social security contributions, less cash benefits. The marginal rate for single individuals without children is shown to decrease slightly on average in the OECD countries for workers earning 67 per cent and 100 per cent of the average wage level (APW), while increasing by more than one percentage point at 167 per cent of that wage level. For the EU15 countries, the marginal tax rate has fallen, on average, by more than two percentage points at 100 per cent of APW earnings while being stable at 67 per cent and having increased by 1 percentage point at 167 per cent of APW earnings. All-in average tax rates for the single individual case are shown to decline on average in OECD countries at all three wage levels, 2

3 with a slightly larger reduction on average across the EU15 countries. Tax wedges are also shown to be lower, and in most countries significantly lower, for one-earner families with two children. The taxation of personal capital income varies substantially among OECD-countries, where some countries tax all personal capital income at a flat rate and wage and pension income at progressive rates and other countries tax all or most capital income according to a progressive schedule at more or less the same rates as labour income. However, in many countries some or all personal capital income is taxed at lower rates than wage income. It is not easy to find a suitable comprehensive measure for comparing the taxation of income from capital across countries. One useful measure is the effective tax rate on domestic dividend income, as governments have been reconsidering the relevant advantages, disadvantages and methods of integrating corporate and personal level taxation of distributed income. The data show an average reduction in the marginal tax rate on dividend income in OECD-countries of 3.7 percentage points between 2000 and 2003, due to reductions in tax rates on corporate income, tax rates on personal capital income or both. There has been a general OECD trend towards increased reliance on general consumption taxes, and away from specific consumption taxes and excise duties, with over 13 countries increasing their value added tax rates since On average across the OECD, environmentally-related tax revenue as a percentage of GDP was slightly lower in 2001 than in 1998 even though several OECD countries have implemented changes in their tax systems during this period as part of green tax reform initiatives. However, this was mainly due to a strong increase in market prices for petrol, and a subsequent reduction in demand, from 1999 to Recent tax reforms in selected OECD countries A clear trend in many OECD countries is the reduction in the taxation of earned income, by lowering tax rates and/or increasing income thresholds. In some countries the statutory tax rates have been reduced at all income levels, while in others the reductions are concentrated to low and medium income groups. In addition, several countries have introduced or increased the level of earned income tax credits or tax allowances targeted at low income wage earners, in order to improve work incentives and strengthening the progressivity of the income tax system. The overall taxation of labour income has in general been reduced as a result of these reforms, even though the rate reductions are accompanied by certain base broadening initiatives in some countries. Several countries have also increased the level and structure of family-related benefits delivered through the tax system, e.g. by replacing tax allowances or direct grants by tax credits, by extending the scope and level of tax credits and allowances and/or by making tax credits non-wastable (i.e. that the amount of the tax credit that exceeds tax due is paid out). Some countries have also made changes in the taxation of personal capital income, by reducing the tax rates on all or, more often, on some types of capital income (e.g. capital gains and dividends). The most fundamental reform of the taxation of personal capital income was probably that of the Netherlands, where the income taxation of savings and investments was replaced by a tax on imputed income from wealth at a 30 per cent rate (box 3). However, if the income is from a substantial business income (e.g. where the individual holds at least 5 per cent of a private or public limited company), the actual net income is taxed at a rate of 25 per cent (box 2). 3

