Which of the following is a secondary effect of government action that levies taxes on some in order to transfer income to others?

 3. Tax reform for inclusive and sustainable economic growth

The COVID-19 crisis has caused a significant deterioration in public finances, which calls for a rethink of tax and spending policies once the recovery is well underway. The unprecedented fiscal response to the COVID-19 crisis has been necessary and has prevented larger declines in employment, income and output, paving the way for a sustainable recovery. However, government debt in relation to GDP has reached the highest levels seen over the past several decades, which means that once the recovery is well advanced, policymakers will have to grapple with the challenge of ensuring public debt sustainability over a medium to long-term horizon.

In rethinking their approach to public finances, countries will need to adapt their tax policies to address the structural trends and challenges they face. Over the last decade, tax policy reform discussions have moved away from a relatively narrow focus on the link between taxation and economic growth (Arnold et al., 2011[49]; Lee and Gordon, 2005[50])towards tax reform that puts equity and economic growth on an equal footing. Increasingly, tax policy reform recommendations for inclusive growth have recognised that equity and growth can go hand in hand (Brys et al., 2016[51]). Tax policy is not static and needs to evolve in light of structural challenges and changing policy priorities so that it can continue to play a role in stimulating inclusive and sustainable growth. Moreover, the financial and economic crisis of 2008 and the COVID-19 crisis have highlighted the central role governments have in absorbing shocks, providing relief and promoting recovery. This role requires significant financial resources, the majority of which policymakers will be looking to tax systems to provide. As a result, there is a need for countries and policymakers to re-evaluate their tax systems and their previous tax policy advice to ensure that they take into account the changing economic and social landscape.

While taxes are the principal means through which governments raise revenues, the role of tax systems goes beyond revenue raising. Tax systems need to address multiple challenges. Tax systems can simultaneously raise revenues, while contributing to addressing the problems of low productivity growth and rising inequality in a context where debt levels have increased considerably as a result of the COVID-19 crisis. These challenges arise in a context of increasing fiscal pressures as a result of ageing populations and climate change. The mobility of capital and of (certain types of) labour in a globalised and rapidly innovating world raise the efficiency costs of using taxes on labour and capital to further enhance domestic equity goals. Technological change and its implications for the future of work challenge traditional social protection systems and require adjustment mechanisms to help individuals navigate the transition.

In many instances developing countries face additional challenges in the design of their tax systems. As fiscal space has become more limited and debt burdens even heavier in many developing countries as a result of the COVID-19 crisis, renewed efforts will be required to improve domestic resource mobilisation. Increasing levels of formalisation amongst businesses and in the labour market will be crucial to raise revenues for public spending in general, and social protection systems in particular, as will reviewing inefficient tax expenditure provisions. Finding ways to enhance the role of social security contributions and health taxes to better finance health systems and encourage healthier behaviours should also be a priority.

Following a systems approach to tax policy design

While improving the design of individual taxes is important, it is not sufficient to develop a coherent tax system that promotes inclusive and sustainable growth. Efficiency-equity trade-offs depend on the interactions between many factors both within and beyond tax systems (Alt, Preston and Sibieta, 2011[52]; Brys et al., 2016[51]; Slemrod and Gillitzer, 2013[53]). While this report focusses on tax policy, it is important to highlight that its interactions with other key fiscal policy design features, such as those related to public spending and the governance of the fiscal system are equally important in determining its effectiveness.

Tax system design will be influenced by a country’s spending priorities and, therefore, cannot be considered in isolation. The tax system needs to raise sufficient revenues to finance the spending priorities that governments have identified. Therefore, discussions about tax system design should not occur in isolation from discussions around the level and quality of public spending. In this context, the COVID-19 crisis and the ongoing structural challenges that countries face highlight the importance of ensuring that tax systems have the capacity to raise the revenues necessary to finance certain public spending priorities, including education and lifelong learning, resilience to health challenges, and investment in digital and green innovation and infrastructure.

Tax systems should be aligned with a country’s broader policy objectives. Tax systems should be designed in a way that provides direct and indirect support to the country’s broader policy objectives. For instance, tax systems can induce individuals to engage in certain behaviours and refrain from engaging in others, such as by promoting healthy consumption decisions through the use of health taxes.

Fiscal frameworks may also need to be adapted given increased financing needs and higher average debt levels. In general, fiscal frameworks will need to support resilient public finances by internalising future socio-economic and political uncertainties, for instance through the design of automatic stabilisers and fiscal rules, and active debt management (Orszag, Rubin and Stiglitz, 2021[39]). More specifically, rules that have led to excessive complexity, governance issues and poor design should be revised. Pro-cyclical fiscal policy should be avoided. Efficient governance of tax and public spending will also play a role, e.g. through independent fiscal institutions, spending reviews, multi-year budgeting and tax expenditure reports, as well as the relationships between different levels of government in taxation and public procurement, for instance.

Revisiting tax policy design criteria

The design of tax systems must be coherent to address the structural challenges countries face. Tax policy coherence has received little attention in the tax policy literature, resulting in tax policies that can provide contradictory incentives or have conflicting implications for equity. For instance, in the context of tackling the climate change challenge, some countries have introduced R&D tax incentives for green investment or subsidise building insulation while continuing to provide fossil fuel subsidies and tax pollution at a rate below its social cost. While some countries that have raised carbon prices continue to provide tax incentives for the use of company cars or to tax diesel more favourably than gasoline. In the personal income context, some countries have increased personal income tax rates at the top of the income distribution, while at the same time providing generous and highly regressive tax expenditures that benefit high-income earners.

The structural tendency towards further increases in inequality demand improvements in the redistributive capacity of the tax and transfer system. The tax system must account for forms of inequality that go beyond the standard concepts of horizontal and vertical equity to include a more explicit focus on equality of opportunity, gender and racial equity, intergenerational equity, regional equity, as well as equity between countries. While the distributional effects of taxes (and transfers) has received a lot of attention in the tax policy literature, of at least equal importance is whether the taxes imposed are affordable for those on whom they are imposed, which is necessary to avoid that the tax system pushing taxpayers into poverty. Finally, tax morale and the integrity of tax systems are increasingly challenged if certain societal groups perceive that the tax burden they pay is too large relative to the benefits and opportunities they receive. Similarly, taxpayers can lose confidence in the integrity of the tax system when corrective taxes are levied to induce behavioural change where there are limited alternatives to those behaviours or where there is insufficient time or resources to adjust their behaviours.

