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![handle is hein.taxfoundation/iretcgadv0125 and id is 1 raw text is: May 3, 2002 No. 128
EVEN THE OECD CRITICIZES THE
U.S. TAX SYSTEM'S INEFFICIENCY
A recent study from the Organisation for
Economic Co-operation and Development (OECD)
concludes that the U.S. tax
system is unnecessarily
inefficient and complicated.' A recent
The study recommends that Organisation
the United States reduce its operation a
heavy tax burden on capital (OECD) ... re
income, praises major elements United States
of the 2001 tax act for cutting burden on ca
high marginal tax rates, and praises najor,
deplores the alternative tax act for cu
minimum tax and many tax rates...
income-based phase-outs.
Given the OECD's generally
pro-tax attitude, these findings
are especially noteworthy and credible.
OECD economists Richard Herd and Chiara
Bronchi explain in Increasing Efficiency And
Reducing Complexity In The Tax System In The
United States, that while taxes in the United States
are low compared to those in most other OECD
members, features in the U.S. system generate
excessive distortions and too much paperwork for
the amount of revenue collected. One example
they cite is the Alternative Minimum Tax (AMT).
They describe it as a very unusual levy that is
study
nd
reduc
rpital
eleme,
tting
found in no other OECD Member country and
which adds substantially to complexity without
achieving its original goals.3 The OECD
economists repeat a number of their
recommendations more explicitly and concisely in
a short follow-up article, Improving The U.S. Tax
System. ,4
The U.S. Income Tax's Treatment of Saving and
Investment Is Particularly Distortionary
The OECD study is critical mainly of the
income tax, especially its treatment of saving and
investment. The current system is not designed in
a way that minimises the excess burden of taxation.
The most noticeable inefficiencies come in the area
of capital income taxation.5 The study recognizes
that a tax system will be
biased against saving and
from1 the investment if a tax is imposed
colnic CO- on both the amounts saved and
Dev~elopment the returns to the saving. The
iends that the income tax subjects earnings
e its heavy tax used for saving to repeated
income [and] taxation, while earnings used
ts of the 2001 for immediate consumption are
high marginal subject to income tax only
once. This, Herd and Bronchi
explain, favours present over
future consumption with a
negative impact on savings
and capital accumulation. 6 This is of concern
because reduced capital formation slows
productivity gains and reduces employment and
income growth.
The OECD economists also point out that
saving is subject to large variations in tax
treatment depending on the sector in which it is
invested and the financing instruments that are
used.'7 For instance, C corporations, whose
earnings are subject to both corporate and individual
income taxes, fare worse than S corporations,
Institute for
Research on the
Economics of
Taxation
IRET is a non-profit, tax exempt 501(c)(3) economic policy research and educational organization devoted to informing the
public about policies that will promote economic growth and efficient operation of the free market economy.
1730 K Street, N., Suite 910, Washington, D.C. 20006
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