4 Another clear trend is the reduction in statutory tax rates on corporate income. Most of the countries covered have reduced the statutory tax rates on corporate income, and some have either already announced plans or are considering proposals for further rate reductions (e.g. Canada, Italy and the Netherlands). In most of these countries, the rate reductions have been accompanied by base broadening initiatives which are expected to at least partly finance rate reductions. The reforms of the corporate tax system in Australia, Belgium, France and the UK are expected to be broadly revenue neutral. Countries that apply special tax rates for small business generally have reduced the taxation of small business relatively more than the taxation of large business, either through additional rate reductions or by introducing targeted tax incentives for small business. Consumption tax changes have mostly been minor. The major exception is Australia s introduction of a value added type tax (the General Sales Tax) in 2000, which replaced the wholesale sales tax and several state indirect taxes. At the same time, both the level and structure of several other excise duties were changed as a result of the introduction of GST. Several countries have also made changes in their consumption tax systems in order to make them more environmentally friendly. 3. Selected tax policy issues Fiscal decentralisation Sub-central governments expenditure share exceeds their share in revenues in all OECD countries. As a consequence, the resulting fiscal imbalance has to be solved by either grants from the central or federal government or by an increase of tax revenues at the sub-central level. Greater revenue autonomy can be achieved by allowing sub-central governments to set the bases and/or the rate of sub-central taxes. Tax revenue sharing schemes is an alternative method of increasing subcentral tax revenues. There are no common patterns in the OECD member countries. Some countries have increased the power of sub-central levels to modify the rate of a commonly shared tax base, without devolving the power to change or create the tax base. Other countries have introduced new taxes, which are aimed to replace existing grant schemes. Making work pay programmes Many countries are now introducing in-work benefits or wage-subsidy schemes to help make work pay for the low-skilled, and thereby increase employment and increase the incomes of disadvantaged groups. The three main policy means to effect this are providing benefits or tax credits to low-wage workers who find employment; cutting social contributions paid by employers; and adjusting minimum wage legislation. The choice about whether to subsidize employers or employees is obviously important, and depends very much on what works best in a particular institutional setting, or for a given set of framework conditions such as the level of taxation (and in particular the marginal tax rate), the income range to which the benefit applies and whether or not there is a minimum wage. To date, the main focus of making work pay (MWP) policies has been on schemes designed to subsidize employees, either by paying cash transfers (benefit programme) or providing relief to personal taxes and in particular, through the use of employment-conditional tax credits. These now exist, although in different forms, in Belgium, Canada, Finland, France, the Netherlands, the U.K. and the U.S. 4

5 Policy-makers now have a considerable amount of experience with employment-conditional tax credits. There is a growing body of evidence to suggest positive effects on aggregate employment levels and/or on income distribution. At the same time, certain unintended or undesired effects have materialised, leading policy-makers to consider fine-tuning their approach. A persistent issue is how best to tailor the withdrawal of relief as income increases, recognising that this withdrawal increases the net tax burden on wages at the margin, tending to reduce incentives to work longer or harder. High marginal rates may also negatively impact on training incentives and wages. However desirable MWP policies may appear in principle, their effectiveness depends on their design and administration, which in turn has to take account of specific factors in any given country. For example, does the tax system tax individuals separately, or on a joint basis? This is important where the intention is to target support to families with low incomes. Because low earners may be part of households with high incomes, targeting relief through a tax system that uses the individual as a unit of assessment poses certain constraints. At the same time, relying on the tax system as a delivery mechanism may hold out considerable administrative cost savings. These and other issues the benefit unit, assessment and payment periods, frequency of payments, and to whom the payment is made confront policymakers with a complicated trade-off. Corporate tax developments In the corporate tax field, main developments in many OECD countries may be seen as a continuation of efforts to reduce distortions in capital allocation, strengthen the competitive position of firms, and protect the corporate tax base, while at the same time ensuring that a fair share of tax is collected from the corporate sector. Probably the most published trend is the general reduction in statutory corporate tax rates over several years, with an average reduction of 3 percentage points among OECD countries only since This development is part of a global trend to cut corporate tax rates, a trend which is partly motivated by increasingly global capital flows and the aim to attract investment capital. While significant corporate tax base broadening was achieved in many OECD countries during the 1980 s and early 1990 s, this continues to be a means of financing, at least in part, corporate rate reductions. Often, policy-makers broaden the base by reducing or abolishing tax reliefs that no longer seem desirable, in order to enhance efficiency, equity and simplicity. Recent tax reforms also indicate alternative strategies to improve the operation of corporate tax systems. Examples considered include increased tax relief for R&D, the elimination of profitinsensitive capital taxes, and adjustments to address double taxation of distributed profits and capital gains. Taxation and R&D Many OECD countries have introduced special tax relief targeted at R&D. In addressing the issue of taxation and R&D, three questions arise. First, should the government intervene? If it should, then how should it intervene? Lastly, if R&D tax credits are chosen, what design features are likely to maximise the amount of incremental R&D undertaken? The policy rationale for public support of R&D is usually based on evidence that R&D generates positive spillovers to society benefits in addition to those accruing to R&D producers. Recent empirical evidence suggests that social rates of return to R&D are substantially above private returns. Given empirical evidence of positive spillover effects, and with clear linkages between R&D, 5

