Tax is bad, says OECD


Over on Cato-at-Liberty, Dan Mitchell has a good couple of blogs (here and here) analyzing the OECD research on tax. As Dan points out, the OECD is a little schizophrenic on tax – while their Committee on Fiscal Affairs always seems desperate to stamp out tax competition in order to enable higher tax rates, their economists usually seem sensible, pro-growth and free market. Here are a few examples Dan pulls from their recent reports (on Japan and Investment and Productivity):

(1) Lower corporation taxes have a laffer curve effect

[T]he impact of lower tax rates on government revenues is likely to be limited by positive supply-side effects. Indeed, in some OECD countries, revenue was boosted by lower tax rates, thanks to higher profitability and the increased size of the corporate sector... [T]he amount of taxable income in the corporate sector tends to be higher in countries with low corporate tax rates... [T]here is almost no correlation between the statutory corporate tax rate and corporate tax receipts as a share of GDP.

(2) Progressive taxes are bad for economic growth

The weak degree of progressivity in the personal income tax system thus has a positive impact on both labour inputs and on human capital and labour productivity. Maintaining the relatively low degree of progressivity, or even reducing it further subject to the fiscal constraints, would be beneficial for Japan’s growth potential...

(3) Taxes in general are bad for the economy

The findings of this paper suggest that taxes have an adverse effect on industry-level investment. In particular, corporate taxes reduce investment by increasing the user cost of capital... The paper finds new evidence that both personal and corporate income taxes have a negative effect on productivity... High top marginal personal income tax rates are found to impede long-run productivity working through the channel of entrepreneurial activity...

All of which makes it sound to me like the OECD should be in favour of a low, single-rate flat tax.