OECD Recommends U.S. Tax Reform

The international Organization for Economic Cooperation and Development has released a new report suggesting a number of reforms to strengthen the U.S. economic recovery, including tax reform.

The organization acknowledged that economic recovery in the U.S. is stronger than in most OECD countries, but it will remain sluggish unless new reforms are launched to boost growth.

In the OECD’s latest Economic Survey of the United States, the report noted that the U.S. recovery has spread across a wide array of sectors.  Most banks have generally returned to health, housing prices are rising and unemployment has fallen. However, growth could be bolstered by new reforms of taxes, education, training, immigration and working conditions—all of which could improve the economic prospects of middle-class families.

Tax reform has a key role to play, according to the report, as business investment is discouraged by high marginal tax rates while numerous tax expenditures distort resource allocation. 

“Aggressive tax planning by multinational firms also imposes a higher tax burden on everybody else; and individual taxpayers face costly compliance obligations,” said the report.

“This isn’t a business as usual recovery for the United States—the pace of growth is slow in historical perspective,” OECD Secretary-General Angel Gurría said in launching the survey in Washington, D.C., last Friday. with Jason Furman, chairman of the Council of Economic Advisors. “Steadfast action is needed to implement the reforms that will bolster the economy’s growth potential and make it more inclusive and greener. In this regard, I particularly welcome President Obama’s recent announcement of concrete measures to cut carbon emissions.”

The report recommended cutting the marginal corporate income statutory tax rate and broadening the tax base, notably by phasing out tax allowances. It also urged the U.S. to act towards rapid international agreement and take measures to prevent base erosion and profit shifting, or BEPS. The OECD is drawing up a set of standards in an effort to prevent BEPS abuses. The report also suggested the U.S. make the personal tax system more redistributive by restricting regressive income tax expenditures.

The report noted that cutting the statutory marginal corporate income tax rate and broadening the base would also lower the incentive to shift business activity to non-corporate forms and support long-term growth.

“Another consequence of the current international tax rules is that multinational firms avoid paying taxes by using a host of legal provisions to narrow their tax base and shift their profits to low-tax foreign jurisdictions,” said the report. “The magnitude of these operations is so large that some multinational firms pay very low taxes, despite being highly profitable. In the current context of fiscal constraints and severe loss of trust in institutions, it is important that these firms pay their fair share of taxes. Taxes unpaid by multinational firms transfer the tax burden to everybody else, hence imposing distortions on other sectors. Reforms to combat base erosion and profit shifting (BEPS) would go a long way towards achieving this goal and towards supporting overall tax reform efforts by leveling the playing field. In this regard continued U.S. leadership on the BEPS project is crucial for ensuring that such reforms are consistent and coordinated across countries.”