6 innovation and productivity growth, many OECD countries have considered, or are considering introducing or expanding relief to R&D. Where public support is called for, an important question remains: should the delivery mechanism be cash support (grants), or the tax system by way of tax credits and/or tax allowances. The experience of OECD countries is mixed, reflecting a diversity of views and country situations, with choice over the delivery mechanism depending on a weighing of arguments for and against alternative strategies. One common argument expressed for relying on the tax system is that tax relief tends to be delivered on a less discretionary basis, compared with grants, once the qualifying criteria are decided. Grants may also be more distorting and deny relief to certain potentially highly promising projects. Direct support may also tend to widen a firm s R&D agenda. At the same time, tax relief tends to be less transparent than grants, and once introduced, may be difficult to remove or refocus. Pressures will also exist to make R&D credits non-wastable to cover non-taxable firms, generally at a greater administrative cost than with basic (wastable) tax credits. Finally, domestic tax relief to affiliates of foreign parents may be partially or fully offset through the operation of mechanisms to relieve international double taxation. Other important considerations include the choice between incremental and volume-based tax credits (whether or not to target expenditures that would not have been made in the absence of tax relief), and whether relief should be targeted at pure research or also include development (the application of research). 6

7 Chapter 1 MAIN TRENDS IN TAX REVENUES AND TAX RATES Chapter abstract: A clear trend is a steady increase in the tax-to-gdp ratio across most of the OECD area since 1975, with tax ratios in the European Union (EU15) generally exceeding those observed elsewhere. Provisional data suggests, however, that this upward trend has largely come to an end. The analysis of the composition of tax revenue shows that more than 90 per cent of tax revenue raised in the OECD area comes from three main sources: income taxes, taxes on goods and services, and social security contributions. However, countries vary considerably in their reliance on these revenue sources. While tax rates alone do not fully reflect tax policy developments in OECD countries, they offer one indication of certain trends in recent tax reforms. An example is the lowering of the all in (i.e. including employees social security contributions) marginal personal income tax rate by more than 2 percentage points for high-income earners between 2000 and All-in average tax rates are also shown to decline on average in OECD countries, with a slightly larger reduction on average across the EU15 countries. This general trend is even more pronounced in corporate income tax rates, with the statutory corporate income tax rate dropping on average by almost 3 percentage points between 2000 and 2003, and by 3.4 percentage points in the EU15. The marginal tax rate on dividend income in OECD-countries dropped by 3.7 percentage points. 1.1 Introduction This chapter describe main trends in tax revenues and tax rates in OECD Member countries, relying on information collected from Member states in Revenue Statistics, Taxing Wages, OECD Tax Data Base and OCED/EU Database on Environmentally Related Taxes. Sections 1.2 and 1.3 describe general trends in tax revenue as a percentage of GDP and the composition of tax revenue among major taxes. Section 1.4 covers the trend in marginal tax rates for high-income earners and the tax rate on corporate income, while sections 1.5 and 1.6 study the tax wedge on labour and the marginal tax rate on dividend income more closely. Sections 1.7 and 1.8 include a description of trends concerning value-added taxes and environmentally related taxes respectively. 1.2 Trends in Tax Revenue The evolution of tax revenue as a percentage of GDP in OECD countries since 1975 is shown in Table 1.1. The main trends are the following: 7

