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Tax Reform: A Social
Democratic Perspective
Social Democratic Perspective
1
Four Big Ideas
1. Increase the overall tax level
2. Use a broad mix of taxes
3. Level high incomes
4. Rationalize tax expenditures
Social Democratic Perspective
2
1. Increase the overall tax level




Taxes reflect a moral judgment about
which social and economic objectives
citizens should pursue collectively.
Services essential to human development
should be delivered through the public
sector, paid for with taxes, and be freely
accessible to everyone.
Investing in human capabilities fosters
both equity and economic growth.
No evidence of a need to trade off equity
and efficiency.
Social Democratic Perspective
3
The Rhetoric of Tax Politics:
The Assault on Citizenship







Taxes are impositions
Taxes are burden
Tax relief
Increased taxes can not be afforded
Taxes restrict freedom
Taxes usurp individual choice
Taxes unjustifiably interfere with
private property rights
Social Democratic Perspective
4
5
Tax Ratio of 19 Selected OECD Countries, 2005
Denmark
Sweden
50.7
49.5
Belgium
Finland
France
44.8
43.9
43.9
Norway
Austria
Italy
43.5
42.1
40.9
Netherlands
New Zealand
United Kingdom
38.8
37.5
36.3
Spain
Germany
Portugal
35.8
34.8
34.7
Canada
Greece
Australia
33.4
31.3
30.8
Ireland
United States
30.6
OECD
27.3
0
5
10
15
20
25
30
35
40
Total Tax Revenue as Percent of GDP, 2005
Social Democratic Perspective
Source: Based on OECD data.
45
50
5
6
Tax as percent of GDP of four country groups,
2005
Nordic
47.2
Continental
European
41.1
Mediterranean
34.7
AngloAmerican
32.7
0
5
10
15
20
25
30
35
40
Total tax revenue as a percent of GDP, 2005
Social Democratic Perspective
Source: Based on OECD data.
Average
45
50
6
Child Proverty Rate in Selected OECD Countries
22
20
18
16
14
12
10
8
6
4
2
0
USA
NZL
GBR
IRL
ITA
PRT
JPN
CAN
AUT
DEU
GRC
AUS
NLD
FRA
CHE
SWE
NOR
FIN
DNK
7
Social
Democratic
Perspective
Source: OECD, Society at a Glance:
OECD
Social
Indicators, 2005, p.57. Child poverty data sourced
from 1999, 2000 and 2001. Dashed line refers to the country average.
Child Poverty and Tax Revenue
25
MEX
USA
20
PRT
15
JPM
ESP
GBR
IRL
NZL
CAN
GRC
ITA
AUT
DEU
HUN
AUS
10
NLD
CHE
CZE
FRA
5
NOR
BEL
FIN
SWE
DNK
0
R-squared = 0.54
15
20
25
30
35
40
Average tax revenue as percent of GDP, 1980-2000
45
Sources: Child poverty rates as appeared on an OECD working paper by Peter Whiteford and Willem Adema, 'What Works
Best in Reducing Child Poverty: A Benefit or Work Strategy?' March 5, 2007; OECD Revenue Statistics.
Social Democratic Perspective
50
8
Gini Index and Tax Revenue
50
MEX
TUR
40
POL
USA
PRT
ITA
GRC
NZL
JPM
30
GBR
ESP
AUS
IRL
HUN
CAN
DEU
CHE
CZE
LUX
NOR
AUT
FRA
FIN
SWE
NLD
DNK
20
R-squared = 0.65
15
20
25
30
35
40
Average tax revenue as percent of GDP, 1980-2000
Sources: OECD Factbook 2007 and Revenue Statistics.
Social Democratic Perspective
45
50
9
Economic Security and Tax Revenue as Percent of GDP
1
SWE
FIN
NOR
DNK
.9
NLD
FRA
BEL
DEU
.8
CAN
GRC
AUT
ESP
PRT
AUS
IRL
GBR
.7
ITA
NZL
USA
.6
R-squared = 0.55
25
30
35
40
Average tax revenue as percent of GDP, 1980-2004
Sources: ILO, Economic Security for a better world, 2004; OECD Revenue Statistics.
Social Democratic Perspective
45
50
10
GDP per Capita and Tax Revenue
75,000
LUX
65,000
55,000
NOR
45,000
USA
CHE
35,000
GRC
IRL
ISL
AUS
ESP
25,000
DEU
NZL
SWE
HUN
SVK
15,000
ITA
DNK
CZE
PRT
KOR
BEL
FIN FRA
GBR
JPM
NLD
AUT
CAN
POL
MEX
TUR
5,000
R-squared = 0.12
15
20
25
30
35
40
Average tax revenue as percent of GDP, 1980-2005
Sources: OECD Factbook 2007 and Revenue Statistics.
Social Democratic Perspective
45
50
11
Results of Comparisons Between
High and Low taxed Countries

