Personal income taxes Progressive personal income taxes reduce

Personal income taxes Progressive personal income taxes reduce growth n High top marginal personal income tax rates reduce productivity growth, especially in industries with industries characterised by high entry rates of new firms n High social security contributions reduce productivity growth, especially in labour intensive industries. n

Corporate taxes: industry level Corporate taxes reduce investment by increasing the user cost of capital. n Corporate taxes reduce productivity and seem to matter more in highly profitable/risky industries. n R&D tax incentives seem to increase productivity and seem to matter more in R&D intensive industries. n

Corporate taxes: firm level n n Statutory corporate taxes seem to have a smaller negative impact on productivity growth in firms that are both young and small. Statutory corporate taxes seem to have a stronger negative impact on productivity growth in ‘dynamic’ firms, that are profitable and experiencing rapid productivity growth.

The tax and growth Recurrent taxes on immovable property can offset other tax preferences and improve capital allocation n Taxes on property transactions also offset other tax preferences but discourage reallocation of housing – and labour n Other property taxes can also distort capital allocation and savings n

The tax and growth Consumption taxes can affect labour supply but are mainly otherwise neutral, especially VAT n Personal income taxes are more harmful because they are more progressive (marginal tax > average tax) and because they discourage savings n

The tax and growth n Corporate taxes are most harmful as they discourage investment and productivity improvements. They also reduce foreign direct investment and increase compliance costs. Finally, corporate taxes often have a large number of distortionary tax preferences for particular activities, distorting the allocation of resources

Other key policy issues Broadening the base of consumption taxes is better for growth than increasing the rate. n There is limited scope to improve growth by using multiple consumption tax rates, and their equity effects are best achieved by other means. n In-work tax credits can promote growth by increasing participation rates, but care is needed to contain costs and minimise adverse effects on hours worked. n

Growth and equity Move from income to consumption taxes generally seen as regressive n Reducing progressivity, including cuts to top rates of personal income tax, is regressive BUT: n Residential property tax need not be regressive n Corporate income tax may fall on workers n

CONCLUSIONS Growth can be increased, at least in the short-to-medium terms, by shifting away from income taxes n Recurrent taxes on immovable property are the least harmful to growth n It is necessary to design individual taxes well in order to benefit most from any tax shift n There is likely to be a trade-off between growth and equity, but there may be exceptions n

Laffer Curve �����