Longer time horizons should also be more explicitly incorporated into the design of tax systems to help tackle long-term challenges. This may involve tax measures that evolve over time. For instance, countries could further increase excise duties on transport to encourage electrification of vehicles, but gradually move towards some form of distance-based charging. Clear communication of policy direction will also be important if governments are to successfully induce behavioural change, such as clear long‑run trajectories for tax rates and prices. The increased digitalisation of the tax administration may enable certain types of income to be taxed on a lifetime rather than an annual basis, by averaging income over time in calculating personal income tax liabilities. Indeed, some countries have already been able to introduce a tax-free amount for lifetime wealth transfers in the context of their inheritance tax regimes.

Making tax reform happen

Changes to tax policy must consider the different ways and varying degrees that structural trends will affect households. Households who have lower incomes, are less skilled and are not active in the labour market are estimated to be hit harder by many of the structural trends than higher-income and higher-skilled workers who have greater financial means to absorb transition costs and may also be more likely to benefit from these longer-term changes. The implications of climate change will be felt by all, but richer households have a greater financial capacity to adapt to changing life conditions. In order to ensure that everyone has an opportunity to thrive, governments will have to carefully assess the impacts of policy changes and, where appropriate, design effective compensation mechanisms.

Designing effective compensation mechanisms has proven to be an exceptionally challenging aspect of implementing successful tax reforms. There are many reasons as to why this has been so difficult. From the growing pressures on governments to implement reforms with no or virtually no “losers” to the increasing challenge of not only adequately compensating households, but doing so to the extent that they also perceive this to be the case. Firstly, designing effective compensation mechanisms requires a detailed understanding of the distributional impacts of these long-term structural trends and the policies to be implemented in response to them. Secondly, governments need to decide who will be compensated, the value of the compensation and its duration. Thirdly, there are wide range of forms that compensation can take that may influence the success of any reform, including personal income tax reductions, increased pensions or cash benefits, training provisions, and subsidies for purchases of specified goods. Furthermore, reaching all households within the target group can be challenging, and different types of households might have to receive different types of compensation depending on their needs.

Introducing tax reforms that address the multiple challenges and opportunities that our economies face will be challenging and many different issues will need to be addressed simultaneously. The remainder of this section presents some initial insights in three areas of ongoing work: growth-friendly tax policies (Section 3.1), tax policies for equitable societies (Section 3.2) and taxation for a sustainable environment (Section 3.3), as well as highlighting the tax policy challenges faced by developing countries (Section 3.4). While the analysis does not aim to provide definitive answers, it offers some direction for reforms that will be explored as part of further work in the future.

 3.1. Growth-friendly tax policies

Tax policies to support inclusive and sustainable economic growth beyond COVID-19 will need to support the efficient use of productive factors, by encouraging labour market participation and skills development, and by increasing business investment, productivity growth and diffusion.

Structural trends and challenges are prompting a reconsideration of the relationship between tax design, investment and economic growth. While the literature on the impact of taxation and growth is long-standing, recent structural trends are prompting a rethink. Continued globalisation, through expansion in foreign direct investment (FDI) and deepening global value chains (GVCs), changing patterns of market concentration, and substantial changes to the international tax system all require a deeper analysis of the relationship between tax and investment, including of its international aspects, as well as how it varies across firms. There is also a need to understand how investment can support climate goals. Ageing societies, increased geographic worker mobility, and the growth of non-standard work are also prompting a reconsideration of the role of labour tax systems, focusing not only on the quantity of labour supply, but who supplies it, how, where and in what form. Skill-biased technological change, digitalisation, and automation all highlight the important role of human capital investment. The productivity slowdown, the rising role of intangibles, as well as concerns about productivity dispersion across firms, highlight the importance of considering how tax policies can support productivity growth, innovation, productivity diffusion, and business dynamism.

Tax and capital investment

Earlier research linking tax structures to economic activity has stressed the adverse effect of taxes on capital and labour income relative to other tax categories. Earlier studies have suggested that shifts in the tax mix from direct taxes to indirect taxes such as taxes on immovable property or consumption, are likely to be growth-enhancing (Johansson et al., 2008[54]; Arnold et al., 2011[49]). There is strong evidence to suggest that both tax levels and structures can affect economic performance across countries (OECD, 2010[55]).

However, many of these earlier studies focussed on the growth impacts of tax structures, without paying equal regard to the distributional and sustainability implications of tax policy. More recently, tax policy reform recommendations for inclusive growth have recognised that equity and growth can go hand in hand (Brys et al., 2016[51]). In light of structural challenges and changing policy priorities, tax policy will have to evolve further so that it can continue to play a role in stimulating inclusive and sustainable growth.

The behavioural impact of taxes may vary across contexts, in particular between countries who are at different stages of development, and good tax policy design will also depend on the tax system that is already in place. Aligned with a tax systems approach, the distortive impact of a shift in the tax mix, for instance, will depend on the tax mix that is in place and the level of the tax rates that are levied at the time reform is contemplated. Tax reform recommendations themselves can produce decreasing returns to scale and may have to be nuanced and even re-evaluated to the extent that they have already been successfully implemented in the past. These findings also imply that tax impacts on economic activity are likely to vary across a wide range of circumstances and that policy recommendations should therefore build on additional research using more disaggregated data.

In many countries, limited scope exists to further increase statutory VAT/GST rates, however, in many countries opportunities to broaden the VAT/GST base remain. In response to the financial and economic crisis of 2008/9, many OECD and G20 countries have increased their statutory VAT/GST rate in order to collect more tax revenues. For many countries, there is merit in prioritising reforms that broaden the VAT/GST base, in particular by abolishing targeted reductions and exemptions that are more beneficial to high income and wealthier households. Recent research has shown that broadening the VAT base through fewer reduced rates and exemptions is more conducive to higher long-run growth than a rise in the standard rate (Acosta-Ormaechea and Morozumi, 2019[56]).