8 There has been a persistent and largely unbroken upward trend in the ratio of tax to GDP since 1975 across most of the OECD area. With the exception of Mexico, tax-to-gdp ratios have increased the most in countries where the ratio was below or close to 20 per cent in the mid seventies and several of these countries now have tax-to-gdp ratios that are close to the OECD average. Very few countries have consistently resisted this long-term trend. Only in the Netherlands and Ireland are tax ratios currently below their 1975 level, and in only three other countries, i.e. Mexico, the United Kingdom and the United States, have tax receipts developed broadly in line with GDP over a long period. A few more, including Canada, Japan and New Zealand, have reduced the tax ratio from peak levels of 1985 or 1990, although not dramatically. Tax ratios in the European Union (EU15), averaging more than 40 per cent of GDP, generally exceed those elsewhere. Outside Europe, only Australia, Canada and New Zealand have tax ratios above 30 per cent of GDP. However, the fact that the 2002 provisional (2001 for 3 countries) tax-to-gdp ratios for 20 countries have fallen from 2000, while they have only risen in 9 countries, suggests that this upward trend could be coming to an end. Although this, as pointed out in OECD (2003c), partly reflects cyclical developments and the unwinding of the asset cycle, it also seems to be an explicit policy goal of governments in several OECD countries to reduce the overall tax burden in particular by reducing taxes on personal and corporate income. Table 1.1 Total tax revenue as percentage of GDP Provisional Canada Mexico United States n.a Australia n.a Japan n.a Korea New Zealand Austria Belgium Czech Republic Denmark Finland France Germany Greece Hungary Iceland Ireland Italy Luxembourg Netherlands Norway Poland Portugal Slovak Republic Spain Sweden Switzerland Turkey United Kingdom Unweighted average: OECD Total OECD America OECD Pacific OECD Europe EU

9 1) Unified Germany beginning in Starting in 2001, Germany has revised its treatment of non-wastable tax credits in the reporting of revenues to bring it into line with the OECD guidelines. 2) The source for the 1975 figure is Swiss authorities, due to a change in the methodology which is only implemented in OECD Revenue Statistics from 1985 onwards. Source: Revenue Statistics and Swiss authorities. 1.3 The Composition of Tax Revenue The distribution of tax revenue among major taxes for OECD countries in 2001 is reported in Table The OECD average shows that the vast bulk of tax revenue, i.e. over 90 per cent, comes from three main sources: income taxes, taxes on goods and services, and social security contributions (other payroll taxes are zero or very small in most countries). However, countries vary considerably in the relative importance of these three main revenue sources. Overall, the European Union relies more on social security contributions and less on personal income tax than the OECD average. In contrast, the United States collects more in personal income tax and property tax but less in consumption taxes and social security. Japan is similar to the United States in its low share of consumption taxes, but collects much less in personal income tax, offsetting this with higher levels of corporate tax and social security contributions. There are also substantial differences across countries in the share of taxes on property, which are generally lower in continental Europe than elsewhere. Table 1.3 shows the trends in OECD average revenue shares over the last 36 years. The lack of a clear trend in the share of personal and corporate income taxes might partly reflect changing policies over time, with recent years witnessing a combination of tax rate reductions and base-broadening measures. However, the changes can also be partly explained by changes in the economy, and in particular by inflation as high inflation increases the revenue from personal income taxes unless income brackets are indexed. One clear trend has been a shift of revenues to general consumption taxes as countries introduce VAT and gradually increase its rates. After Australia introduced GST in 2000, the United States is the only OECD country that does not have VAT/GST. This increased reliance on VAT/GST has mainly been at the expense of excise duties and other taxes on goods and services. A second trend evident in Table 1.3 is the growth in social security contributions, so that they now nearly raise as much revenue in the OECD area as personal income tax. Indeed, in the majority of OECD countries, more was raised from social security contributions than from personal income tax. 1.4 Personal and corporate income tax rates It is obvious that tax rates alone do not sum up tax policy developments in OECD countries. They do, however, provide an indication of one of the overall trends in tax reform. 1 A cautious interpretation of the first two columns of numbers in this table is called for. The split between personal and corporate income tax, can be seriously misleading for two reasons. First, many OECD countries have some form of integration between corporate and personal income taxes, so that a portion of corporate taxes are refunded to the shareholders as a reduction in personal income tax. This is reflected in the statistics as a reduction in the revenue from personal income taxes, but it could be just as well regarded as a reduction in corporate tax revenue. Second, OECD countries vary in the extent to which businesses are incorporated. For example, German firms are much less likely to be incorporated than firms in Japan and the United States. This means that Germany reports a much lower share of tax revenue coming from corporate income tax. 9

10 Table 1.2 Tax revenue of major taxes as a percentage of total tax revenue, Personal income 2 Corporate income 2 Social security and other payroll Property Goods and services Of which : General consumption 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 Kingdom United States OECD Total Unweigthed EU15 Unweigthed ) Rows do not add to 100 because some minor taxes are omitted and general consumption taxes (mainly VAT) are a sub-category of taxes on goods and services. 2) The breakdown of income tax into personal and corporate tax is not comparable across countries. 3) Data for personal income tax and corporate income tax do not exist. Source: Revenue Statistics

