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Fundamental Tax Reform: The Experience of OECD Countries

1 min readBy: Jeffrey Owens

Download Background Paper No. 47

Background Paper No. 47

Executive SummarySince the mid-1980s all OECD countries have engaged in fundamental reforms of their 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. systems. These reforms have been driven by the need to provide a more competitive fiscal environment: one which encourages investment, risk-taking and entrepreneurship, and which provides increased work incentives.

At the same time, governments are aware of the need to maintain taxpayers’ faith in the integrity of their tax systems. Fairness and simplicity have become the bywords of reformers. Fairness requires that taxpayers in similar circumstances pay similar amounts of tax. Simplicity requires that paying your taxes becomes as painless as possible (not some- thing easily achieved in modern societies) and that the administrative and compliance costs of collecting taxes are kept at a minimum. Almost all the tax reforms of the last two decades can be characterized as rate reducing and base broadeningBase broadening is the expansion of the amount of economic activity subject to tax, usually by eliminating exemptions, exclusions, deductions, credits, and other preferences. Narrow tax bases are non-neutral, favoring one product or industry over another, and can undermine revenue stability. reforms, following the rates were rarely less than 45 per cent, while today most are below 35 per cent and an increasing number fall below 25 per cent.

These reforms, however, did not, until recently, lead to a fall in the overall tax burden (measured by the tax-to-GDP ratio). From 1975 to 2000, most OECD countries experienced an increase in this ratio. Some, like Finland and France, saw the tax burden increase by almost a third. A small number of countries — notably the United Kingdom and the United States — experienced a stable tax burden. It does appear, however, that this long-term upward trend peaked in 2000 and the latest figures available to the OECD suggest that most countries are now below the peak 2000 level.

This paper provides a brief summary of major tax reforms, both in policy and administration, in OECD countries, with particular emphasis on changes since the year 2000.