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Tax policy: going beyond
budgetary impacts
Luiz de Mello
OECD Economics Department
OECD Network of Parliamentary Budget
Officials
Lisbon, 5 February 2019
 High tax takes, spending and debt in OECD countries
 Governments under pressure to be efficient and cost-
effective
 Conventional assessment of tax policy tends to focus on
budgetary impacts
 Several other impacts are also important: allocative
efficiency (growth), incidence (income distribution), etc.
 Tax policy as part of broader public finance reform,
including spending
Context and background
The tax take has risen gradually
Source: OECD Public Finance Dataset (Bloch et al., 2016), 2018 update.
Personal income
taxes
Personal income
taxes
Personal income
taxes
Social security
contributions
Social security
contributions
Social security
contributions
Corporate income
taxes
Corporate income
taxes
Corporate income
taxes
Environmental
taxes
Environmental
taxes
Environmental
taxes
Consumption taxes Consumption taxes Consumption taxes
Property taxes Property taxes
Property taxes
Other primary
revenue
Other primary
revenue
Other primary
revenue
0
5
10
15
20
25
30
35
40
45
2001 2007 2014
% of potential
GDP
Primary receipts adjusted for the cycle
No linear link between size and efficiency
Source: Fournier and Johansson (2016) and 2018 update of Bloch et al.’s (2016) database.
Sizeofgovernment(cyclicallyadjustedspendingasa
ratiotopotentialGDP,2016,percent)
Index of perceived government effectiveness
Area where greater size means lower GDP
Area where greater size
goes with higher GDP
Estimate long-term effects of policy reforms on
• Output per capita
• Household disposable income by decile allowing to gauge
• Moves relative to other deciles
• Changes in absolute income levels by decile
With econometric regressions
• Production function framework for output
• Estimation by decile
• Long-term effects (after cyclical impacts have played out)
On an internationally comparable dataset
• Covers 35 countries over 1985-2014
• Adjusts for cyclical effects
OECD inputs to tax reforms
Tax policy has long-term growth and
distributional effects
Permanent percentage effect on output per capita of a tax change
(unchanged overall government spending and revenue)
Note: The magnitude of the tax changes is the standard deviation for each country averaged across countries. The
brackets show 10% confidence intervals.
Source: Cournède, Fournier and Hoeller (2018).
The bars show the point estimates while bracketed solid lines depict the 10% confidence intervals. Estimates come from panel regressions covering 34 OECD countries over 1981-2014 or fewer observations depending on da
0 2 4 6
Easing the labour tax wedge on low earnings (1.7 pp)
Increasing inheritance taxes (0.06 pp of GDP)
Lowering the CIT effective rate (4.4 pp)
Easing the tax burden on above-average labour earnings (1.7
pp)
Lowering wealth taxes (0.1 pp of GDP)
Raising recurrent property taxes (0.2 pp of GDP)
inequality-widening inequality-narrowing no identified effect on inequality
Distributional effects: net wealth taxes
Estimated long-term change in disposable income after permanently reducing net
wealth tax receipts by 0.1% of GDP while increasing other taxes
Source: Cournède, Fournier and Hoeller (2018).
-0.5
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
D1 D2 D3 D4 D5 D6 D7 D8 D9 D10
%CHANGEININCOME
DECILE OF INCOME DISTRIBUTION
Lower bound Estimate Higher bound
POOREST 10% RICHEST 10%
Note: the bounds delineate 90% confidence intervals.
Distributional effects: inheritance taxes
Estimated long-term effect on disposable income of a large tax-mix shift involving
increases in inheritance taxes allowing proportionaly cuts in other taxes
Source: Cournède, Fournier and Hoeller (2018).
-2
-1
0
1
2
3
4
5
6
7
8
D1 D2 D3 D4 D5 D6 D7 D8 D9 D10
%CHANGEININCOME
DECILE OF INCOME DISTRIBUTION
Lower bound Estimate Higher bound
POOREST 10% RICHEST 10%
Note: the bounds delineate 90% confidence intervals.
