OECD Re-Writes US Tax Code

by Mike Godfrey, for LawAndTax-News.com, New York

31 October 2005

In its generally bullish annual economic survey of the United States, the Paris-based OECD recommends additional taxation, including the introduction of a VAT and standardization of state-level taxation.

'Most likely,' says the OECD, 'it will . . . be necessary to bolster revenues by broadening tax bases and relying more on indirect taxation.'

'The complexity of the personal and corporate income taxes has steadily increased since the last major tax reform in 1986, largely due to the continued proliferation of deductions, exemptions, credits and tax shelters that have substantially narrowed the tax base and created many distortions, several of which harm incentives to save. The Administration has charged an advisory panel with submitting options for federal tax reform with the aim of making the tax code simpler, fairer and more conducive to economic growth. A number of measures should be undertaken, even if the basic structure of the current income tax is retained.'

The OECD says that replacement of the 'grossly inefficient' corporate income tax by a federal VAT should be considered, and that state sales taxes could also be replaced by a VAT, especially if the Streamlined Sales and Use Tax Agreement is successful, and Congress removes the ban against collecting sales taxes across state lines. The organization also calls for the deductibility of state and local taxes from federal income tax to be abolished.

The OECD takes issue with the anti-savings bias in the Tax Code, and like the Tax Panel wants to remove the mortgage interest deduction. 'Broadening the tax base in this way would eliminate the advantage currently given
to residential investments over other forms of capital and, if implemented gradually, withdraw some of the current frothiness in housing markets.'

Finally, on its wish-list of political impossibilities, the OECD is in favour of a carbon tax. 'Such a move would not only reduce air pollution and combat global warming, it would also promote energy independence,' intones the report.

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