Tax reforms accelerating with push to lower corporate tax rates

Pierre Moscovici, on the right, and Carlos Moedas. © European Union , 2018 / Photo: Jennifer Jacquemart.

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Countries have used recent tax reforms to lower taxes on businesses and individuals, with a view to boosting investment, consumption and labour market participation, continuing a trend that started a couple of years ago, according to a new report from the OECD.
Tax Policy Reforms 2018 describes the latest tax reforms across 35 OECD members, Argentina, Indonesia and South Africa. The report identifies major tax policy trends and highlights that economic stimulus provided by fiscal policy, including to a large extent through tax policy, has become more significant.

Significant tax reform packages were introduced in Argentina, France, Latvia and the United States, with a strong focus on supporting investment and some measures designed to enhance fairness. Other countries have introduced tax measures in a more piecemeal fashion.

Across countries, the report highlights the continuation of a trend toward corporate income tax rate cuts, which has been largely driven by significant reforms in a number of large countries with traditionally high corporate tax rates. The average corporate income tax rate across the OECD has dropped from 32.5% in 2000 to 23.9% in 2018. While the declining trend in the average OECD corporate tax rate has gained renewed momentum in recent years, corporate tax rate reductions are less pronounced than before the crisis.

“Among the countries that introduced significant corporate tax reforms were a number with high corporate tax rates, where tax reform was long overdue,” said Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration. “While these corporate tax cuts have created some concerns of a ‘race to the bottom,’ most of these countries appear to be engaged in a ‘race to the average,’ with their recent corporate tax rate cuts now placing them in the middle of the pack. We will be closely watching how other countries respond to this trend in the future.”

Beyond corporate tax reform, the OECD identifies a number of common tax reform trends in this year’s report. Personal income tax cuts were introduced in many countries, primarily to alleviate the tax burden on low and middle-income earners. A common strategy has been to increase earned income tax credits, which can achieve dual goals of improving labour market participation and enhancing the progressivity of the tax system.

Reforms to social security contributions have generally been limited, and these charges will continue to weigh heavily on labour income in many countries.

Value-added tax (VAT) rates stabilised, with South Africa being the only country where the standard VAT rate was raised in 2018. High VAT rates have led many countries to look for alternative ways of raising additional VAT revenues, notably through tax administration and anti-fraud measures.

New excise taxes are being introduced to deter harmful consumption, in addition to continued increases in excise duty rates on tobacco and alcohol. Some of the most notable reforms include new taxes on sugar-sweetened beverages in Ireland, South Africa and the United Kingdom, and the introduction of a tax on cannabis in Canada.

Environmentally-related tax reforms have continued to focus on energy taxes, where efforts have been made to go beyond road transport. Despite the large potential to generate environmental improvements, tax reforms outside of energy and vehicles, such as taxes on waste, plastic bags or chemicals, have been much less frequent, according to the report.

“As economic times improve, fiscal policy choices should avoid the risk of excessive pro-cyclicality and focus on supporting the longer-term drivers of growth and equity,” Mr Saint-Amans said. “Continued international cooperation will also be important to continue the fight against international corporate tax avoidance, in line with the commitments made by countries to implement the minimum standards and recommendations agreed upon as part of the OECD/G20 Base Erosion and Profit Shifting (BEPS) project.”