11 Table 1.3 Tax structures in the OECD-area Personal income tax Corporate income tax Social security contributions (employee) (6) (7) (7) (8) (8) (employer) (10) (14) (13) (15) (15) Payroll taxes Property taxes General consumption taxes Specific consumption taxes Other taxes Total ) Percentage share of major tax categories in total tax revenue. 2) Including social security contributions paid by the self-employed and benefit recipients (heading 2300) that are not shown in the breakdown over employees and employers. 3) Including certain taxes on goods and services (heading 5200) and stamp taxes. Source: Revenue Statistics Table 1.4 shows that the marginal tax rates for high-income individuals were eased between 2000 and Both the OECD-average and the EU15-average of the top all in effective marginal income tax rate employee for a high-income single individual were reduced by just about 2.2 percentage points between 2000 and The rates were reduced by more than 1 percentage point in 17 countries, and raised by more than this amount in only 1. On average, the top statutory marginal personal income tax rates were reduced by 2.3 percentage points in OECD and by 2.9 percentage points in the EU15. It was reduced by more than 1 percentage point in 16 countries, and it was not increased in any of the OECD countries by more than this amount (in fact, Sweden was the only country where the rate increased and by only 0.8 percentage points). The largest reductions in the statutory personal income tax rates were in Luxembourg (9 percentage points), the Netherlands (8 percentage points), Belgium (7 percentage points), Mexico (6 percentage points), France (5.16 percentage points), the United States (5.1 percentage points) and Greece (5 percentage points). Social security contributions are fully or partially capped in 19 2 of the 28 OECD-countries that impose such levies. This is the reason why the social security contribution rate is zero at the margin for high-income earners or at least less than at lower income levels in these countries. In addition, Australia and New Zealand do not collect social security contributions. Such ceilings explain why the all in marginal tax rate in some countries may be lower for high income earners than for individuals at lower income levels. Table 1.4 shows that the effective marginal contribution rates facing high income earners increased in five of the 19 countries which levied some positive social security contribution for high-income earners in 2003, while it decreased somewhat in five other countries Including Iceland where the contribution is a fixed amount. The increased rate in Greece is due to abolishment of the ceiling on social security contributions, whereas the reduction in Italy is due to the introduction of a ceiling. Also for some of the other countries, the changes are due to changes in the extent to which social security contributions are ceiled. 11

12 The general trend towards reduced tax rates is even more pronounced in respect of corporate income tax rates. Table 1.5 shows that the statutory corporate income tax rates in the OECD Member countries dropped on average by 2.8 percentage points between 2000 and 2003, from 33.6 per cent to 30.8 per cent. This trend seems to be widespread, as rates have been reduced in 18 countries and in none of the OECD countries was the rate increased. In the EU15 countries, the average corporate tax rate has dropped by an average of 3.4 percentage points from 35.1 per cent to 31.7 per cent. The sharpest reductions were in Iceland (12 percentage points), Germany (11.8 percentage points), Ireland (11.5 percentage points), Canada (8 percentage points), Luxembourg (7.1 percentage points) and Belgium (6.2 percentage points). Table 1.4 Marginal tax rates for high income employees 1, and 2003 All in Statutory Statutory rate for employee All in 3 rate for SSC 5 personal income tax 4 Statutory rate for personal income tax 4 Statutory rate for employee SSC 5 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 UK USA OECD-Average EU15-Average ) Tax rates calculated at an income level of 10 APW earnings in 2003 and 12 APW earnings in ) These are the rates that apply for income earned in the year in question, although the actual tax payments in certain countries are fully or partly postponed until the following year. 3) The all-in rate is calculated as the net increase in personal income tax plus employee social security contributions resulting from a marginal increase in gross wage earnings, including the effect of all tax credits and deductibility of social security contributions in personal income tax. 4) The statutory personal income tax rates includes all compulsory surcharges, and includes the effects of one income tax being deductible against other income tax rates. 5) These are the statutory employee social security contribution rates that apply to high-income earners at the margin, taking account of ceilings. 6) Unweighted averages. Source: Taxing Wages calculations and national authorities. 12