The impact of tax structures may have been changing as the economy has evolved over recent decades. Key trends include expanding digitalisation, low interest rates, increased prominence of intangibles and expanding market concentration.An increasing amount of international evidence suggests that firm-level mark-ups and industry concentration are rising, particularly in digital-intensive and services sectors(Calligaris, Criscuolo and Marcolin, 2018[57]; Bajgar, Criscuolo and Timmis, 2020[58]; Syverson, 2019[59]) (De Loecker, Eeckhout and Unger, 2020[60]). The ability of firms to charge higher mark-ups may be due to a decrease in competition intensity; but it may also be the result of “winner-takes-most” dynamics where the most productive firms gain a larger share of the market (Autor et al., 2020[61]). Higher mark-ups and lower competition intensity have been associated with lower investment (Gutiérrez and Philippon, 2018[62]; Gutiérrez and Philippon, 2017[63]). Prolonged periods of low interest rates could have implications for the design of growth-enhancing tax policies (Auerbach and Gale, 2021[64]) as for example low rates may narrow the difference between accelerated and standard depreciation.

The international tax landscape is also evolving rapidly, as evidenced by the steady decline in statutory corporate income tax rates, an expansion of tax incentives and continued concerns about profit shifting. The average statutory corporate income tax (CIT) rate in OECD countries has declined from above 32% in 2000 to around 23% in 2020. A similar trend is observed across a sample of more than 90 developing and developed countries over the same time horizon, with the average CIT rate declining from around 28% to just below 21% (OECD, 2021[151]). Forward-looking effective average tax rates, capturing not only the statutory rates but also standard components of the corporate tax base, point in the same direction, declining on average from 29% to around 23% in a balanced panel of OECD and G20 countries over the period 1999 to 2017 (OECD, 2020[65]). Expenditure- and income-based tax incentives for R&D are increasingly used to promote business R&D in OECD countries and beyond (Appelt, Galindo-Rueda and González Cabral, 2019[97]; Evers, Miller and Spengel, 2014[149]; Gaessler, Hall and Harhoff, 2021[100]; OECD, 2021[151]), while developing and emerging countries make extensive use of tax incentives as discussed below. In addition, most major economies have now shifted from worldwide to territorial systems, implying that tax rate differentials have potentially become more relevant for real economic decisions. Given this background, countries face the challenge to combine growth-enhancing policies with the need to sustain tax revenues as well as ensure tax certainty.

Competitive pressures in the area of business taxation can be seen through the widespread use of tax incentives to encourage investment. In particular, emerging and developing economies often adopt tax incentives to attract FDI (Abbas and Klemm, 2013[70]; James, 2013[71]; IMF OECD UN World Bank, 2015[72]; Andersen, Kett and Von Uexkull, 2017[73]). These incentives are used in search of the positive spillovers on output, local employment and productivity that may come with increased investment activity, as well as due to domestic capital scarcity and lack of, or costly, development financing mechanisms.

Tax incentives often come at a substantial cost to a country and their use deserves careful monitoring and analysis to understand whether their benefits outweigh these costs.Poorly designed incentives may restrict revenue-raising capacity without yielding significant investment increases, thereby limiting efforts to mobilise domestic resources and creating windfall gains to investors, or yielding investments of low quality, with limited spillovers on productivity and employment (IMF OECD UN World Bank, 2015[72]). It is therefore essential that these incentives be well designed, transparent, maximise additionality, and minimise windfall gains. To maximise positive spillovers, investment tax incentives should align with broader policy goals such as advancing decarbonisation strategies, improving job quality, or improving local supply linkages.

The impacts of investment tax incentives depend on their design; with evidence suggesting that expenditure based incentives may perform better than income-based incentives although they can still involve substantial costs. The costs and benefits of investment tax incentives are highly design- and context-specific and are not always well understood.The empirical evidence on the benefits of tax incentives is limited but so far the evidence suggests that the design of incentives is critical for their success. Expenditure-based incentives (e.g., accelerated depreciation, allowances, and credits) increase the likelihood of generating additional investment as they directly target investment expenses. The value of income-based incentives (e.g., reduced rates and exemptions), on the other hand, relates to the profit rate of a firm. This may provide benefits to companies that plausibly would have invested regardless of the preferential treatment. Some of the literature has suggested limited investment responses to income-based incentives in developing economies (Klemm and Van Parys, 2012[74]; Chai and Goyal, 2008[75]). By contrast, there is evidence suggesting that expenditure based incentives have increased investment in OECD countries (Maffini, Xing and Devereux, 2019[76]; Zwick and Mahon, 2017[77]; House and Shapiro, 2008[78]; Cohen and Cummins, 2006[79]).

Recent research suggests that investment responses to taxation vary significantly across different firms. Empirical studies generally find a negative correlation between business taxation and investment (De Mooij and Ederveen, 2003[80]; Feld and Heckemeyer, 2011[81]). Higher corporate income tax, by reducing the after-tax returns on investment, can lead some firms to forgo, downscale or relocate some investment projects. However, in contrast to domestic firms, MNEs are able to shift profits to lower-tax jurisdictions thus avoiding the full tax burden associated with their investments and making them less sensitive to taxation (Sorbe and Johansson, 2017[82]). Higher mark-ups have been associated with lower sensitivity to investment, as mentioned above, an effect that could be driven by economic rents or an increased reliance on intangible assets (Crouzet and Eberly, 2020[83]) or competitive advantages gained through international tax planning (Sorbe and Johansson, 2017[82]). Investment of MNE entities located in jurisdictions with stronger transfer pricing regulations is more sensitive to tax changes, while global investment at the MNE group level does not show a significant response to a strengthening of these regulations (De Mooij and Liu, 2018[84]). New evidence also suggests that investment responses of entities that are part of highly-profitable MNE groups are more limited compared to entities in other groups (Millot et al., 2020[85]).

Given the evolving international environment, global coordination on tax policies may be even more important to support tax certainty, fiscal stabilisation and growth. Such coordination can play an important role in supporting revenues while limiting potentially negative impacts on investment. The two-pillar solution to address the tax challenges of the digital economy will introduce significant changes to the international tax rules targeted to large, highly profitable MNE groups (Pillar One) and MNE entities with low effective tax rates (Pillar Two). While global investment impacts are expected to be limited (OECD, 2020[65]), the reforms are likely to produce a more level playing field among MNEs, and relative to their smaller and domestic-only competitors, as well as those firms not engaging in profit shifting, due to the reform’s focus on the largest and most profitable MNEs, especially those engaging in profit shifting.

Policymakers should also consider the limited investment impacts of personal capital taxes. Some authors have argued that a potential reaction to competitive pressures is to reduce corporate taxes while increasing the taxation of capital at the shareholder level (Grubert and Altshuler, 2016[86]).Empirical evidence suggests that the impact of dividend taxes on investment is modest (Yagan, 2015[87]; Kari, Karikallio and Pirttilä, 2009[88]; Alstadsæter, Jacob and Michaely, 2017[89]). While these findings point to limited negative economic consequences from additional capital taxes at the personal level, such taxes may have significant equity benefits (see Section 3.2).