A large tax-mix shift is defined as having a 10% probability of being observed over 20 years
0
0.5
1
1.5
2
2.5
3
D1 D2 D3 D4 D5 D6 D7 D8 D9 D10
%CHANGEININCOME
DECILE OF INCOME DISTRIBUTION
Lower bound Estimate Higher bound
POOREST 10% RICHEST 10%
Distributional effects: tax on low-wage
earners
Estimated long-term effect on disposable income of reducing the labour tax wedge
applicable at 67% of average income by one percentage point while increasing other
taxes proportionally to compensate the revenue loss
Source: Cournède, Fournier and Hoeller (2018).
Note: the bounds delineate 90% confidence intervals.
Shifting spending away from subsidies boosts
output but only raises above-average incomes
Estimated long-term change in disposable income after permanently reducing
subsidies by 0.1% of GDP while increasing other spending items
Source: Cournède, Fournier and Hoeller (2018).
-2
-1
0
1
2
3
4
D1 D2 D3 D4 D5 D6 D7 D8 D9 D10
%CHANGEININCOME
DECILE OF INCOME DISTRIBUTION
Lower bound Estimate Higher bound
POOREST 10% RICHEST 10%
Note: the bounds delineate 90% confidence intervals.
Understanding distributional impacts helps to
design reform packages
Source: Cournède, Fournier and Hoeller (2018).
Percent
0
5
10
15
20
25
30
35
40
0
5
10
15
20
25
30
35
NZL
CHL
KOR
JPN
DEU
AUS
GBR
ISL
NOR
PRT
ESP
SWE
GRC
FIN
ITA
FRA
Bottom quintile Middle quintile Top quintile
Long-term change in disposable income following a ½ per
cent of GDP increase in environmental taxes accompanied by
a same-sized reduction in the all-in tax wedge on low-income
Another example: combining subsidy cuts with a
reduction in the low-income tax wedge
Source: Cournède, Fournier and Hoeller (2018).
Percent
0
5
10
15
20
25
30
35
40
0
10
20
30
40
NZL
CHE
CHL
CAN
KOR
IRL
JPN
USA
DEU
ISR
AUS
MEX
GBR
DNK
ISL
LUX
NOR
POL
PRT
SVN
ESP
SVK
SWE
CZE
GRC
NLD
FIN
HUN
ITA
AUT
FRA
BEL
Bottom quantile Middle quintile Top quintile
Long-term change in disposable income following a ½ per cent
of GDP cut in subsidies accompanied by a same-sized reduction
in the all-in tax wedge on low-income earners
Political economy of tax reforms
• Ease effective marginal tax rates on low-
income earners
• Hike inheritance taxes
Reduce disposable
income disparities
• Increase public investment
• Raise recurring property taxes
• Lower effective corporate income tax rates
Leave disposable
income disparities
broadly unchanged
and improve absolute
income levels for all
• Reduce subsidies,
• Lower wealth taxes
• Lighten the tax burden on above-average
labour earnings
Widen income
disparities, but leave
no group worse off in
terms of absolute
income
Thank you
 Cournède, B., J.-M. Fournier and P. Hoeller (2018), “Public Finance Structure and
Inclusive Growth”, OECD Economic Policy Paper, No. 24, OECD Publishing, Paris.
 Akgun, O., D. Bartolini and B. Cournède (2017), “The Capacity of Governments to
Raise Taxes”, OECD Economics Department Working Papers, No. 1407, OECD
Publishing, Paris, http://dx.doi.org/10.1787/6bee2df9-en.
 Akgun, O., B. Cournède and J. Fournier (2017), “Effects of the Tax Mix on
Inequality and Growth”, OECD Economics Department Working Papers, No. 1447,
OECD Publishing, Paris, http://dx.doi.org/10.1787/c57eaa14-en.
 Fournier, J. (2016), “The Positive Effect of Public Investment on Potential Growth”,
OECD Economics Department Working Papers, No. 1347, OECD Publishing,
Paris, http://dx.doi.org/10.1787/15e400d4-en.
 Fournier, J. and Å. Johansson (2016), “The Effect of the Size and the Mix of Public
Spending on Growth and Inequality”, OECD Economics Department Working
Papers, No. 1344, OECD Publishing, Paris, http://dx.doi.org/10.1787/f99f6b36-en.