13 Table 1.5 Corporate income tax rates to 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 UK USA OECD-average EU15-average ) Combined central and sub-central statutory tax rates. In federal countries, the sub-central rate in the most populated city is used. Where sub-central income tax is deductible against central government tax, this is reflected in the net rate. 2) Including the CSB (Contribution Sociale sur les Bénéfices), which is only payable for companies with a taxable profit of more than 2,289,000 and liable tax payments of at least 763,000. For companies that do not pay the CSB, the top rate is 1.1 percentage point lower than these rates. 3) Including the regional trade tax (Gewerbesteuer) and the surcharge. 4) This is the corporate income tax rate (IRPEG) excluding the regional tax (IRAP). The base of IRAP is broader than, but includes, corporate income. The general rate for the IRAP is 4.25 per cent, but regions may increase or decrease this rate by 1 percentage point. 5) Source: KPMG s Corporate Tax Rate Survey. 6) Unweighted average. Source: OECD Tax Database and KPMG s Corporate Tax Rate Survey. 13

14 1.5 Taxation of Labour The total tax wedge on labour, or the difference between what employers pay out in wages and social security charges and what employees take home after tax and social security deductions plus any cash benefits for which they may be eligible, can be a disincentive to work. The increases in social security contributions noted above have increased this wedge in a number of countries, leading some to argue that a shift away from labour taxation is required to stimulate employment activity. But there are signs that some countries with the highest tax wedges are in the process of reducing them. So are a number of countries where tax wedges are more moderate. Tables 1.6 and 1.7 show the all in marginal and average tax rates, e.g. including personal income tax and employee social security contributions and less cash benefits, for a single individual without children at different income levels in 2000 and Marginal tax rates may influence decisions on how many hours to work, as they assess how much of the extra wage income an individual worker keeps after taxes. Average tax rates may influence decisions on entry (or exit from) the labour market, as they effect how much total net income after tax changes if one decides to join (or exit from) the labour market. Both marginal and average tax rates may also effect other labour-market related decisions, such as education. Table 1.6 shows that the marginal tax rate for single individuals without children has decreased slightly on average in the OECD countries at an income level of 67 per cent and 100 per cent of the average income level (APW earnings), but that it has increased by more than one percentage point at 167 per cent of APW earnings. In the European Union (EU15), the average marginal tax rate has fallen by more than two percentage points at 100 per cent of APW earnings while being stable at 67 per cent of APW earnings and having increased by 1 percentage point at 167 per cent of APW earnings. However, the average of marginal tax rates in the EU15 is still in the range of five percentage points higher than the OECD average at these income levels. The difference is smaller at higher income levels. If the employer social security contribution is included, the marginal tax rate in 2003 is on average 10.7 percentage points higher at 67 per cent, 9.9 percentage points higher at 100 per cent and 8 percentage points higher at 167 per cent of APW earnings than the figures in Table 1.6. In the EU15, employer social security contributions increased the marginal tax rate in 2003 by 12 percentage points at 67 per cent, 11 percentage points at 100 per and by 9.3 percentage points at 167 per cent of APW earnings. Table 1.7 shows that average all in tax rates for single individuals without children have dropped, by just below one percentage point in the OECD countries and by just above one percentage point in the EU15 countries. The rate has decreased somewhat less at 167 per cent of APW earnings than at the other two wage levels. The EU15 countries still have higher average tax rates than the OECD average, with a difference of 2.1 percentage points at an income level of 67 per cent of APW earnings increasing to 3.4 percentage points at an income level of 167 per cent of APW earnings. 14

15 Table 1.6 Marginal tax rates all-in for employees and % of APW APW 167% of APW 67% of APW APW 167% of APW 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 UK USA OECD-average EU15-average ) Single person, no children. Income tax plus employee social security contributions less cash benefits. 2) Unweighted average. Source: Taxing Wages