Tax and labour market participation

In the aftermath of the COVID-19 crisis, as well as in the context of ageing societies, it is important to support labour market participation, especially amongst those with low incomes and low levels of labour market attachment. Labour taxes can have potentially important consequences for both job quantity and job quality, particularly in the case of low-productivity workers (OECD, 2018[90]). Social security contributions (SSCs) in particular have risen as a share of the tax mix in recent decades. These contributions are typically less progressive than personal income taxes, with some studies suggesting that much of the negative effect of tax wedges on employment, in particular at lower income levels, is driven by the impact of SSCs (OECD, 2007[91]). It is thus possible that shifting the tax mix from SSCs to personal income taxes and/ or by introducing lower SSC rates at lower incomes could have positive impacts on labour market activation. Such shifts are particularly important in the context of ageing societies, where there is an increasing necessity to broaden the base of social protection financing (Brys et al., 2016[51]). Policymakers can strengthen (and in many countries already have strengthened) work incentives through an expansion of in-work benefits such as earned-income tax credits or related types of in-work benefits. Policymakers should design labour income tax burdens to incentivise work, and should carefully consider the impacts on informal workers, women, and the low-skilled, whose labour market attachment may be lower, including by carefully considering the impact of tax systems on the labour market incentives of second earners (Thomas and O’Reilly, 2016[92]).

Tax and skills investment

Investment in human capital can support growth and inclusiveness, and will be an important response to the ongoing technological change in the economy and the ageing of populations (OECD, 2016[93]). While muchof the impactof public finances on incentives to invest in skills is concentrated on the spending side, the impact of taxes should also be considered. OECD research suggests that, on average, skills investments at the tertiary level may be at least partially self-financing from the governments’ perspective in terms of additional personal income tax (PIT) and other forms of revenue. While skills investments are important, empirical evidence suggests that many tax incentives for skills may have limited efficacy (OECD, 2017[130]).

Incentives to invest in human capital should be taken into account when considering the level and progressivity of personal income taxes, as well as the mix of labour and capital taxes at the personal level. The need to incentivise investment in skills highlights why tax progressivity discussions should focus on the whole of the tax system, and not simply the progressivity of the labour income tax system. Stantcheva (2014[94]) argues that while progressive labour taxation can discourage investment in skills, it can also incentivise riskier skills investments by providing partial insurance against losses in earnings. She also stresses that full deductibility of skills investments can come close to an optimal policy mix. Deductibility, however, may mean that tax incentives for skills provide higher benefits to those at the top of the income distribution. Policymakers should therefore consider refundable credits, while noting that the tax system may be a second best instrument with which to incentivise skills investment. The incentive to invest in human capital is also a function of the tax burden on physical capital. Some studies have suggested that very low levels of capital taxation relative to labour taxation can distort the mix of productive factors in ways that can reduce productivity, though this finding depends on the substitutability between physical capital and labour (Acemoglu, Manera and Restrepo, 2020[95]).

Tax and productivity

In the context of an investment slowdown in some advanced economies, as well as ageing populations, supporting productivity will be key in supporting growth. However, productivity growth has been lacklustre in the majority of G20 countries over the past decades. Supporting productivity growth through productivity diffusion, business dynamism and investment in intangible assets is crucial for policymakers. However, the links between tax policy and productivity are complex and understudied. A key policy challenge is how to support productivity increases not only by firms at the productivity frontier, but also by non-frontier firms. Developing countries have often large informal sectors, which reduces productivity even further (Andrews, Criscuolo and Gal, 2016[96]).

Investment in intangibles such as investment in research and development (R&D), data or software are a source of increased productivity and growth, but not all firms are equally able to make and obtain the benefits from these investments. Financing intangible development is an important barrier for start-ups and young firms as intangible capital is harder to collateralise than physical capital (Demmou, Franco and Stefanescu, 2020[97]). Aside from collateral, large firms, particularly MNEs, may have access to financing channels and rates that are unavailable to young and small firms, and are also able scale-up intangible asset investment at a lower marginal cost. Such financing barriers can be compounded by differences in tax costs of MNEs versus non-MNEs and large firms versus small firms, for example where MNEs can lower tax burdens through profit-shifting (Sorbe and Johansson, 2017[82]). Aside from financing constraints, firms at the bottom of the productivity distribution also lack the skills and the absorptive capacity to reap the benefits from these investments. These barriers to technology and knowledge diffusion become particularly acute in digital and knowledge intensive sectors, where productivity dispersion is greater (Berlingieri et al., 2020[98]).

The tax system can support the development of intangibles but there is a need to consider design issues. Absent any preferential tax treatment, the current tax system provides greater incentives for investment in intangible capital, typically expensed, than to most forms of tangible capital. To address certain market failures, governments may consider the use of tax incentives to promote investment in certain types of intangible capital, particularly where spillovers are greatest, e.g. by providing tax incentives for R&D and innovation (Appelt et al., 2016[99]; González Cabral, Appelt and Hanappi, 2021[100]; Appelt, Galindo-Rueda and González Cabral, 2019[66]). Further research is needed to understand the short- and long-term effects of different forms of tax support for intangibles on investment and productivity.

Incentives to invest in intangibles should be designed in ways that address the market failures for targeted firms without providing unintended windfall gains to other market participants. Poorly designed incentives may lead to policies that entrench the position of incumbents further deepening the productivity gaps, particularly where market characteristics generate winner-takes-all or winner-takes-most dynamics. Tax policies need to be carefully calibrated to ensure that they do not exacerbate incumbency advantages or create opportunities for tax arbitrage. Tax incentives can generate substantial tax expenditures and should be assessed to ensure their effectiveness and value for money. The effectiveness of expenditure-based R&D tax incentives in promoting business R&D is well documented in the literature, while that of income-based incentives is less conclusive (Hall and Van Reenen, 2000[101]; OECD, 2020[102]; Gaessler, Hall and Harhoff, 2021[68]).

