OECD urges rich nations like Australia to address income inequality

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This was published 6 years ago

OECD urges rich nations like Australia to address income inequality

By Nassim Khadem
Updated

Australia would benefit from cutting personal income tax and addressing high levels of income and wealth inequality, a new Organisation for Economic Cooperation and Development (OECD) report shows.

The Paris-based think tank examined rich countries' approaches to tax reform and found that while nations had moved to cut corporate taxes not enough was being done to reduce the divide between the rich and poor.

Inequality of market incomes (before taxes and transfers) has continued to increase slightly since the global financial crisis on average in OECD countries, it said, with 20 out of 33 countries examined reporting an increase.

This has worsened the drag on economy-wide household spending, it said.

OECD's head of tax Pascal Saint Amans says Australia could benefit if it handed down personal tax cuts.

OECD's head of tax Pascal Saint Amans says Australia could benefit if it handed down personal tax cuts.Credit: Michelle Smith

Need for inclusiveness

While a number of countries have embarked on reforms aimed at "fostering inclusiveness" and lowering personal income taxes on low and middle income earners and on families, Australia has not. Instead, Prime Minister Malcolm Turnbull's signature tax reform plan focused on company tax cuts.

The OECD's head of tax policy Pascal Saint Amans told Fairfax Media that while the report's aim was not to assess the tax policy merits of specific measures in countries, Australia could benefit if it moved down the same path of also handing down personal tax cuts.

"Tax cuts to low and middle income earners, in particular, can be an important way of supporting increased labour market participation and stronger economic growth," he said. "Well targeted tax cuts can also play an important role in promoting more inclusive growth."

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The report said in some countries there had been moves to shift the tax burden on capital income from the corporate to the personal level, "which is likely to have positive effects on both equity and growth".

Inequality between the rich and poor is rising, the OECD report says.

Inequality between the rich and poor is rising, the OECD report says.Credit: John Woudstra

Redistribute wealth?

"Tax reforms that contribute to strengthening progressivity and redistribution will play a key role in addressing today's high levels of income and wealth inequality and in bridging the divide between those who have benefited from growth and those who have not," the report said.

Labor's Andrew Leigh said: "Since the mid-1970s, earnings have risen three times as fast for the top tenth of Australian workers as for the bottom tenth. The labour share in the economy is at a four-decade low, and the home ownership rate is at a six-decade low. We want tax cuts for low and middle income earning Australians, not the big end of town."

But low growth rates, coupled with improvements in public budgets, have pushed many countries to cut corporate income tax rates. The think tank said continuing reductions in corporate tax rates had lowered the average across its 35 members to 24.7 per cent in 2016 (from 32.2 per cent in 2000).

Prime Minister Malcolm Turnbull's signature tax reform plan focused on company tax cuts.

Prime Minister Malcolm Turnbull's signature tax reform plan focused on company tax cuts.Credit: AAP

Eight countries reduced their corporate tax rates in 2017, with cuts averaging 2.7 percentage points. And three announced forthcoming tax cuts, including Australia (with planned cuts from 30 per cent to 25 per cent), Britain and France.

Tax competition intensifies

US President Donald Trump has also signalled he wants to cut America's corporate tax rate to 15 per cent, which will further intensify tax competition.

US President Donald Trump has signalled he wants to cut America's corporate tax rate to 15 per cent, which will further intensify tax competition.

US President Donald Trump has signalled he wants to cut America's corporate tax rate to 15 per cent, which will further intensify tax competition.Credit: AP

Tax cuts to low and middle income earners, in particular, can be an important way of supporting increased labour market participation and stronger economic growth

Pascal Saint-Amans, OECD's head of tax

The OECD's report said competition on corporate tax rates was intensifying, partly as a response to weak investment. There was also evidence of increased competition through new or enhanced tax incentives for R&D and intellectual property related activities, it said.

The report also looked at measures governments have implemented to tackle tax avoidance, following its global plan to fight the problem known as, Base Erosion and Profit Shifting (BEPS).

OECD's Angel Gurria says governments need to 'strike the right balance between maintaining a competitive tax system and ensuring they continue to raise the revenues'.

OECD's Angel Gurria says governments need to 'strike the right balance between maintaining a competitive tax system and ensuring they continue to raise the revenues'.Credit: Gian Ehrenzeller

It says the Turnbull government's Diverted Profits Tax ( DPT), also dubbed as the Google tax, "acts as a deterrent aimed at increasing corporate income tax revenues as well as preventing tax avoidance". But tax experts warn DPT could also create revenue disputes between taxing authorities, including the United States and Australia.

'Uncertain' tax outcomes

Mr Saint-Amans said "in relation to Australia's Diverted Profits Tax, we have previously said that we discourage countries from taking unilateral actions such as these".

"Where countries implement unilateral and uncoordinated measures this can give rise to greater uncertainty in tax outcomes," he said.

Mr Saint-Amans said the report did show a trend of countries around the world cutting corporate income tax. "This is largely driven by a desire to maintain competitiveness, attract investment, create jobs and boost growth," he said.

"In the case of Australia, its current corporate income tax rate rate remains above the OECD average and its revenues from corporate income tax – as a share of total revenues – are higher than most OECD countries. "

Angel Gurría, secretary-general of the OECD, said the increase in corporate tax competition "raises challenging questions for governments seeking to strike the right balance between maintaining a competitive tax system and ensuring they continue to raise the revenues necessary to fund vital public services, social programmes and infrastructure".

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