These reports provide additional results and
more detail on the analysis
Look up your country on the interactive map
http://oe.cd/pfig

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Tax policy and its economic and budgetary impacts - Luiz de Mello, OECD

  • 1. Tax policy: going beyond budgetary impacts Luiz de Mello OECD Economics Department OECD Network of Parliamentary Budget Officials Lisbon, 5 February 2019
  • 2.  High tax takes, spending and debt in OECD countries  Governments under pressure to be efficient and cost- effective  Conventional assessment of tax policy tends to focus on budgetary impacts  Several other impacts are also important: allocative efficiency (growth), incidence (income distribution), etc.  Tax policy as part of broader public finance reform, including spending Context and background
  • 3. The tax take has risen gradually Source: OECD Public Finance Dataset (Bloch et al., 2016), 2018 update. Personal income taxes Personal income taxes Personal income taxes Social security contributions Social security contributions Social security contributions Corporate income taxes Corporate income taxes Corporate income taxes Environmental taxes Environmental taxes Environmental taxes Consumption taxes Consumption taxes Consumption taxes Property taxes Property taxes Property taxes Other primary revenue Other primary revenue Other primary revenue 0 5 10 15 20 25 30 35 40 45 2001 2007 2014 % of potential GDP Primary receipts adjusted for the cycle
  • 4. No linear link between size and efficiency Source: Fournier and Johansson (2016) and 2018 update of Bloch et al.’s (2016) database. Sizeofgovernment(cyclicallyadjustedspendingasa ratiotopotentialGDP,2016,percent) Index of perceived government effectiveness Area where greater size means lower GDP Area where greater size goes with higher GDP
  • 5. Estimate long-term effects of policy reforms on • Output per capita • Household disposable income by decile allowing to gauge • Moves relative to other deciles • Changes in absolute income levels by decile With econometric regressions • Production function framework for output • Estimation by decile • Long-term effects (after cyclical impacts have played out) On an internationally comparable dataset • Covers 35 countries over 1985-2014 • Adjusts for cyclical effects OECD inputs to tax reforms
  • 6. Tax policy has long-term growth and distributional effects Permanent percentage effect on output per capita of a tax change (unchanged overall government spending and revenue) Note: The magnitude of the tax changes is the standard deviation for each country averaged across countries. The brackets show 10% confidence intervals. Source: Cournède, Fournier and Hoeller (2018). The bars show the point estimates while bracketed solid lines depict the 10% confidence intervals. Estimates come from panel regressions covering 34 OECD countries over 1981-2014 or fewer observations depending on da 0 2 4 6 Easing the labour tax wedge on low earnings (1.7 pp) Increasing inheritance taxes (0.06 pp of GDP) Lowering the CIT effective rate (4.4 pp) Easing the tax burden on above-average labour earnings (1.7 pp) Lowering wealth taxes (0.1 pp of GDP) Raising recurrent property taxes (0.2 pp of GDP) inequality-widening inequality-narrowing no identified effect on inequality
  • 7. Distributional effects: net wealth taxes Estimated long-term change in disposable income after permanently reducing net wealth tax receipts by 0.1% of GDP while increasing other taxes Source: Cournède, Fournier and Hoeller (2018). -0.5 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 D1 D2 D3 D4 D5 D6 D7 D8 D9 D10 %CHANGEININCOME DECILE OF INCOME DISTRIBUTION Lower bound Estimate Higher bound POOREST 10% RICHEST 10% Note: the bounds delineate 90% confidence intervals.
