Tax Reform in Open Economies

Tax Reform in Open Economies

International and Country Perspectives

Edited by Iris Claus, Norman Gemmell, Michelle Harding and David White

The eminent contributors (including Altshuler, Creedy, Freebairn, Gravelle, Heady, Kalb, Sørensen and Zodrow) investigate the beneficial directions for medium-term tax reform in the light of global developments and lessons from the latest taxation research. In addressing this issue, they review recent advances in both the theoretical and empirical tax literature and reform evidence from individual countries. Topics covered include the impact of taxes on economic performance; international and corporate taxation; personal tax and welfare systems; environmental taxation; and country-specific tax reform experiences.

Chapter 2: Taxes and Firm Performance: Evidence from the OECD

Åsa Johansson, Christopher Heady, Jens Arnold, Bert Brys, Laura Vartia and Philip Spier

Subjects: economics and finance, financial economics and regulation, public finance, public sector economics


Åsa Johansson, Christopher Heady, Jens Arnold, Bert Brys and Laura Vartia* 2.1 INTRODUCTION This chapter analyses the effects of changes in tax structures (the ways in which different tax instruments are designed and combined to generate revenues) on the performance of firms, and thus on the level and growth of GDP per capita. It draws on the results of a recent OECD study on tax and economic growth, described in Johansson et al. (2008).1 Since practical tax policy has many objectives, the results presented here do not constitute policy recommendations, as the single-minded pursuit of GDP growth could compromise other policy objectives. In particular, the chapter draws attention to a number of instances in which there is a tradeoff between growth and equity. Focusing on tax structures rather than levels (as measured, for example, by the overall tax–GDP ratio) is desirable because cross-country differences in tax levels largely reflect societal choices as to the appropriate level of public spending, an issue that is beyond the scope of tax policy analysis. In addition, the focus on tax structures allows a consideration of revenueneutral tax policy changes, and thus avoids the difficulty of taking account of how any changes in aggregate revenue might be reflected in changes in public expenditure. The importance of this second point can be seen by comparing (i) a tax revenue increase that finances increased infrastructure investment with (ii) a similar increase to finance increased social benefits. Policy (i) can be expected to have a better...

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