A new OECD working paper entitled “The Tax Policy Landscape Five Years after the Crisis” published on 9 September 2013 looks at developments in tax policy in the five years since the financial crisis. The paper points out that in 2008 and 2009 countries responded to the crisis by making temporary tax cuts in an effort to stimulate their economies, but since that time the need to reduce budget deficits has led to increases in most major taxes in many countries. In many cases the tax base has also been broadened for taxes such as income tax.

The nature of the corporate income tax regime is seen as crucial to business investment and is often framed with this in mind. The corporate income tax regime is sensitive to effects of the business cycle and of the growing international nature of business, in a world where global value chains mean that many goods and services can be said to be made in the world rather than made in a particular country. Tax is a policy instrument that can be easily and quickly changed by governments and is therefore important in promoting investment and fostering economic growth.

As a result of the global financial crisis business investment has been reduced in most OECD countries. In an effort to counter this trend many governments have reduced corporate income tax rates even though most other taxes have been increasing. New tax incentives for investment have been introduced, such as accelerated depreciation or tax incentives for research and development expenditure.

Personal income tax on income from capital such as interest, dividends and capital gains has increased during the period since the financial crisis. One reason for this, in addition to the need to collect more revenue and decrease budget deficits, has been a need to make tax systems fairer in the eyes of the taxpayers. Before the financial crisis policies were leading to a situation where the share of income of the highest 1% of earners had been increasing, but since the crisis there has been a move for high earners to pay what is seen as a fair share of tax.

These developments may also reflect a view that policy on corporate income tax is more important than changes to tax on personal income from capital in reducing the cost of capital and encouraging investment. By reducing corporate income tax and increasing personal income tax on income from capital governments may therefore be attempting to achieve a balance between providing incentives and promoting fairness.

Increases in unemployment in many countries have led to arguments for tax changes to provide incentives for hiring lower paid workers and to provide incentives for individuals to find this work. Other policies used to combat unemployment have been an increase in tax credits for those already in work and an increase in the annual tax-free allowance. At the other end of the income scale the personal taxes on the earned income of the highest earners have generally tended to increase.

Governments have stepped up their efforts to combat tax evasion with particular emphasis on international tax planning structures. Many of the efforts have related to high net worth individuals who hold their wealth in offshore accounts and there have also been moves to eliminate legal loopholes that could be exploited in tax planning. As individual countries have had difficulty in preventing individual tax evasion and aggressive tax avoidance schemes of corporations there has been increased cooperation through the OECD to increase the automatic exchange of tax information and to address base erosion and profit shifting.

Increased rates of consumption taxes including VAT have been a method used by governments to reduce budget deficits. This rate increase has however been counteracted by the reduced purchasing power of many households. This has tended to reduce consumption and therefore reduce the tax take from consumption taxes.

The paper concludes that a feature of tax policy since the financial crisis has been the influence of short term fiscal considerations, first in terms of the need to stimulate demand and later the need to raise more tax to reduce deficits. Policy is also influenced by long term structural trends such as globalization, the increasing significance of intangible assets and the need to deal with inequality of income. In the future tax policy is likely to continue to be shaped by wider economic and social considerations such as fiscal consolidation and the need to reduce inequality and ensure a fair distribution of the tax burden among income groups. Tax policy will be used to restore growth of output and employment, take advantages of opportunities arising from technological change and achieve an equitable distribution of income.