16 Table 1.7 Average tax rates all-in for employees and % of APW APW 167% of APW 67% of APW APW 167% of APW 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 UK USA OECD-average EU15-average ) Single person, no children. Income tax plus employee social security contributions less cash benefits. 2) Unweighted average. Source: Taxing Wages Table 1.8 shows that the total tax wedge, e.g. also including employer social security contributions, for a single worker at average earnings levels ranged in 2003 from a low of 14.1 per cent in Korea to above 54.5 per cent in Belgium, with an average of 36.5 per cent in the OECD area. When comparing this with Table 1.7, the importance of the employer social security contribution is revealed as the inclusion of this increases the total tax wedge in 2003 for a single person on average earnings by 11.7 percentage points (from 24.8 per cent to 36.5 per cent). The total tax wedge has on average decreased by 0.8 percentage points since 1996, when the average was 37.3 per cent ranging from 6.3 per cent in Korea to 56.4 per cent in Belgium. The reduction in the EU15 during the same period was 2.5 percentage points, but the average rate in 2003 was still 4.4 percentage points higher than the OECD average. The total tax wedge was reduced by more than one percentage point in 18 countries between 1996 and 2003 and increased by this amount in 7 countries. For a married couple with one earner at average earnings and two children, Table 1.9 shows the total tax wedge in 2003 ranged from 7.4 per cent in Ireland to 42.3 per cent in Turkey with an average of 26.9 per cent. On average the tax rate has fallen by 1.1 percentage points since 1996, from a level of 28 per cent (ranging from -6.6 per cent in Iceland to 44.6 per cent in Sweden). The reduction of the EU15-average was substantially larger than that of the OECD (3.8 percentage points), but the tax wedge in 2003 was still 2.6 percentage points above the OECD-average. Table 1.9 also shows that the tax wedge has fallen by at least one percentage point in 15 countries since 1996 and increased by this 16

17 amount in 9. The marginal tax rate for this family type is substantially higher than the average tax rate. In 2003 it was on average 45.7 per cent in OECD and 48.8 per cent in the EU15, which is somewhat lower than in In Greece, Mexico and Turkey, the total tax wedge for singles without children was equal to that for one-earner families with two children. In all other countries the tax wedges were lower, and in most countries significantly lower, for the latter family type. A generally similar pattern of reduction emerges when data for other categories of workers are examined, and the main reason is that in most countries workers with children face lower tax wedges than those without The taxation of dividends The taxation of personal capital income varies substantially between OECD-countries, where some countries tax all personal capital income at a flat rate and wage and pension income at progressive rates (dual income tax systems) and other countries tax all or most capital income according to a progressive schedule at more or less the same rates as labour income (comprehensive income tax systems). However, many countries have a semi-dual income taxation of personal capital income, in the sense that all or some personal capital income is taxed at lower rates than wage income. Given difficulties over the choice of a suitable, comprehensive measure for comparing the taxation of income from capital across countries, this section concentrates on the taxation of dividends. These rates have been of particular interest in recent years, given policy interest in reconsidering the relevant advantages, disadvantages and methods of integrating corporate and personal level taxation of distributed income. Table 1.10 reports the effective tax rates on distributions of domestic source profits to a resident individual shareholder, reflecting that in many countries the taxation of dividends takes account of the fact that profits are taxed both at the corporate level and again when it is distributed as dividends by introducing imputation systems, tax credits or reduced tax rates on dividends 5. The table shows that on average, the top marginal tax rate on dividends in the OECDcountries has been reduced by 3.7 percentage points between 2000 and 2003 from 50.1 per cent to 46.4 per cent. The tax rates have been reduced in 16 countries in this period, ranging from -1.3 percentage points in Switzerland to almost 20 percentage points in Netherlands. The rate has increased somewhat in four countries. In the EU15, the average tax rate has fallen by 3.8 percentage points from 51.7 per cent to 47.9 per cent. The reductions in the effective tax rate on dividends reflect the reduction of corporate income tax rates, personal income tax rates on dividend or both. 4 5 See the special feature Taxing families in OECD (2003b) for more details on the tax treatment of different family types in OECD countries. Table 1.10 reports the all-in tax rate seen from the individual shareholder, taking account of both corporate and shareholder taxes. However, this does not necessarily reflect the actual tax burden for the shareholder. In a small open economy, it can be argued that corporate taxes only affects the required pre-tax rate of return on investments while dividend taxation only affects private savings. 17