Beyond supporting intangible investment, other aspects of the tax system may also affect productivity growth, and productivity gaps between frontier and non-frontier firms. Combining policies that enable access to intangible investments with policies that facilitate access to complementary tangible investments, e.g. ICT infrastructure and skills, could help firms reap the benefits from digitalisation (Corrado et al., 2021[103]). As discussed above, certain tax incentives for investment beyond intangibles, can also contribute to supporting productivity increases, not least where they support integration in GVCs, which can support productivity diffusion (Criscuolo and Timmis, 2017[104]). Beyond targeted provisions, the general corporate tax system can also affect productivity growth (Vartia, 2008[105]; Hanappi, 2018[106]). More analysis is required to understand the impact of tax systems on productivity, by considering both baseline CIT provisions and targeted tax provisions.

Productivity growth may be supported by international tax reform that supports an efficient allocation of capital and other productive factors across jurisdictions. Both capital allocation and profit shifting can be key drivers of productivity dynamics across countries. (Bartelsman, Haltiwanger and Scarpetta, 2013[107]; Baqaee and Farhi, 2020[108]; Guvenen et al., 2017[109]; Bricongne, Delpeuch and Lopez Forero, 2021[110]). Firms with access to tax planning opportunities, e.g. more intangible intensive firms, may respond to tax differentials by shifting profits to jurisdictions where they can obtain a tax advantage (Grubert, 2003[111]; Heckemeyer and Overesch, 2017[112]). Recent evidence has also suggested that tax differentials can inhibit the realization of productivity improvements (Todtenhaupt and Voget, 2021[113]). Reductions in tax differentials through international tax reforms, such as those being advanced under the two-pillar solution, may therefore support the efficient allocation of capital and productivity growth.

Tax and digitalisation

In addition to work carried out by the Inclusive Framework on BEPS, digitalisation creates challenges and opportunities in other tax areas. Digitalisation enables improvements in the functioning of the tax administration through better use of data, which itself creates opportunities to refine the design of tax systems. The automatic exchange of information for tax purposes between jurisdictions allows countries to revisit the design of their capital income tax system and tax household savings in a more coherent manner. Digitalisation has also created opportunities to broaden the VAT base and improve its functioning notably by introducing reporting and VAT collection responsibilities on foreign online vendors and on digital platforms.

In response to increasing digitalisation and growing needs for revenue, an increasing number of countries are implementing the OECD standards for the effective collection of VAT on online sales of goods, services and digital products. These standards and the recommended solutions for their effective and consistent implementation were included in the 2015 BEPS Action 1 Report and in the detailed implementation guidance that has been developed since then (OECD, 2017[114]; OECD, 2015[115]; OECD, 2019[116]). These rules and mechanisms are particularly relevant given the continuously growing volume of online sales by offshore vendors, made directly to consumers or through the intervention of digital platforms. To date, more than 70 countries, including the overwhelming majority of OECD and G20 countries, have implemented reform in accordance with these standards. Recent adopters of these rules and mechanisms include Canada, Chile, Indonesia, Mexico and Singapore. Many other countries are considering similar reforms.

Policymakers also continue to grapple with the implications of rapid developments in virtual currencies and crypto-assets. The nature of these assets pose a number challenges for policymakers due to their lack of centralised control, (pseudo-)anonymity, valuation difficulties and hybrid characteristics (i.e. including both aspects of financial instruments and intangible assets). Other challenges may arise from the swift evolution of their underpinning technology and of virtual currencies themselves, including the greater prevalence of stablecoins and central bank digital currencies (CBDCs).

Tax systems need to be adjusted to address the risks and opportunities posed by crypto-assets. In its October 2020 report to G20 Finance Ministers and Central Bank Governors, the OECD provided guidance to policymakers on a number of areas including on how virtual currencies and other forms of crypto-assets fit within existing tax frameworks and on the definition of the taxable events associated with virtual currencies (OECD, 2020). Particular consideration was suggested for the consistency of the tax treatment of virtual currencies and assets vis-à-vis existing sources of income and wealth, as well as the importance of establishing their taxation within a coherent broader regulatory framework. Formalising a process for regularly reviewing and updating taxation guidance for crypto-assets and currencies was also recommended, given their rapid development, as was communicating the rationale behind the adopted tax treatments to support tax compliance.

The OECD is working to develop a reporting framework to exchange information on crypto-assets, as noted in the April 2021 communiqué of the G20 Finance Ministers and Central Bank Governors (Italian G20 Presidency, 2021[117]). This reporting standard will build on and complement the OECD Common Reporting Standards for automatic exchange of financial account information. The objective is to present it to the G20 in 2022.

 3.2. Tax policies for equitable societies

Tax policy can play an important role in enhancing equity. Tax policies play a key role in addressing income inequality, along with direct transfers. To a lesser extent, tax policies are also used to address wealth inequality (OECD, 2018[118]). Beyond their role in narrowing income and wealth gaps, recent work has emphasised the role of tax policy in enhancing intergenerational equity, equality of opportunity (OECD, 2021[30]), and gender equality (Harding et al., Forthcoming[119]). Ultimately, tax policies that support greater equity can also contribute to economic growth and political stability (Cingano, 2014[120]; Alesina and Perotti, 1996[121]).

With rising public revenue needs and increasing inequalities since the start of the pandemic, taxes on personal capital income and property will likely need to play a bigger role in the future. The crisis has left countries with high budget deficits and significant increases in public debt levels (see Section 2). At the same time, the crisis has exacerbated some existing inequalities and hit many vulnerable households hardest (see Section 2.3). In this context, raising taxes on labour and consumption, as was done in the wake of the 2008 global financial crisis, might be less desirable from an equity and growth perspective and very difficult politically. Thus, the current crisis is prompting reflection on the need to turn to new or under-utilised sources of revenue. Taxes on personal capital income and property are among the taxes that governments are reconsidering (OECD, 2021[32]) given their potentially significant role in reducing inequality and their currently limited role in most countries’ tax mixes (OECD, 2020[122]).

There has been an increasing focus in particular on the taxation of top income earners and wealth holders (OECD, 2021[32]). This is partly explained by recent studies showing very low effective tax rates at the top of the income and the wealth distribution, especially with respect to capital gains and foreign source income (Advani and Summers, 2020[123]; Fairfield and Jorratt De Luis, 2015[124]; Cooper et al., 2016[125]; Londoño-Vélez and Ávila-Mahecha, 2021[36]) and new evidence on the extent of tax arbitrage and income-shifting among owners of closely-held entities (Cooper et al., 2016[125]; Smith, Pope and Miller, 2019[126]). Recent analysis has also shed light on tax evasion by wealthy taxpayers (Alstadsæter, Johannesen and Zucman, 2019[127]). Growing interest in top income and wealth taxation has also been encouraged by recent analysis suggesting that distortions to the real economy from the taxation of personal capital income are relatively limited (Kari, Karikallio and Pirttilä, 2009[88]; Alstadsæter, Jacob and Michaely, 2017[89]; Yagan, 2015[87]) and that tax cuts on wealthy households in recent decades have not had the anticipated growth-enhancing effects (Hope and Limberg, 2020[128]).

