OECD (2010), “Tax Policy Reform and Economic Growth, OECD Publishing, 11/03/10

This OECD report underscores the point that VAT’s are least negative for economic growth, and that corporate income taxes are “most harmful” in stimulating investment and productivity.

As to the fears that VAT’s always grow, in the ten years from 2000 to 2010, 21 of 30 OECD countries with VAT’s held or reduced their VAT’s. Those 9 of 30 countries which increased their VAT’s raised the tax an average 1.6% absolute on an average base of 18.4%.

“Many countries have been running large budget deficits as a result of the financial and economic crisis with strongly increased debt levels as a consequence. Reducing debt levels, also in light of ageing societies and the resulting higher pension and health costs, has been – or very likely will be – put high on the political agendas in many countries. Debt-to-GDP levels can be reduced either by reducing spending or increasing taxes but also by increasing the GDP growth rate. Such considerations point to designing the tax system in such a way that it is the least negative for economic growth, p. 9 …

…In open economies the design of a national tax system will need to consider the design of tax systems in other countries, since countries are increasingly using their tax systems to improve their ability to compete in global markets, p. 19 …

…Corporate income taxes can influence the choice of location of factories and offices. The tax system is only one factor among many in improving countries’ competitiveness otherwise there would have been a large outlfow of capital and activities from high to low tax countries, but there is evidence that location decisions are becoming more sensitve to tax, p. 20 …

…Corporate income taxes are the most harmful for growth as they discourage the activities or firms that are most important for growth: investment in capital and productivity improvements. In addition, most corporate tax systems have a large number of provisions that create tax advantages for specific activities, typically drawing resources away from the sectors in which they can make the greatest contribution to growth, p. 22″

http://dx.doi.org/10.1787/9789264091085-en

NRF Distorts Domenici-Rivlin Sales Tax, 11/18/10

The National Retail Federation has it in for consumption taxes and wrongly opposes the Domenici-Rivlin plan, “Restoring America’s Future” from the Bipartisan Policy Center. NRF fears the short-term losses that might occur from an increase in prices. Fair enough. But, the Ernst & Young study they funded looks only to the effect of an ADD-ON value added tax, and that is not what the Domenici-Rivlin deficit reduction package is all about. (E&Y cannot be faulted; they were given the assignment to look only at an add-on VAT and not a VAT substitute for other taxes.)

First and foremost, D-R is intended to get the economy on a firm footing for growth, and they do this with an initial stimulus for jobs that puts money in the hands of consumers. NRF should really like that. The Deficit Reduction Sales Tax proposed in D-R is 3% in the first year, and rises to 6.5% thereafter, but it is offset in the first year by a payroll tax holiday for both employers and employees (combined 12.4%). Employers will have a reduced burden for employment, and that should help stimulate jobs. Employees will have extra cash in their pockets which when spent will be an off-budget stimulus to the economy. will be a boost to the economy and retail sales.

NRF is simply wrong-headed on this. The payroll tax cut and increase in consumer income in the Domenici-Rivlin plan will be good for retail business, jobs, and the economy.