Tax Reform: An International Tax Reform: An International PerspectivePerspective

The President’s Advisory Panel on Federal Tax ReformThe President’s Advisory Panel on Federal Tax ReformSan FranciscoSan Francisco

March 31, 2005March 31, 2005ByBy

Jeffrey OwensJeffrey OwensOrganisation for Economic Cooperation and Organisation for Economic Cooperation and

DevelopmentDevelopment

22

OECD Member CountriesOECD Member Countries

OECD Member countries Countries which engage in Tax Dialogue

33

Since mid 1980s a Wave of Tax Since mid 1980s a Wave of Tax Reform in All OECD Countries Driven Reform in All OECD Countries Driven by: by: A fairer tax systemA fairer tax system

• similar treatment for similarly placed taxpayers similar treatment for similarly placed taxpayers (horizontal equity)(horizontal equity)

• achieve desired allocation of tax burden by income achieve desired allocation of tax burden by income level (vertical equity)level (vertical equity)

• improved complianceimproved compliance

An efficient and competitive tax systemAn efficient and competitive tax system• promoting a competitive and flexible fiscal promoting a competitive and flexible fiscal

environmentenvironment• making work, savings and investment paymaking work, savings and investment pay

A simpler tax systemA simpler tax system• reduce compliance costs for taxpayers reduce compliance costs for taxpayers • reduce administrative costs for tax authoritiesreduce administrative costs for tax authorities

Protecting the environment through tax and related Protecting the environment through tax and related measuresmeasures

44

Main Characteristics of Tax Reform Main Characteristics of Tax Reform in OECD Countriesin OECD Countries

Lower tax rates; broader tax basesLower tax rates; broader tax bases Move towards flatter personal income taxesMove towards flatter personal income taxes Move towards dual income taxes (lower Move towards dual income taxes (lower

rates on capital than on labor)rates on capital than on labor) Integrate social benefits into the tax system Integrate social benefits into the tax system

(earned income tax credits)(earned income tax credits) Relief for taxation of dividend incomeRelief for taxation of dividend income Change in mix of income and consumption Change in mix of income and consumption

taxes (VAT)taxes (VAT) Reduction of complexityReduction of complexity Introduction of market based environment Introduction of market based environment

instrumentsinstruments

55

Trends in the Taxation of Dividend Trends in the Taxation of Dividend Income (2000-2004)Income (2000-2004)

CountryCountry Reform Reform YearYear

Pre-Reform SystemPre-Reform System Post-Reform SystemPost-Reform System

United StatesUnited States 20032003 ClassicalClassical Reduced scheduler PIT Reduced scheduler PIT rate (15% federal)rate (15% federal)

GermanyGermany 20012001 Full imputation (with Full imputation (with split rate)split rate)

Classical (with PIT rate)Classical (with PIT rate)

20022002 Classical (with split Classical (with split rate)rate)

Partial inclusionPartial inclusion

ItalyItaly 20042004 Full imputationFull imputation Partial inclusionPartial inclusion

KoreaKorea 20012001 ClassicalClassical Partial inclusionPartial inclusion

Portugal Portugal 20022002 Reduced scheduler Reduced scheduler PIT ratePIT rate

Partial inclusionPartial inclusion

Slovak RepublicSlovak Republic 20032003 ClassicalClassical Personal tax exemptionPersonal tax exemption

TurkeyTurkey 20032003 Partial imputationPartial imputation Partial inclusionPartial inclusion

66

The overall tax burden and structureThe overall tax burden and structureM

exic

oU

nite

d S

tate

sK

orea

Japa

n *

Sw

itzer

land

Irel

and

Aus

tral

ia *

Pol

and

*Tu

rkey

Slo

vak

Rep

ublic

*C

anad

aP

ortu

gal *

New

Zea

land

Uni

ted

Kin

gdom

Spa

inG

reec

e *

Ger

man

yH

unga

ry *

Net

herl

ands

Cze

ch R

epub

licIc

elan

dLu

xem

bour

gA

ustr

iaIta

lyN

orw

ayFr

ance

Fi

nlan

dB

elgi

umD

enm

ark

Sw

eden

0

10

20

30

40

50

60

Corporate and personal income taxes Social security contributions Consumption taxes Other

EU 15 Average 40.6

2003

US

A

OECD 15 Average 36.6

For more details, see Table 1 in the Appendix.

