Has the OECD abandoned its neo-liberal taxation policies?

Paul Sweeney: The OECD has relentlessly pursued a neo-liberal taxation policy. It seldom uses the word taxation without the appendage “burden” For its tax department, tax is not a “charge” or a “payment”, but nearly always a “burden”. On taxation, the OECD seemed like a Koch Brothers’ funded think-tank rather than one funded by governments. So when it revises its thinking in a new paper, it has to be welcome.

The Paris-based think tank is very influential on economic, educational and social policies. OECD data on taxation is extremely informative and very useful in comparing tax systems across its 34 rich member states.

It produces a great deal of useful data – though its conclusions are often informed by conservative and at times neo-liberal thinking. For example it coined the terms “harmful taxes” and the “hierarchy of taxes” thinking which generally favour corporates and the rich. It asserts that the most “harmful taxes” are on corporate profits and it has produced many documents calling for what it terms “growth friendly taxes”. “Growth friendly” to OECD tax department means friendly to business and to the very well-off and such taxes are often highly regressive for working people.

So it’s a pleasant surprise when OECD produces a paper “Tax design for Inclusive Growth” calling for Governments to “use tax policy to drive forward economic agendas that seek to boost growth while sharing the benefits more evenly within society.” And it also says “with fiscal consolidation, there is scope for tax policy to play a bigger role in income redistribution.”

Finally.

Its says that “against a backdrop of historically high income and wealth inequality, this new OECD research underlines the key role that tax policy can play in not only supporting growth, but also in addressing distributional concerns.”

The paper examines how the design features of countries’ tax systems can be strengthened to support inclusive economic growth. Indeed this paper seeks to re-assess the policy recommendations stemming from the 2008 “Tax and Economic Growth” report, which focused on the impact of taxes on economic growth only from an efficiency perspective, and it now explicitly takes account of equity considerations.

The recent OECD paper admits that it has examined “recent developments in the academic literature and in countries’ tax policies,” which includes Piketty and his colleagues, Saez and Zucman. The “paper examines how the basic design aspects of each tax can be improved to better achieve inclusive growth.” It also looks at the interactions of taxes with other factors – both within and beyond tax systems, including benefit systems.

The OECD paper also argues, correctly, that the “design of domestic tax policies needs to go hand in hand with the implementation of international tax rules and mechanisms that prevent tax evasion and tax avoidance”. The OECD is doing good work in this area in its BEPs programme.

It says that “recently, there have been calls to move away from a narrow focus on economic growth towards a greater emphasis on inclusiveness. These calls have been sparked by the rise in income and wealth inequality over the last 30 years as well as the economic crisis which caused the largest downturn in several generations.” It is time the OECD realised this.

“In this paper, tax design for inclusive growth is defined as tax policy which reconciles efficiency and equity considerations.” It argued that “this can be achieved either by minimising the trade-offs between efficiency and equity”. It also admits “the need for an overall tax systems approach to tax design for inclusive growth.”

OECD argues that, in principle, tax policies should aim to be efficient, i.e. to limit distortions in economic behaviour which may in turn hamper economic growth. “Tax systems should therefore be as neutral as possible to minimise discrimination in favour of, or against, any particular economic choice.” But in practice tax is used for many purposes – to incentivise certain behaviour, instead of direct provision by the state and to redistribute income and wealth. All distort markets. Some have major unintended outcomes.

OECD report declares that increasing income inequality became more widespread, “including in countries that have traditionally been more equal such as Germany, Denmark and Sweden, where inequality rose faster than in any other OECD country in the 2000s.” “On the other hand, inequality levels saw very little change in France, Hungary, Greece and Belgium while Turkey and Chile had a fall in inequality, “which is consistent with trends in other emerging countries where inequality is very high but generally declining.” It found that “in all OECD countries, wealth is much more unequally distributed than income.”

Taxes affect inequality in many ways. “The most direct way in which taxes redistribute income is by narrowing the distribution of disposable (post-taxes and transfers) income. However, taxes can also more indirectly reduce market (pre-taxes and transfers) income inequality, for instance by encouraging labour market participation and upskilling or by limiting the perpetuation of income inequality across generations.

Taxes also contribute to redistributing income across individuals’ life cycles. More generally, taxes raise revenues which are used to finance public programmes that reduce inequality.”

Seldom was tax policy so deliberately and insanely used as by the Irish state in incentivising property and related areas during a massive property bubble in the Noughties. This was part of political decisions taken by the then governments to assist (and ultimately destroy) their builder and wealthy investing friends. These tax incentives – 100% tax write off of investments – ie 100% subsidy on the investments - also destroyed the economy.

In the next blog, we will look further at the OECD’s new recognition of the role of tax in addressing inequality and at its tax-by-tax discussion on tax design that supports inclusive growth.