Removing regressive tax expenditures is crucial, but more work is needed to help strengthen the effective taxation of top income earners and wealth holders. Previous OECD work has highlighted the role of tax expenditures in personal income and property taxation, which can have regressive effects and lower effective tax rates for taxpayers at the top-end of the distribution (OECD, 2018[129]), but further work on the use and prevalence of tax arbitrage and avoidance opportunities is needed. This will require carefully measuring the effective tax burden on households at the top of the income and the wealth distribution, and examining the drivers of lower effective tax rates on top income earners and wealth holders.

Raising top personal income tax rates will have limited effectiveness, if loopholes and arbitrage opportunities continue to allow those with the highest levels of income and wealth to shield their income from personal income tax. Apart from reducing the revenue-raising potential and fairness of existing tax systems, tax arbitrage and avoidance opportunities could render increases of top PIT rates largely ineffective if the income of the wealthy remains beyond the reach of the PIT system. A better understanding of existing tax arbitrage and avoidance opportunities, including those with a cross-border dimension, will be key to identifying reform options that could strengthen the effective taxation of the wealthiest households and ultimately ensure that they pay their fair share of tax.

Importantly, the potential for a more effective taxation of personal capital income and assets has been enhanced by the progress made on international tax transparency. The development of the automatic exchange of information between tax authorities over the last decade has increased the tools available to governments to detect any offshore assets and income and has reduced the opportunities for taxpayers to evade taxes by shifting assets abroad (O’Reilly, Parra Ramirez and Stemmer, 2019[33]).

Tax systems also need to provide adequate income support and enhance economic opportunities for those at the bottom. Tax measures, in combination with direct transfers, should be used to provide income support to households, which in some cases may need to be reinforced post-pandemic. In addition, tax measures could be used to enhance the longer-term economic opportunities and prospects of low‑income and vulnerable groups. For instance, tax measures that encourage employment, labour market participation and upskilling could contribute to reducing unemployment and addressing labour mismatches. Tax support measures should be carefully targeted, however, to contain costs for governments and ensure that they reach their intended targets. Indeed, there is evidence that tax incentives can lead to little additionality and be regressive when they are not targeted (OECD, 2017[130]). Such measures should therefore focus on those with low incomes and low levels of labour market attachment.

Tax systems can have profound implications for gender equality. Tax policy and social security systems have an important role to play in closing gender gaps, and this not only through a progressive tax system. High tax burdens on second earners can have a significant impact on the incentives for female labour force participation. This, in combination with social norms and a lack of adequate childcare, can lead not only to employment and pay gaps but also pension gaps in the long run. Women also often have lower incomes and less capital wealth than men. The design of public policy, including on tax issues, needs to account for these gender differences and should be reflective of inclusive societies.

Many developing countries have a large degree of informal employment that escapes taxation and regulation. Informal employment makes it difficult to provide sufficient social protection for workers and undermines tax collection efforts, often leading to high tax rates being imposed on those in formal employment or poor-quality government services. Informal markets can also result in unfair competition between sectors and inefficient production methods, and may even encourage illegal migration. Social protection systems in economies with a large informal sector are therefore often relatively ineffective because of contribution evasion by low-risk groups and a lack of coverage for the most disadvantaged working-age population groups.

Particular attention should also be paid to the distributional effects of taxes and the possible need for compensation measures. Assessing the distributional effects of tax measures or reforms is particularly important for taxes that are not linked to income, such as consumption, property and carbon taxes. Correctly assessing distributional effects also requires a careful examination of the final tax incidence of potential reforms as the taxpayers directly paying the tax may not be the ones ultimately bearing the burden of the tax. Compensation mechanisms may also be necessary to offset the distributional and poverty impacts of certain tax reforms on low-income households (e.g. carbon tax rate increases – see Section 3.3).

In the longer run, a priority will be to ensure that tax systems are adapted to future challenges and can continue to deliver on their equity objectives. Indeed, structural trends that are shaping the future, including automation and digitalisation, could make it more difficult for tax systems to achieve their equity objectives if reforms are not undertaken.

Automation could contribute to increasing inequalities and affect tax systems. With automation, new and more productive jobs are being generated, but many existing jobs will disappear and some skills will become obsolete. Skill-biased technological change has already led to growing wage gaps and employment polarisation (Autor, Levy and Murnane, 2003[131]; Michaels, Natraj and Van Reenen, 2014[132]). Tax systems could reinforce the speed of automation when taxes on labour exceed taxes on capital. While tax support for automation may help enhance productivity (see Section 2), it could further reinforce inequality in the future. Automation could also have an impact on tax revenues if labour tax bases are eroded as a result of growing levels of unemployment. This would affect public finance sustainability more widely given countries’ high reliance on labour taxes. However, the evidence on the impact of automation on unemployment is mixed (Frey and Osborne, 2017[133]; Nedelkoska and Quintini, 2018[134]), so potential impacts on tax revenues remain unclear. Overall, a careful assessment of the links between automation and tax systems is needed to assess potential impacts on productivity, inequality and tax revenues.

Digitalisation is facilitating new forms of work, which present new challenges for taxation. A challenge for the taxation of labour income in an increasingly digitalised economy is the rising share of the workforce earning some or all of their income outside of traditional employee-employer relationships. Indeed, new technologies are facilitating the rise of non-standard or “gig” work, though the share of the population engaged in non-standard work arrangements remains relatively limited (OECD, 2019[135]). This may create particular challenges for social protection and tax systems in the future. Entitlements to social protection may diminish if individuals’ SSC contribution histories become irregular, reducing their entitlements and lowering social protection, for example with respect to unemployment, disability and retirement (OECD, 2015[136]), which may be particularly problematic given the higher share of vulnerable workers in non-standard jobs (OECD, 2020[137]). Reduced contributions may also undermine the fiscal sustainability of social insurance systems. In many countries, self-employed workers pay SSCs at lower rates compared to standard employees. Increases in self-employment could therefore lead to substantially lower SSC revenues in the absence of reforms. A greater number of self-employed/gig workers may also be associated with a reduction in SSC and income tax compliance.