Nordic countries have achieved dramatically
better outcomes than Anglo-American countries
in the pursuit of their social objectives
• Of the 40 social indicators examined, in 21 their
outcomes were significantly better; on 13 other
measures they were better. On only 6 social
indicators were the outcomes in Anglo-American
countries better and on all of these the rankings the
differences were trivial and could have been due to
chance.

With respect to economic outcomes, the
differences were a wash
• Nordic countries ranked higher on 12 indicators and
the Anglo-American
In only one12
Socialcountries
Democratic Perspectiveon 10.
was the difference significant.
2. Use a broad mix of axes


A broad mix of taxes has fewer economic
and political costs.
Economics
• More economically efficient;
• falls on less mobile factors of production;
• competitive pressures on corporate tax rates

Politics
• Represents a bargain between labour (more
public services) and capital (lower taxes on
income from capital)
• Tax on income politically divisive
• Taxes on consumption less politically visible
• Three large tax bases takes pressure off
loopholes.
Social Democratic Perspective
13
14
Tax Mix of 19 Selected OECD Countries
32
Personal income
30
28
26
24
Social security
22
20
General consumption
18
16
14
Specific consumption
12
10
Corporate income
8
Property
6
4
2
Other
0
1965
Source: Based on OECD data.
1970
1975
1980
1985
Social Democratic Perspective
1990
1995
2000
2005
14
15
Statutory Corporate Income Tax Rates
U.S.
40
Belgium
33.99
Canada
France
33.5
33.33
Italy
31.4
Australia
New Zealand
30
Spain
Germany
30
30
29.51
Norway
28
Sweden
U.K.
28
28
Finland
26
Netherlands
Austria
25.5
25
Denmark
25
Greece
Portugal
25
25
Ireland
12.5
0
5
10
15
20
25
30
Corporate
Income
Tax Rate (%), 2008
Social Democratic
Perspective
Source: KPMG.
35
40
15
16
VAT/GST Rates
Sweden
Norway
Denmark
Finland
Portugal
Ireland
Belgium
Italy
Austria
France
Netherlands
Greece
Germany
U.K.
Spain
New Zealand
Australia
Canada
0
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
VAT/GST rates, 2007 (%)
Social Democratic Perspective
Source: Based on OECD data.
16
17
Top Personal Marginal Income Tax Rates
Denmark
Sweden
Belgium
Netherlands
Finland
Austria
France
Germany
Australia
Canada
Italy
Spain
Portugal
U.S.
Ireland
U.K.
Norway
Greece
New Zealand
59.7
56.5
53.5
52.0
50.5
50.0
47.8
47.5
46.5
46.4
44.9
43.0
42.0
41.4
41.0
40.0
40.0
40.0
OECD
39.0
0
5
10
15
20
25
30
35
40
45
Top personal marginal tax rate, 2007 (%)
Social Democratic Perspective
Source: Based on OECD data.
50
55
60
17
SWE
30
FRA
28
DEU
26
BEL
24
DNK
AUT
NOR
ITA
POL
22
GRC
PRT
20
GBR
18
CZE
ESP
CHE
FIN
HUN
NLD
NZL
AUS
CAN
16
USA
JPN
IRL
14
25
30
35
40
45
50
55
Average Effective Tax Rates on Consumption, 1991-1997 (%)
Sources: OECD Social Expenditure Database. Effective rates by Carey and Tchilinguirian
(2000). All OECD countries with data included except Korea excluded as outlier.
The horizontal dash line represents an average public social expenditure of 20%,
18
Socialline
Democratic
Perspective
while the vertical dash
represents
an average effective tax rate of 44%.
60
30
SWE
FRA
28
DEU
