Publications banner
Taxnotes

Pandemic Led to Personal and Corporate Tax Cuts, OECD Says

By: Sarah Paez

 

Many governments shrank their personal income tax bases and cut corporate taxes or increased incentives to alleviate the economic pressure of the COVID-19 pandemic and spur growth, according to an OECD report.

 

Personal income tax cuts and base narrowing were mostly targeted at low- and middle-income households to encourage employment over the course of 2021 and provide in-work benefits, according to "Tax Policy Reforms 2022,“ released September 21. Many countries boosted corporate tax incentives to “stimulate investment and innovation.”

 

“Recent tax reforms have been targeted at stimulating economic recovery from COVID-19, while countries with the greatest fiscal space have been providing more generous tax benefits for longer periods of time,” said Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration, in a September 21 OECD release. “Countries have also used tax policy as one of their main tools in responding to rapid rises in energy prices.”

 

The report notes that progress on environmental taxes like carbon taxes and motor vehicle taxes slowed compared with previous years. Very few countries increased or introduced carbon taxes in 2021, and many of those that did combined them with cuts to personal and corporate income taxes. Carbon prices are low overall as a result of temporary cuts to energy taxes implemented in 2021 to alleviate economic pressure from rising energy prices, the report says.

 

In the report's section on policy responses to increased energy prices, the OECD urged governments to switch from short-term policies aimed at limiting price increases to policies that provide targeted income support for at-risk groups. It noted that governments have most often resorted to temporary indirect tax reductions, such as cuts to excise taxes on petroleum products, to solve the impact of rising energy prices.

 

Providing targeted income support “will ensure that the support provided is fair and effective, while limiting its effects on government budgets and maintaining price signals to encourage the transition to carbon neutrality. However, even the most sophisticated fiscal systems may not be fully geared to the task, calling for action to improve their capacity to target specific groups,” the report said.

 

Governments should move away from price controls or caps because they tend to disproportionately help high-energy consumers in higher-income households, and they may also limit the incentive for households to save energy or switch to renewable fuels, the report says. Countries should also phase out energy tax reductions, like those on excise duties or VAT, because they discourage reducing energy consumption as well and can be costly for governments.

 

In 2021 governments also reversed most of the temporary VAT changes implemented in 2020, according to the report. Many countries maintained standard and reduced VAT rates but changed their VAT bases. More specifically, in 2021, some countries permanently made reduced VAT rates applicable to a wider range of goods and services, and others applied reduced VAT rates to gas and electricity (to alleviate rising energy prices), both of which narrowed the VAT bases in those countries, the report says.

Company Tax Notes
Category FREE CONTENT;ARTICLE / WHITEPAPER
Intended Audience CPA - small firm
CPA - medium firm
CPA - large firm
Published Date 09/21/2022

User-added image

 


Taxnotes

Tax Notes
(703) 533-4432
www.taxnotes.com

Tax Notes is the first source of essential daily news, analysis, and commentary for tax professionals whose success depends on being trusted for their expertise.

Tax Notes is a portfolio of publications offered by Tax Analysts, a nonprofit tax publisher. It provides comprehensive and impartial coverage of tax news, while its commentary contributes important voices to the discussion and understanding of tax policy.

Founded in 1970, Tax Analysts was created to foster free, open, and informed discussion about taxation. In 1972 Tax Analysts published Tax Notes Federal, its first weekly journal, featuring news, commentary, and analysis on federal taxation. In 1989 Tax Analysts added Tax Notes International, a weekly magazine focused on international taxation. Tax Notes State rounded out the weekly portfolio in 1991. Each magazine offers best-in-class tax commentary and analysis on the latest changes in tax law and policy, as well as on court opinions, legislative action, and revenue rulings.

Tax Notes has continued to innovate through the years, adding the online daily news services Tax Notes Today FederalTax Notes Today International, and Tax Notes Today State between 1987 and 1991. Tax Notes also provides several research and reference tools, as well as specialized services focusing on exempt organizations, state tax audit guidance, and international tax treaties.