NCPA - National Center for Policy Analysis

OECD Report Recommends U.S. Tax Reform

February 27, 2002

Commenting on U.S. federal tax cuts enacted last year, a report from the Organization for Economic Cooperation and Development (OECD) says, "the average tax burden does influence the growth rate of the economy and so these cuts should boost the medium-term growth rate of the economy by a small yet worthwhile amount."

  • In comparison to OECD countries, the United States has relatively low taxes; on average, they have total tax burdens about one-third higher than ours.
  • However, the OECD explains, it is not just the amount of money that the state takes that affects growth, but how it does so.
  • The U.S. tax system is unusually complex and has disincentive effects out of proportion to the revenue raised.

A key source of complexity is the Alternative Minimum Tax, which appears to be unique among industrialized countries. It is supposed to ensure that all rich people pay some taxes; but its burden now falls most heavily on middle income taxpayers.

Another source of complexity are special provisions of the tax law. At least 50 so-called tax expenditures have been added to the Tax Code since 1986, lowering federal revenue by about 1.5 percent of gross domestic product.

The great achievement of the Tax Reform Act of 1986 was to get the top income tax rate down to 28 percent. At that level, most tax loopholes and shelters are not worth bothering with. But Congress has incrementally repealed almost all of the reforms. With the top rate now 39.6 percent, rich people spend considerably more time sheltering their income.

The OECD says this misdirection of economic activity reduces federal revenue and stifles growth. Thus "the fall in tax yields from rate cuts would be significantly offset by changed behavior and perhaps most markedly at high income levels."

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, February 27, 2002; see Richard Herd and Chiara Bronchi, "Increasing Efficiency and Reducing Complexity in the Tax System in the United States," Economics Department Working Paper No. 313 (December 17, 2001).

 

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