Tax policy evolving : point of view, by OECD

from crisis management towards long-term fiscal priorities

A trend of decreased taxes on businesses and individuals during the pandemic and the subsequent inflationary period is now showing signs of deceleration and reversal, according to a new OECD report.

Working with over 100 countries, the OECD is a global policy forum that promotes policies to preserve individual liberty and improve the economic and social well-being of people around the world.

Tax Policy Reforms 2024 describes the tax reforms implemented in 2023 across 90 jurisdictions, including all OECD countries. It also identifies longer-term reform trends, highlighting how governments have used tax policy to respond to consecutive crises, high levels of inflation, and long-term structural challenges.

​OECD (2024), Tax Policy Reforms 2024: OECD and Selected Partner Economies, OECD Publishing, Paris, https://doi.org/10.1787/c3686f5e-en.​

The report outlines the evolving tax policy landscape as governments strive to balance the need for additional domestic resources with measures to alleviate the cost-of-living crisis affecting households and businesses. It shows a shift from the tax-decreasing reforms introduced during the COVID-19 pandemic and the subsequent period of high inflation to more balanced approaches involving rate increases and base broadening initiatives.

“Tax reforms have been one of the key policy tools used by governments to protect households & businesses from decade-high inflation levels and the economic impact of the COVID-19 pandemic,” OECD Secretary-General Mathias Cormann said. “We are now seeing the policy focus shift, and it should continue shifting, towards creating the fiscal space needed to respond to future shocks and support the long-term structural transformations of our economies and societies are facing, including digitalisation and AI, evolving patterns of trade, climate change, population aging.”

The new OECD report highlights data suggesting that the trend of decreasing corporate income tax (CIT) rates observed since the Global Financial Crisis is reversing, with more jurisdictions implementing CIT rate increases than decreases in 2023. With CIT rates at historic lows, countries and jurisdictions seeking favourable CIT treatment opted for base-narrowing measures instead of rate decreases. Furthermore, significant progress has been made towards implementing the Global Minimum Tax (GMT), which establishes a worldwide 15% floor for the effective tax rates of large multinational enterprises. As of April 2024, 60 jurisdictions had announced that they are considering or taking steps towards implementing the GMT, with 36 jurisdictions taking steps towards an application of the GMT starting in 2024, and some expect to implement legislation taking effect from 2025.

While personal income tax (PIT) cuts continued to support economic recovery and household incomes, there is an emerging trend towards increasing social security contributions (SSCs) to address demographic shifts, rising healthcare costs, and social protection needs. In particular, the share of the population aged 65 and over across OECD countries has doubled in recent decades and is projected to increase further, along with associated spending needs such as for long-term care. PIT reforms have focused on supporting low- and middle-income households, with a few countries increasing their top PIT rates.

Following significant value-added tax (VAT) relief measures on energy products to counter rising energy costs and inflation, the pace of VAT cuts is now slowing, and some jurisdictions are scaling back VAT relief. Six jurisdictions increased their standard VAT rate in 2023.

The use of reduced VAT to promote lower-carbon economies, through reduced rates for electric vehicles or zero rates for solar panels, is increasingly common. Several countries also extended tax incentives for electric vehicles at the time of purchase. Concurrently, a number of countries increased their carbon taxes to support the transition to a low-carbon economy.

In order to stimulate healthy lifestyles and improve public health, several high- and upper-middle-income countries strengthened health-related excise taxes on tobacco, alcoholic beverages, sugar-sweetened beverages, and gambling.

To access the report, data, and summary, visit https://oe.cd/tpr2024.

Full report

Exécutive summary

The annual publication "Tax Policy Reforms: OECD and Selected Partner Economies" provides a summary and comparison of tax reforms across countries. The report documents the evolution of tax policy changes over time and highlights recent trends in country tax policy. This year’s edition covers tax reforms introduced or announced during the 2023 calendar year within 90 member jurisdictions of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting, including all OECD countries.