DNK
AUT
26
BEL
NOR
24
ITA
FIN
22
PRT
ESP
20
GRC
CZE
NLD
NZL
CHE
18
AUS
GBR
CAN
JPN
16
USA
14
15
20
25
30
35
Average Effective Tax Rates on Capital, 1991-1997 (%)
Sources: OECD Social Expenditure Database. Effective rates by Carey and Tchilinguirian
(2000). All OECD countries with data included except Korea excluded as outlier.
The horizontal dash line represents an average public social expenditure of 20%,
Social line
Democratic
Perspective
while the vertical dash
represents
an average effective tax rate of 27%. 19
40
Gini Indices of Market and Disposable Income
Reduction in Gini indices
Market income due to redistribution
Disposable income
Denmark (2004)
.23
Netherlands (1999)
.23
Belgium (1997)
.42
46%
.37
38%
.25
Norway (2000)
.25
Finland (2004)
.25
Sweden (2000)
.25
.48
.40
38%
.46
.27
Germany (2000)
.28
44%
.39
30%
.47
.29
.31
Canada (2000)
.31
United Kingdom (1999)
32%
.43
27%
.34
United States (2004)
.37
.1
.2
41%
.46
.33
0
42%
.49
Australia (2003)
Ireland (1987)
46%
.45
Switzerland (2002)
France (1994)
48%
.3
.50
34%
.50
31%
.48
.4
23%
.5
Source: CalculationsSocial
by Jesuit
and Mahler;
available on Luxembourg Income Study web site.
Democratic
Perspective
20
Shares of Fiscal Redistribution Resulting from Taxes and Transfers
Redistribution
Taxes
Belgium (1997)
0.07 (32%)
Finland (2004)
0.05 (22%)
Germany (2000)
0.05 (25%)
France (1994)
Transfers
0.16 (68%)
0.17 (78%)
0.15 (75%)
0.02 (9%)
Sweden (2000)
0.18 (91%)
0.04 (19%)
Denmark (2004)
0.04 (22%)
Ireland (1987)
0.05 (26%)
United Kingdom (1999)
0.16 (81%)
0.15 (78%)
0.13 (74%)
0.03 (20%)
Norway (2000)
0.12 (80%)
0.04 (26%)
Australia (2003)
0.05 (32%)
Netherlands (1999)
0.04 (31%)
Switzerland (2002)
0.002 (2%)
Canada (2000)
0.11 (74%)
0.10 (68%)
0.10 (69%)
0.12 (98%)
0.04 (35%)
United States (2004)
0.07 (65%)
0.04 (40%)
0
0.06 (60%)
.05
.1
.15
.2
Source: Calculations by Jesuit and Mahler; available at Luxembourg Income Study web site.
Social Democratic Perspective
.25
21
Effective Tax Rates in Canada
Effective Tax Rates in Canada, 1988
18%
16%
Personal Income Tax
14%
12%
Corporate Income Tax
10%
Commodity Taxes
8%
6%
Payroll Taxes
Property Tax
4%
2%
0%
Other Taxes
Up to
$10,000
$10,001 $20,000
$20,001 $30,000
$30,001 $40,000
$40,001 $50,000
$50,001 $60,000
$60,001 $70,000
$70,001 $80,000
Social Democratic Perspective
$80,001 $90,000
$90,001 - $100,001 - $150,001 Over
$100,000 $150,000 $300,000 $300,000
22
Source: Frank Bermaeten, W. Irwin Gillespie and Arndt Vermaeten, "Tax Incidence in Canada" (1994), vol. 42, no.
2, Canadian Tax Journal 348-416.
Overall Effective Tax Rate in Canada
Overall Effective Tax Rate in 1988
60%
55%
50%
45%
40%
35%
35.3%
30.1%
30%
33.5%
34.2%
34.9%
34.5%
33.8%
33.2%
33.3%
$60,001 $70,000
$70,001 $80,000
$80,001 $90,000
$90,001 $100,000
31.4%
32.6%
32.7%
29.2%
25%
20%
15%
10%
5%
0%
Up to
$10,000
Source:
$10,001 $20,000
$20,001 $30,000
$30,001 $40,000
$40,001 $50,000
$50,001 $60,000
Social Democratic Perspective
$100,001 - $150,001 $150,000 $300,000
Frank Bermaeten, W. Irwin Gillespie and Arndt Vermaeten, "Tax Incidence in Canada" (1994), vol.
42, no. 2, Canadian Tax Journal 348-416.
Over
$300,000
23
3. Taxing High Incomes

