January 20, 2009 12:51PM

OECD Study Acknowledges Laffer Curve, Admits Progressivity Bad for Growth

The Paris‐​based Organization for Economic Cooperation and Development is a schizophrenic organization. Its Committee on Fiscal Affairs pushed to thwart tax competition in order to enable high tax rates, yet the bureaucracy’s professional economists publish studies noting that high tax rates are damaging. The latest example is a fiscal survey of Japan, which explicitly notes that lower corporate tax rates lead to a Laffer Curve effect, while also warning that progressivity (penalizing people who contribute most to society with higher tax rates) is bad for growth:

…additional government revenue should be balanced against the risk that high corporate tax rates will reduce economic activity and Japan’s potential growth rate, in the context of growing international tax competition. Given the serious fiscal situation, the government has thus far resisted pressure from domestic business groups, such as Nippon Keidanren (2006), to reduce statutory corporate tax rates. However, the impact of lower tax rates on government revenues is likely to be limited by positive supply‐​side effects. Indeed, in some OECD countries, revenue was boosted by lower tax rates, thanks to higher profitability and the increased size of the corporate sector (2007 OECD Economic Survey of the United Kingdom). Indeed, the amount of taxable income in the corporate sector tends to be higher in countries with low corporate tax rates (Figure 12). Consequently, corporate income tax receipts show less variation across countries as the impact of higher tax rates is negated by the lower level of taxable income. As a result, there is almost no correlation between the statutory corporate tax rate and corporate tax receipts as a share of GDP (Panel B). …The weak degree of progressivity in the personal income tax system thus has a positive impact on both labour inputs and on human capital and labour productivity. Maintaining the relatively low degree of progressivity, or even reducing it further subject to the fiscal constraints, would be beneficial for Japan’s growth potential.