The Organisation for Economic Co-operation and Development (OECD) is a collection of 30 developed countries that embrace free markets and representative democracy. Every 1-1/2 to 2 years, the OECD publishes an Economic Survey on member countries and a few non-member countries. Each report, in the words of the OECD, “identifies the main economic challenges faced by the country and analyses policy options to meet them.”
Earlier this week, the OECD released the Economic Survey of the United States. Chapter 3 of that report addresses taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. policy, and here are some excerpts from the OECD’s assessments and recommendations:
On entitlement program spending:
Under current law, public spending on retirement and health programmes is expected to rise toward 20% of GDP by the middle of the century; resulting soaring budget deficits would entail a government debt twice the size of GDP at that time. Raising tax rates to finance such spending would be an expensive and inefficient solution.
On tax rates:
On the revenue side, it may be difficult to sustain the recent reductions in marginal tax rates, while meeting the fiscal burden from entitlement programmes, although this would be clearly desirable. To the extent that revenues have to be raised, the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. should be broadened, rather than reversing reductions in marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. s.
On tax expenditureTax expenditures are a departure from the “normal” tax code that lower the tax burden of individuals or businesses, through an exemption, deduction, credit, or preferential rate. Expenditures can result in significant revenue losses to the government and include provisions such as the earned income tax credit, child tax credit, deduction for employer health-care contributions, and tax-advantaged savings plans. s:
Since the comprehensive tax reform in 1986, which broadened tax bases and reduced marginal rates, most of the resulting gains in simplicity and efficiency have been lost through a renewed expansion in tax expenditures. To be sure, not all of them are undesirable. However, tax expenditures, which are distorting, ill targeted and ineffective, should be reduced or abolished.
On replacing income taxes with consumption taxA consumption tax is typically levied on the purchase of goods or services and is paid directly or indirectly by the consumer in the form of retail sales taxes, excise taxes, tariffs, value-added taxes (VAT), or an income tax where all savings is tax-deductible. es:
[C]onsideration should also be given to shifting the tax burden from direct taxes to consumption based indirect taxAn indirect tax is imposed on one person or group, like manufacturers, then shifted to a different payer, usually the consumer. Unlike direct taxes, indirect taxes are levied on goods and services, not individual payers, and collected by the retailer or manufacturer. Sales and Value-Added Taxes (VATs) are two examples of indirect taxes. es – such as a national sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. or a value added tax. This would produce efficiency gains, including reducing disincentives to saving.
On the home mortgage interest deductionThe mortgage interest deduction is an itemized deduction for interest paid on home mortgages. It reduces households’ taxable incomes and, consequently, their total taxes paid. The Tax Cuts and Jobs Act reduced the amount of principal and limited the types of loans that qualify for the deduction. :
In principle aimed at promoting home ownership to lower- and middle-income households, tax preferences have mostly benefited high-income households with easy access to home ownership. Furthermore, tax preferences have encouraged investment in residential property at the expense of other household assets, possibly affecting capital formation elsewhere in the economy and, thereby, productivity growth. The mortgage interest tax deductionA tax deduction is a provision that reduces taxable income. A standard deduction is a single deduction at a fixed amount. Itemized deductions are popular among higher-income taxpayers who often have significant deductible expenses, such as state/local taxes paid, mortgage interest, and charitable contributions. should be replaced with a tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. available to all home owners, with a maximum amount reflecting the average cost of housing, so as to promote home ownership, without unduly subsidising housing consumption. The interest deductibility on home equity loans and second homes should be eliminated to avoid encouraging overinvestment in housing.