Faced with consecutive challenges coupled with an uncertain macroeconomic outlook, policymakers have been navigating a complex terrain. Policymakers are tasked with raising additional domestic resources while simultaneously extending or enhancing tax relief to alleviate the cost-of-living crisis that is affecting households and businesses around the world. This balancing act has led to a range of strategies. On the one hand, governments further protected and broadened their domestic tax bases, increased rates, or phased out existing tax relief. On the other hand, reforms also kept or expanded personal income tax relief to households, temporary VAT reductions, or cuts to environmentally related excise taxes.

The trend towards tax decreasing reforms observed during the COVID-19 pandemic and the subsequent period of high inflation is showing signs of deceleration or reversal. While recent editions of the report have identified a trend of countries introducing both temporary and permanent tax concessions to support individuals and businesses during global macroeconomic shocks, 2023 has seen a relative decrease in rate cuts and base narrowing measures in favour of rate increases and base broadening initiatives across most tax types.

A notable shift occurred in the taxation of businesses, where the trend in corporate income tax (CIT) rate cuts seems to have halted, with far more jurisdictions implementing rate increases than decreases in 2023, for the first time since the first edition of the Tax Policy Reforms report in 2015. As the global economy continues to recover, this change reflects the need for additional revenues and an effort to enhance equity within the tax system. With statutory tax rates at historic lows, responses suggest that countries wanting to offer favourable CIT treatment to businesses are choosing base narrowing measures rather than rate decreases. In parallel, significant progress has been made towards implementing the Global Minimum Tax (GMT) to establish a worldwide floor for the effective tax rates of large multinational enterprises (MNEs). As of April 2024, 60 jurisdictions had announced publicly that they are taking steps towards introducing CIT or implementing the GMT, with 36 taking steps towards an application of the Global Minimum Tax starting in 2024, and some expect to implement legislation taking effect from 2025. Climate considerations are also increasingly influencing the design and use of tax incentives, with more jurisdictions implementing generous base narrowing measures to promote clean investments and facilitate the transition towards less carbon-intensive capital.

Although cuts to personal income taxes (PIT) remain a tool for supporting economic recovery and household incomes, a growing share of jurisdictions covered in this report are implementing social security contribution (SSC) increases. During the pandemic, PIT and SSC reforms were crucial for providing tax relief to households. However, since the pandemic, against a backdrop of demographic shifts such as population ageing, rising healthcare costs, and a heightened need for social protection financing, there has been a growing trend to broaden and increase SSCs. PIT reforms generally focused on supporting low- and middle-income households, with the number of base narrowing measures continuing to significantly exceed base broadening measures. Some countries also introduced progressive reforms shifting the tax burden away from low-income households and three countries increased their top PIT rate. Meanwhile PIT base broadening reforms were either implemented because the original motivations for the tax relief had dissipated, or due to a need for additional revenues to finance other government priorities. Reforms to capital income taxes remain modest as in previous years.

After various jurisdictions introduced significant VAT relief measures on energy products in response to a sharp rise in energy costs and subsequent inflation, the pace of such VAT cuts and base narrowing measures is slowing, with some scaling back VAT relief measures on those products. A large share of jurisdictions expanded or extended temporarily reduced VAT rates on energy products, allowing governments to enact visible policy measures that could have an immediate impact on household budgets. There was also a notable trend of jurisdictions using the VAT system to encourage the transition to lower-carbon economies through reduced rates for electric vehicles or zero rates for solar panels, for example. In contrast to previous years, however, six jurisdictions increased their standard VAT rate. Additionally, in an ongoing effort to raise revenues and promote public health by discouraging the consumption of certain products or activities, several high and upper-middle-income countries have intensified their health-related excise taxes, especially on tobacco, alcoholic beverages, sugar sweetened beverages (SSBs), and gambling.

The ongoing cost-of-living pressures continued to prompt jurisdictions to reduce taxes on energy use, a trend that initially emerged in 2022. Despite these inflation-induced challenges, however, several primarily high-income countries increased their carbon tax in 2023 to support the transition to a low-carbon economy. As the year progressed, the challenge for policy makers was to move from what were initially broad support measures to more targeted policy responses, due to the rising fiscal costs of these measures and their potential to undermine environmental incentives. In 2023 high-income countries thus generally opted for support measures that reduced excise tax rates only and avoided adjusting their carbon tax rates.