Many governments shrank their personal income tax bases and cut corporate taxes or increased incentives to alleviate the economic pressure of the COVID-19 pandemic and spur growth, according to an OECD report.
Personal income tax cuts and base narrowing were mostly targeted at low- and middle-income households to encourage employment over the course of 2021 and provide in-work benefits, according to "Tax Policy Reforms 2022,” released September 21. Many countries boosted corporate tax incentives to “stimulate investment and innovation.”
“Recent tax reforms have been targeted at stimulating economic recovery from COVID-19, while countries with the greatest fiscal space have been providing more generous tax benefits for longer periods of time,” said Pascal Saint-Amans, director of the OECD Centre for Tax Policy and Administration, in a September 21 OECD release. “Countries have also used tax policy as one of their main tools in responding to rapid rises in energy prices.”
The report notes that progress on environmental taxes like carbon taxes and motor vehicle taxes slowed compared with previous years. Very few countries increased or introduced carbon taxes in 2021, and many of those that did combined them with cuts to personal and corporate income taxes. Carbon prices are low overall as a result of temporary cuts to energy taxes implemented in 2021 to alleviate economic pressure from rising energy prices, the report says.
In the report's section on policy responses to increased energy prices, the OECD urged governments to switch from short-term policies aimed at limiting price increases to policies that provide targeted income support for at-risk groups. It noted that governments have most often resorted to temporary indirect tax reductions, such as cuts to excise taxes on petroleum products, to solve the impact of rising energy prices.
Providing targeted income support “will ensure that the support provided is fair and effective, while limiting its effects on government budgets and maintaining price signals to encourage the transition to carbon neutrality. However, even the most sophisticated fiscal systems may not be fully geared to the task, calling for action to improve their capacity to target specific groups,” the report said.
Governments should move away from price controls or caps because they tend to disproportionately help high-energy consumers in higher-income households, and they may also limit the incentive for households to save energy or switch to renewable fuels, the report says. Countries should also phase out energy tax reductions, like those on excise duties or VAT, because they discourage reducing energy consumption as well and can be costly for governments.
In 2021 governments also reversed most of the temporary VAT changes implemented in 2020, according to the report. Many countries maintained standard and reduced VAT rates but changed their VAT bases. More specifically, in 2021, some countries permanently made reduced VAT rates applicable to a wider range of goods and services, and others applied reduced VAT rates to gas and electricity (to alleviate rising energy prices), both of which narrowed the VAT bases in those countries, the report says.