Paul L. Caron

Monday, January 23, 2012

OECD: Using Tax Policy to Reduce Income Inequality, Boost Economic Growth

OECDOECD, Reducing Income Inequality While Boosting Economic Growth: Can It Be Done?:

[S]ome policy options that could promote growth and reduce inequality:

  • Re-assess tax expenditures that benefit mainly high-income groups (e.g. tax relief on mortgage interest). Cutting back such tax expenditures is likely to be beneficial both for long-term GDP per capita, allowing a reduction in marginal tax rates, and for a more equitable distribution of income. Lowering tax expenditures would also reduce the complexity of the tax system, and thus tax compliance and collection costs.
  • Reduce distortions in taxing capital income. Tax relief – such as reduced taxation for capital gains from the sale of a principal or secondary residence – often distorts resource allocation without boosting aggregate savings and growth, and benefits mainly high-income groups. Specific tax relief may also provide tax avoidance instruments for top-income earners. In particular, there is little justification for tax breaks for stock options and carried interest. Raising such taxes would increase equity and allow a growth-enhancing cut in marginal labour income tax rates.

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