V. Challenges for Tax Policy in Oecd Countries

Tax design needs to balance considerations of economic efficiency, equity and enforceability Modern OECD economies have fundamental economic and social objectives that require public spending. This in turn must be financed mainly through taxation. However, because taxation inevitably impinges on most aspects of economic activity, careful consideration must be given to its design – in addition to its level and hence the level of related expenditure. Three features of taxation are especially important. First, so long as taxation affects incentives it may alter economic behaviour of consumers, producers or workers in ways that reduce economic efficiency. These effects should be taken into account when the costs and benefits of public expenditure to be funded are being assessed. Second, the distribution of taxation’s impact across the population raises issues of equity, or fairness, which must be given substantial weight even if it entails costs in terms of economic efficiency. Third, the practical enforceability of tax rules and the costs arising from compliance are important considerations, the more so since these are both affected by, and have implications for, the efficiency and public perceptions of the fairness of tax systems. As elaborated in more detail in Box V.1, the key challenge for tax policy is to strike the best possible balance among these issues.