The rich are undeserving
• High income individuals do not deserve the vast amounts they
receive in a market economy nor do they have a moral
entitlement to them even if they receive those amounts as the
result of voluntary exchanges.

Inequality threatens democratic and other widely held
values
• The ideals of a modern democratic states can only be achieved
if economic resources are relatively equally distributed.

The progressive income tax is an effective policy
instrument for redistribution
• Therefore, an important part of the government’s distributive
function is to achieve a more equal distribution of resources
than that which results from market forces. The progressive
income tax is an appropriate policy instrument for the
government to use in achieving that objective.
Social Democratic Perspective
24
Pathologies of Inequality











Threatens the equal distribution of political rights
Reduces mobility between income classes
Increases criminal activities and other forms of social
disorder
Erodes social right to good health
Erodes social right to equal educational opportunities
Results in an overall loss of well-being
Creates social waste in winner-take-all labour markets
Weakens trust, social capital and social cohesion
Weakens support for the market economy
Reduces rates of economic growth
Shortens people
Social Democratic Perspective
25
Top 0.1% Income Shares in U.S., Canada and Australia
10
U.S.
8
6
Canada
4
Australia
2
0
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
2010
Note: Capital gains excluded from U.S. series by Piketty and Saez (2006) and Canadian series by Saez and Veall (2005).
Certain capital gains included in Australian series by Atkinson and Leigh (2007).
Social Democratic Perspective
26
Major Findings of Top-Income Researchers
1. At beginning of century share earned by top 1 percent
was about 20 percent
• No progressive taxes
2. Their share dropped dramatically before and during
WW II, to about 10 percent
• Due to fiscal shocks, but also marginal income tax increases to
between 75 to 90 percent.
3. Their share continued to decline during development
of the welfare state, down to about 7 to 9 percent, until
around 1980
• High marginal income rates, and capital transfer taxes, made it
impossible for the wealthy to recover their pre-war position
4. Since the early 1980s, share of national income
received by top 1 percent has returned to Gilded Age
levels
• “it is plausible to think that the drastic reduction in top marginal
tax rates, which started in the 1960s, opened the possibility of the
dramatic increase in top wages that started in the 1970s, and
accelerated in the 1980s and 1990s”
27
Social Democratic Perspective
5. Unlike, the earlier Gilded
Age, the top income earners
share of income is largely accounted for by salary income
4. Rationalizing Tax Expenditures

Tax expenditures – an essential pathway to tax
reform involves the rationalization of tax
expenditures:
• Tax expenditures are equivalent to direct spending
programs and ought to be evaluated, reported, and
subject to the same budgetary process as direct
spending program
• Many tax expenditures



are inherently unfair and ought to be repealed;
others ought to be converted into direct spending programs;
and
remaining tax expenditures ought to be converted into
28
Social Democratic Perspective
refundable tax credits.
Place Tax Expenditures in Separate Part of the Legislation


All tax expenditures should be placed in a
separate division of the tax legislation; and
preferably in a separate legislative enactment
altogether that allows for the delivery of the
enumerated subsidies by an offset against the
recipient’s tax liability.
Advantages of clearly separating technical tax
provisions and tax expenditures:
• The tax expenditures are more transparent
• The basic principles that underlie the technical tax
provisions are more obvious to judges and others
who wish to understand and interpret the tax
legislation.
• There will be a line on the taxpayer’s tax return
which records the taxpayer’s economic income
(income before tax expenditures) which might be
29
Perspective
used for a numberSocial
ofDemocratic
reasons.
Tax Expenditures – Convert to Credits

