Evolving Tax Policy: Long-Term Fiscal Priorities in London
The landscape of tax policy in London and around the world is undergoing significant changes as governments respond to ongoing crises and structural challenges. A recent report by the OECD sheds light on the trends in tax reforms implemented in 2023 across 90 jurisdictions, including all OECD countries. These reforms have been crucial in addressing the economic fallout from the COVID-19 pandemic, high levels of inflation, and long-term structural challenges affecting economies globally.
Shift in Tax Policy Trends
One notable trend highlighted in the report is the shift from tax-decreasing reforms introduced during the pandemic to more balanced approaches involving rate increases and base broadening initiatives. This shift reflects the need for governments to balance the demand for additional domestic resources with measures to alleviate the cost-of-living crisis affecting households and businesses.
According to OECD Secretary-General Mathias Cormann, tax reforms have been instrumental in protecting households and businesses from the economic impact of the pandemic and decade-high inflation levels. However, the focus is now shifting towards creating fiscal space to respond to future shocks and support long-term structural transformations in economies and societies.
Reversal of Corporate Income Tax Rates
The report also highlights a reversal in the trend of decreasing corporate income tax (CIT) rates observed since the Global Financial Crisis. In 2023, more jurisdictions implemented CIT rate increases than decreases, signaling a shift in tax policy towards establishing a more sustainable revenue base. With CIT rates at historic lows, countries are opting for base-narrowing measures instead of rate decreases to maintain revenue streams.
Global Minimum Tax Implementation
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 their intention to implement the GMT, with 36 jurisdictions taking steps towards its application starting in 2024. This move aims to ensure a level playing field for multinational corporations and prevent tax evasion through profit shifting.
Personal Income Tax and Social Security Contributions
While personal income tax (PIT) cuts have supported economic recovery and household incomes, there is a growing trend towards increasing social security contributions (SSCs) to address demographic shifts, rising healthcare costs, and social protection needs. With the population aged 65 and over projected to increase across OECD countries, governments are focusing on strengthening social security systems to meet the needs of an aging population.
Value-Added Tax and Carbon Taxes
Following significant VAT relief measures on energy products to counter rising energy costs and inflation, the pace of VAT cuts is slowing down. Some jurisdictions are even scaling back VAT relief, with six jurisdictions increasing their standard VAT rate in 2023. The use of reduced VAT rates to promote lower-carbon economies, such as for electric vehicles and solar panels, is becoming more common as countries aim to transition to a greener future.
Incentives for Electric Vehicles and Carbon Taxes
To support the transition to a low-carbon economy, several countries have extended tax incentives for electric vehicles at the time of purchase. Additionally, an increasing number of countries have raised carbon taxes to incentivize businesses and individuals to reduce their carbon footprint. These measures are essential in achieving climate targets and fostering sustainable growth in the long run.
Health-Related Excise Taxes
In a bid to promote healthy lifestyles and improve public health, several high- and upper-middle-income countries have strengthened health-related excise taxes on tobacco, alcoholic beverages, sugar-sweetened beverages, and gambling. These taxes not only generate revenue for governments but also discourage consumption of harmful products, leading to better public health outcomes.
Conclusion
As governments navigate the challenges posed by ongoing crises and long-term structural changes, tax policy remains a critical tool in shaping economic recovery and fostering sustainable growth. The trends highlighted in the OECD report demonstrate the evolving landscape of tax reforms and the shift towards creating fiscal space for future shocks and transformations. By implementing balanced tax policies that address current challenges while preparing for the future, governments can build resilient and inclusive economies for the years to come.