Digitalisation is also increasing international taxpayer mobility, which could hinder the functioning of personal tax systems. The mobility of wealthy taxpayers has been a longstanding issue, butdigitalisation is exacerbating risks of tax-related migration. Indeed, digitalisation has led to more mobile forms of work, including teleworking as well as new jobs that can be performed from anywhere (e.g. digital nomads), which could in turn enable individuals, particularly wealthy ones, to relocate more easily where taxation is more favourable. However, risks of increased mobility and PIT and SSC base erosion are difficult to assess and will likely vary widely across countries, sectors and types of jobs, and depend on other factors, including how widespread teleworking remains after the pandemic. Risks of increased mobility could nevertheless have significant implications for both tax revenues and equity, given that tax burdens could end up bearing more heavily on less mobile, and typically less wealthy, individuals. Thus, work should be done to assess these risks and start identifying policy options that could help ensure that tax systems are adapted to a world where individuals are increasingly mobile.

 3.3. Taxation for a sustainable environment

Limiting the adverse consequences of the major environmental challenges requires deep structural change. Addressing climate change, loss of biodiversity, and air and water pollution now is a policy priority. Curbing climate change involves reducing greenhouse gas (GHG) emissions to net-zero by around the middle of the century. To be on track for that goal, emissions of carbon dioxide (CO2) and other GHGs must be cut by a quarter to a half below 2019 levels by 2030 to put the world on an emissions pathway consistent with climate stabilisation targets.

Reaching greenhouse gas abatement goals requires a strong and coherent mix of regulations and incentive-based policies. The market failures involved with climate change are many, and responses require a combination of policy instruments. In addition, the political economy of climate policy is challenging and will become more so as ambitions increase. This calls for policy approaches that seek a balance between effectiveness, efficiency and what is publicly acceptable.

Tax policy can create incentives to reduce greenhouse gas emissions through favourable treatment of environmentally appealing technologies or behaviours, and by pricing greenhouse gas emissions. Apart from carbon taxes, emissions trading systems can also result in prices on pollution. If done well, pricing pollution is a strong environment policy principle because prices, from taxes or emissions trading systems, create ongoing incentives for cost-effective reduction of pollution, mobilise private investment, reduce rebound effects, and mobilise government revenues. The choice for taxing or trading is driven by political and administrative factors. Taxes are relatively more straightforward to implement and result in more stable prices. Trading systems tend to be easier politically, particularly in industry and electricity where a relatively small number of large emitters is targeted.

Current carbon prices on the whole fall well short of their potential. The OECD’s Effective Carbon Rates track, for OECD and G20 countries, the explicit carbon prices from carbon taxes and prices of tradable emission permits and the implicit carbon prices resulting from fuel excise taxes (OECD, 2021[138]). The main findings are that around 60% of energy-related CO2 emissions are not priced at all, either via a carbon tax, an ETS or an excise tax. Where there are prices, they are often low and they differ strongly across countries, sectors, fuels and emitters. Rates are lowest in the industry and electricity sectors, and are further weakened by fossil fuel support and where free permit allocation rules provide an advantage to carbon-intensive technologies. While the level of increased policy action needed varies from country to country, depending upon their level of ambition, energy mixes, and different starting points, the IMF estimates that reaching the emissions abatement objectives defined in nationally determined contributions requires measures equivalent to explicit carbon price increases of around USD 75/tCO2 or more by 2030 in the majority of G20 countries.

Tax and fiscal policy has a key role to play in shaping the distributional impact of environment policy, through the design of the environmental taxes themselves or – usually better – accompanying policies (targeted or broad transfers, selective PIT and CIT cuts, etc.). For this reason, deciding on the use of revenues from environmental taxes should be an integral element of the policy design challenge.

Environmental taxes can be regressive, but even when they are not they can still have disproportionate effects on vulnerable groups. In high-income economies, road fuel taxes tend to affect middle-income deciles more strongly than those with the lowest and highest incomes; taxes on heating fuels tend to be roughly proportional; and electricity taxes tend to be regressive. In lower income economies, road fuel taxes tend to be progressive given prevailing car ownership patterns, but by the same token, they may reduce accessibility to car ownership. Even a progressive tax can increase poverty risk for certain vulnerable groups. Evidence from selected OECD countries suggests that it takes about one third of the revenue from a tax increase on domestic energy use to avoid worsening energy affordability. In low income countries, reducing subsidies can result in strongly increased poverty risk, and this has induced governments to maintain subsidies for fuels used particularly by the poorest, e.g. kerosene. Removing these subsidies could increase poverty and push households towards informal fuels, with potentially worse impacts on health and the environment.

Transfers or other flanking tax reforms can make reforms progressive and increase energy affordability, but there is evidence that this may not always suffice to change perceptions, particularly where trust in government is low. Offering alternatives for highly taxed consumption patterns has strong potential to improve public support. Examples include situations where public transport is not a viable alternative to car use, while low-carbon cars are expensive and charging infrastructure is limited; or where investment in better insulation and more efficient heating systems are out of reach in response to higher heating costs. Using revenues from higher taxes to make alternatives more affordable is an option worth considering. In addition, given long lead times for some investments, gradual tax increases may be preferable.

Concerns about competitiveness, carbon leakage and free-riding make it difficult to advance with carbon pricing in trade exposed and energy-intensive industries. Existing measures to address competitiveness and leakage impacts of carbon pricing (e.g., free allowance allocations) become less effective with deeper decarbonisation. Pressure for border carbon adjustments (BCAs) to address competitiveness and leakage concerns is emerging with greater dispersion in explicit carbon prices across jurisdictions for carbon-intensive and trade-exposed sectors. International co-ordination, for example over minimum carbon prices, is potentially effective, though co-ordination needs to be equitable (accounting for countries differentiated responsibilities and respective capabilities) and pragmatic (recognising national circumstances), meaning also that it needs to take a broader view of mitigation efforts, going beyond explicit carbon prices from carbon taxes and emissions trading systems, considering in addition implicit carbon prices from a variety of mitigation policies.

There is a need for improved measurement of different mitigation policy instruments and approaches. At the G20 High Level Tax Symposium held in Venice on 9 July 2020, Ministers observed a relative dearth of comparable data on the stringency of greenhouse gas mitigation policies across countries where these take the form of implicit carbon prices. Explicit carbon prices are relatively well mapped and understood, but in order to achieve a more complete picture of the state of mitigation policies for the purposes of cross-country comparisons, a stocktake of mitigation policies other than through explicit pricing instruments is needed, and where possible their implicit carbon-price equivalent estimated.