  • 8. Distributional effects: inheritance taxes Estimated long-term effect on disposable income of a large tax-mix shift involving increases in inheritance taxes allowing proportionaly cuts in other taxes Source: Cournède, Fournier and Hoeller (2018). -2 -1 0 1 2 3 4 5 6 7 8 D1 D2 D3 D4 D5 D6 D7 D8 D9 D10 %CHANGEININCOME DECILE OF INCOME DISTRIBUTION Lower bound Estimate Higher bound POOREST 10% RICHEST 10% Note: the bounds delineate 90% confidence intervals. A large tax-mix shift is defined as having a 10% probability of being observed over 20 years
  • 9. 0 0.5 1 1.5 2 2.5 3 D1 D2 D3 D4 D5 D6 D7 D8 D9 D10 %CHANGEININCOME DECILE OF INCOME DISTRIBUTION Lower bound Estimate Higher bound POOREST 10% RICHEST 10% Distributional effects: tax on low-wage earners Estimated long-term effect on disposable income of reducing the labour tax wedge applicable at 67% of average income by one percentage point while increasing other taxes proportionally to compensate the revenue loss Source: Cournède, Fournier and Hoeller (2018). Note: the bounds delineate 90% confidence intervals.
  • 10. Shifting spending away from subsidies boosts output but only raises above-average incomes Estimated long-term change in disposable income after permanently reducing subsidies by 0.1% of GDP while increasing other spending items Source: Cournède, Fournier and Hoeller (2018). -2 -1 0 1 2 3 4 D1 D2 D3 D4 D5 D6 D7 D8 D9 D10 %CHANGEININCOME DECILE OF INCOME DISTRIBUTION Lower bound Estimate Higher bound POOREST 10% RICHEST 10% Note: the bounds delineate 90% confidence intervals.
  • 11. Understanding distributional impacts helps to design reform packages Source: Cournède, Fournier and Hoeller (2018). Percent 0 5 10 15 20 25 30 35 40 0 5 10 15 20 25 30 35 NZL CHL KOR JPN DEU AUS GBR ISL NOR PRT ESP SWE GRC FIN ITA FRA Bottom quintile Middle quintile Top quintile Long-term change in disposable income following a ½ per cent of GDP increase in environmental taxes accompanied by a same-sized reduction in the all-in tax wedge on low-income
  • 12. Another example: combining subsidy cuts with a reduction in the low-income tax wedge Source: Cournède, Fournier and Hoeller (2018). Percent 0 5 10 15 20 25 30 35 40 0 10 20 30 40 NZL CHE CHL CAN KOR IRL JPN USA DEU ISR AUS MEX GBR DNK ISL LUX NOR POL PRT SVN ESP SVK SWE CZE GRC NLD FIN HUN ITA AUT FRA BEL Bottom quantile Middle quintile Top quintile Long-term change in disposable income following a ½ per cent of GDP cut in subsidies accompanied by a same-sized reduction in the all-in tax wedge on low-income earners
  • 13. Political economy of tax reforms • Ease effective marginal tax rates on low- income earners • Hike inheritance taxes Reduce disposable income disparities • Increase public investment • Raise recurring property taxes • Lower effective corporate income tax rates Leave disposable income disparities broadly unchanged and improve absolute income levels for all • Reduce subsidies, • Lower wealth taxes • Lighten the tax burden on above-average labour earnings Widen income disparities, but leave no group worse off in terms of absolute income
  • 15.  Cournède, B., J.-M. Fournier and P. Hoeller (2018), “Public Finance Structure and Inclusive Growth”, OECD Economic Policy Paper, No. 24, OECD Publishing, Paris.  Akgun, O., D. Bartolini and B. Cournède (2017), “The Capacity of Governments to Raise Taxes”, OECD Economics Department Working Papers, No. 1407, OECD Publishing, Paris, http://dx.doi.org/10.1787/6bee2df9-en.  Akgun, O., B. Cournède and J. Fournier (2017), “Effects of the Tax Mix on Inequality and Growth”, OECD Economics Department Working Papers, No. 1447, OECD Publishing, Paris, http://dx.doi.org/10.1787/c57eaa14-en.  Fournier, J. (2016), “The Positive Effect of Public Investment on Potential Growth”, OECD Economics Department Working Papers, No. 1347, OECD Publishing, Paris, http://dx.doi.org/10.1787/15e400d4-en.  Fournier, J. and Å. Johansson (2016), “The Effect of the Size and the Mix of Public Spending on Growth and Inequality”, OECD Economics Department Working Papers, No. 1344, OECD Publishing, Paris, http://dx.doi.org/10.1787/f99f6b36-en. These reports provide additional results and more detail on the analysis Look up your country on the interactive map http://oe.cd/pfig