The scope for progressive tax reform in the OECD countries

Abstract

The trend of increasing inequality in the distribution of income and wealth in most developed countries has led to calls for corrective tax increases for the rich and wealthy. Such calls are often confronted with the claim that higher taxes on top personal incomes, corporate income and wealth are detrimental to growth and employment and/or will foster tax avoidance. This paper argues that even the dominating theoretical framework leaves substantial leeway for redistributive taxation. Furthermore, from a Keynesian macroeconomic perspective redistribution may even be systematically conducive to growth and employment. At the same time a change towards such a policy of redistribution may for some economies, particularly the German one, well be the prerequisite for compliance with the European Fiscal Compact if an increase of the macroeconomic imbalances that have come to be seen as a root cause of the global financial and economic crisis 2008/2009 and also the Euro crisis by many observers is to be avoided. Therefore, besides attempts at international tax coordination and harmonisation, national tax policies should actively use their room of manoeuvre for progressive taxation to correct the disparities in the income distribution and at the same time to increase the fiscal space.