The case for converting tax expenditures
that take the form of exemptions or
deductions to credits is straightforward:
• It avoids the inequity of the upside down
effect of deductions
• It avoids arbitrarily tying the value of tax
expenditures to a taxpayer’s tax rates
• It promotes efficiency (unless there is
evidence that an individual’s responsiveness
to incentives (or the social benefits their
activities generate) varies with income
Social Democratic Perspective
30
Tax Credits – Make Refundable and Taxable




More nearly achieves the objectives of
subsidy programs
Removes inequities between large diverse
corporations and smaller more specialized
corporations
Saves the compliance and other costs of
having corporations attempt to sell off, in
effect, their excess tax expenditures
through leasing and other arrangements.
Tax credits are government subsidies and
should be taxed in the same way as other
government subsidies.
Social Democratic Perspective
31
Minimize the Use of Tax Expenditures (1)








They disguise the true size of government
They require the tax system to have higher tax rates
than otherwise would be the case, resulting in
increased distortions.
Since they are open-ended, they often lead to greater
levels of spending than expected and thus they make it
difficult to project tax revenues.
They lead to unintended inefficiencies and inequities.
They jeopardize the main functions of the tax system –
to raise revenue and to achieve a more socially
acceptable distribution of income.
They complicate the tax system and thus increase the
cost of both complying with the system and
administering it.
Embedded in the tax system they are difficult to
monitor and adjust.
They are often difficult to coordinate with the technical
32
Social Democratic Perspective
tax system.
Minimize the Use of Tax Expenditures (2)







They consume and divert the resources in the revenue department
and disputes in their delivery taint the revenue department.
Revenue officials are unlikely to be experts with respect to the
diverse spending programs they are called upon to administer.
Tax lawyers and accounts – dedicated and highly paid individuals
whose job is to find ways to twist tax programs for the benefit of
their clients – become involved in their delivery.
They give rise to abuse and inordinate amounts of litigation as
taxpayers, advised by aggressive tax planners, attempt to qualify
for tax breaks that often turn on arbitrary and ambiguous
distinctions.
Their cost and even their existence are not transparent or subject
to budget scrutiny and, therefore, once enacted they are rarely
repealed.
They encourage interest groups to lobby for additional relief since
once a few exemptions are granted there is often little basis for
denying them to others and the fact that a particular case appears
analogous to one of the exemptions is always a plausible
argument.
They contribute to the public’s cynical attitude toward the tax
system and thus erode the
responsibility
to pay taxes.
33
Socialcivic
Democratic
Perspective
Convert Tax Expenditures to Direct Spending Program:
Example - The Charitable Deduction
•
•
Instead of a tax deduction for charitable contributions,
the government might match private donations to
charities by providing a grant that matched some
percentage of private donations received by charities.
The matching grant would be paid directly to charities,
quarterly.
Advantages:
• Promotes pluralism and altruism– everyone’s contribution
attracts the same percentage of government funds
• Controllability – the government is able to immediately
determine and adjust the amount spent
• Accountability and transparency– the amount of government
funds received by each public benefit organization is easily
determined
• Since individuals donors are unlikely to reduce donations by the
full amount of the lost tax benefits, the scheme increases
funding available to the voluntary sector
Socialdepartment
Democratic Perspectiveis no longer involved in34this
• The tax system and tax
spending program, with all the advantages that entails.
Embed Tax Expenditures in the Budget Process








List all tax expenditures by functional category
Provide estimates of forgone revenue
List tax expenditures in order of size
Provide the incidence of tax expenditures by
income class
Provide information on the incidence of
personal tax expenditures by age cohort
Subject to same performance and evaluation
process as direct spending
Make tax expenditures subject to departmental
spending limits
List entities that benefit from tax expenditures
and the amount
Social Democratic Perspective
35
Good Luck
Social Democratic Perspective
36