January 20, 2009 12:51PM

OECD Admits High Personal and Corporate Tax Rates Hurt Prosperity

There’s additional evidence that the OECD is a two‐​headed entity. While the Committee on Fiscal Affairs persecutes low‐​tax jurisdictions as part of its anti‐​tax competition jihad, the economists at the Paris‐​based bureaucracy have published a new study showing that high tax rates on personal and corporate income reduce productivity and entrepreneurship:

Taxes can have an effect on countries’ material living standards by affecting the determinants of GDP per capita – labour, capital and productivity. For instance, by distorting factor prices and returns to market activities, they can alter households’ labour supply decisions and incentives to enrol in higher education, as well as firms’ incentives to invest and to hire employees, and thus, lead to an inefficient allocation of factor inputs and lower productivity. …The findings of this paper suggest that taxes have an adverse effect on industry‐​level investment. In particular, corporate taxes reduce investment by increasing the user cost of capital. …The paper finds new evidence that both personal and corporate income taxes have a negative effect on productivity. …High top marginal personal income tax rates are found to impede long‐​run productivity working through the channel of entrepreneurial activity and this effect is estimated to be stronger the higher the entrepreneurial activity is in an industry. …The results also support the assumption that social security contributions have a negative influence on TFP and that this effect is more pronounced in industries that are characterised by high labour intensity.