Tax as % GDP

77

Change in tax to GDP ratiosChange in tax to GDP ratiosH

ung

ary

(*)

Cze

ch R

epub

lic

Net

her

lan

dsS

lova

k R

epu

blic

(*)

Pol

and

(*)

Uni

ted

Sta

tes

Uni

ted

Kin

gdo

mG

erm

any

Irel

and

Can

ada

Sw

itze

rlan

dM

exic

o

Lu

xem

bou

rgN

orw

ayJa

pan

(*)

Aus

tral

ia (

*)B

elg

ium

Aus

tria

New

Zea

lan

dF

inla

nd

Fra

nce

S

wed

enD

enm

ark

Icel

and

Kor

eaP

ortu

gal

(*)

Gre

ece

(*)

Tu

rkey

Spa

in

Ital

y

-8

-6

-4

-2

0

2

4

6

8

10

12

14

16

18 1975 to 2003

US

A

Tax as % GDP

For more details, see Table 1 in the Appendix.

88

0.0

10.0

20.0

30.0

40.0

50.0

60.0

Slovak

Rep

ublic

Czech

Repub

lic

Mex

ico

Hungary

Luxem

bourg

New Zeala

nd

Korea

Portugal

Greece

United

Kingdom

Poland

Turkey

United

State

s

Irela

nd

Switzerla

nd

Icel

and

Spain

Italy

Canada

Germ

any

Norway

Australia

Austria

Japa

n

Nether

lands

Finlan

d

Belgiu

m

France

Sweden

Denmar

k

%

Top CIT Rate Top PIT Rate

Countries ranked by top PIT Rate

Top personal and corporate tax Top personal and corporate tax ratesrates

2004

USA

CIT – OECD average = 30

CIT – EU average = 31

PIT – OECD average = 44

PIT – EU average = 48

For more details, see Figure 2 and 3 in the Appendix.

Includes Central, State and Local Taxes

99

The tax wedge – income tax and The tax wedge – income tax and social security contributions as % of social security contributions as % of labor costslabor costs

0

10

20

30

40

50

60

%

Mex

ico

Korea

New Zeala

nd

Irela

nd

Japa

n

Australia

Switzerla

nd

United

State

s

Icel

and

United

Kingdom

Luxem

bourg

Canada

Portugal

Greece

Norway

Spain

Denmar

k

Slovak

Rep

ublic

Turkey

Poland

Nether

lands

Czech

Repub

lic

Finlan

d

Austria

Italy

Hungary

France

Sweden

Germ

any

Belgiu

m

Personal Income Tax Employee Social Security Contr. Employer Social Security Contr. and payroll taxes

2004

USA

Single individual at average earningsSingle individual at average earnings

For more details, see Figure 4 and 5 in the Appendix.

1010

VAT – tax rates and revenues VAT – tax rates and revenues (1)(1)

0

5

10

15

20

25

30

DENMARK

HUNGARY (2)

SWEDEN

ICELAND

NORW

AY

CZECH REPUBLIC

FINLAND

POLAND

BELGIUM

IRELAND

AUSTRIA

ITALY

SLOVAK REPUBLIC

(2)

FRANCE

NETHERLANDS

PORTUGAL (3)

GREECE (2)

TURKEY

UNITED K

ING

DOM

OECD

GERMANY

SPAIN

LUXEMBOURG

MEXIC

O

NEW Z

EALAND

AUSTRALIA (2

)

KOREA

SWIT

ZERLA

ND

CANADA

JAPAN (2

)

UNITED S

TATES

VAT/sales tax revenues as % of total tax revenues VAT standard rate

1) 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

2003

USA

1111

Successful Tax Reform Requires Successful Tax Reform Requires Administrative ReformAdministrative Reform

Tax administrations face challenges due to Tax administrations face challenges due to globalizationglobalization• proliferation of tax shelters and abuse of tax havensproliferation of tax shelters and abuse of tax havens• changing attitudes towards compliancechanging attitudes towards compliance

The response of OECD tax administrationsThe response of OECD tax administrations• move to integrated tax administrationsmove to integrated tax administrations• administration by segment/function rather than by type administration by segment/function rather than by type

of taxof tax• move to cumulative withholding and information move to cumulative withholding and information

reportingreporting• improved risk managementimproved risk management• better access to informationbetter access to information• Use of new technologiesUse of new technologies

Good compliance requires good taxpayer service and Good compliance requires good taxpayer service and effective enforcementeffective enforcement

Putting tax compliance on the good corporate Putting tax compliance on the good corporate governance agendagovernance agenda

1212

Key Elements for successful tax Key Elements for successful tax reform: Experience of OECD reform: Experience of OECD CountriesCountries

Political champions who can mobilize Political champions who can mobilize popular supportpopular support

Clear and well-articulated principlesClear and well-articulated principles A package approach, with gains and A package approach, with gains and

pains intricately linkedpains intricately linked Policy reform matched by Policy reform matched by

administrative reformadministrative reform Limited time between announcement Limited time between announcement

and full implementationand full implementation Transition rules matterTransition rules matter Education and guidance package Education and guidance package

available from Day Oneavailable from Day One