The G20 is well placed to ensure the coherence of mitigation policies differentiated across countries, taking into account that the ultimate collective goal of net-zero emissions can only be reached with patterns and speed of adjustment that align with country-specific circumstances. Developing and sharing metrics and indicators on policy approaches is a pre-requisite to paving the way for common approaches at the international level. Assessing the relative merits of different responses to negative international spillovers – ranging from “carbon border adjustment mechanisms” to “carbon pricing floor agreements” and broader “climate clubs” – will help to strengthen co-operation with a view towards reaching our common climate goals.

 3.4. Tax policy challenges faced by developing countries

In April 2021, the G20 reaffirmed its engagement to support developing jurisdictions in strengthening the capacity to build sustainable tax revenue bases. The COVID-19 pandemic has had a huge impact on the health of both people and economies, with developing countries hit the hardest. For developing countries with limited fiscal space and heavy debt burdens, balancing the need to provide income support and collect revenue to finance spending has been extremely challenging.

This report provides valuable context, as the need to focus on domestic resource mobilisation is particularly acute in developing countries where tax revenues were already low as a share of GDP prior to the COVID-19 crisis. Many developing countries need to raise more tax revenues to finance the sustainable development goals (SDGs). Improving tax policy so that it is aligned to SDG financing strategies is an increasing priority for many countries to ensure vital public goods, such as skills development and education, health and infrastructure are properly funded and so that social protection is available to all citizens. As the Addis Action Agenda underlines, tax revenues are the only viable source for the financing of the vast majority of public goods and will be essential for the realisation of the SDGs. This is reflected in many developing countries’ medium- and long-term strategies for financing the SDGs.

Developing countries often have large informal sectors that narrow the tax base and put tax revenues under pressure. While informality is a multidimensional phenomenon, tax policy together with social protection and labour market policy can have both direct and indirect effects on its reduction. High levels of informality can create a vicious circle of high tax rates paid by formal sector workers and businesses, creating incentives for them to operate partially or fully in the informal sector, and in turn increasing the need for governments to raise statutory tax rates further. Developing countries therefore typically face narrow tax bases and high tax rates, which reduces the tax revenues available to finance public good provision. Significant opportunities exist to improve the design of simplified and presumptive tax regimes that can induce informal businesses and workers to enter the formal sector and formal businesses to continue growing in the regular economy.

Investment tax incentives may reduce tax revenuesand thus limit efforts to mobilise domestic resources and progress towards the SDGs. Forgone revenue resulting from tax incentives is of particular concern when the incentives do not attract additional investment, and rather result in windfall gains to investors for projects that would have taken place in the absence of the incentives. Reforms to improve tax incentive design and limit the use of wasteful and redundant tax incentives is therefore crucial6.

COVID-19 has thrown into sharp relief the need for tax systems to support the financing of robust and responsive health systems in developing countries, particularly in times of crisis. Health financing presents a range of challenges including the design and use of SSCs and the role of taxation to encourage healthier behaviour. In many developing countries, public expenditure on health is comparatively low as a share of GDP, necessitating a high share of private expenditures on health-care, which can be both regressive and inequitable, leaving many without adequate healthcare. Restricted public financing also limits the ability of the health system to develop capacity to respond to increasing healthcare needs in the community. Improving health financing through the tax system requires careful consideration of the design and use of health SSCs, through broadening the contribution base, ensuring adequate rates, and promoting formal labour force participation. Improving the design of taxes with strong links to the health sector can also contribute to the financing of health systems, such as on products that are harmful to health such as tobacco and alcohol consumption. Environmentally related taxes that help reduce pollution can also play an important role in boosting public revenues as well as reducing harmful product consumption; as can other health related taxes, such as taxes on sugar, which are increasingly being considered.

Significant scope exists to strengthen the functioning and design of VAT systems in developing countries. In particular, reform to increase the efficiency and the revenue-raising capacity of VAT systems could be considered by reducing the significant number of VAT exemptions and reduced VAT rates that exist in many developing economies. Strong e-commerce growth is also creating increasingly important challenges for VAT regimes in developing countries. The main VAT challenges relate to the strong growth in online sales of services and digital products to private consumers (such as "apps", music and movie streaming, gaming, ride-hailing, etc.) and to the exponential growth in online sales of low-value imported goods, often by foreign sellers, on which VAT is not collected effectively under existing rules. To support developing economies wishing to implement the OECD standards for addressing the VAT challenges of digital trade, the OECD together with the World Bank Group and other partner organisations is developing VAT Digital Toolkits thatprovide detailed guidance for the implementation of a comprehensive VAT strategy directed at e-commerce. These Toolkits are based on the internationally agreed OECD policy framework and draws on the expertise and best practices from jurisdictions that have already successfully implemented these standards.

Developing countries are increasingly vocal that greening the tax system and addressing the challenges posed by climate change are a priority for future global tax policy discussions. Developing countries that are reliant on fossil fuels will need to urgently design strategic policies to navigate the energy transition and to intensify investments into economic sectors that will deliver sustainable economic growth and tax revenue. This includes eliminating wasteful fossil fuel subsidies and increasing environmentally related taxes and carbon pricing through carbon taxes or emissions trading systems. These measures will need to be accompanied by policies to ensure energy affordability.

Many developing countries also have opportunities to improve the design and implementation of personal income and property taxes. Broadening the base of personal income taxes and strengthening the overall progressivity of these taxes will be an important part of the tax policy debate in developing countries over the coming years. The potential for more effective taxation of capital incomes in developing countries has also been enhanced by the implementation of the automatic exchange of taxpayer information.

Developing countries should prioritise to abolish and redesign poorly targeted and ineffective tax expenditures.Many developing countries have narrow tax bases as a result of a wide range of special tax provisions. These provisions are often not well designed nor targeted, and are often beneficial to households and firms that need the support the least. As well as improving the equity of the tax system, broadening the tax base and improving the design of tax expenditures will be important to improve tax revenues. A crucial step in this process is developing an annual tax expenditure report that lists all tax expenditures and calculates their tax revenue foregone and, possibly, their distributional implications. Such a tax expenditure report should be made publicly available, as this increased transparency will lead to better-informed tax policy decision making.

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