Norges Bank recommends lower tax on income from employment
Norges Bank supports the proposal for a system with a flatter tax, but is of the view that this should be based on a reduction in the tax on income from employment. This is the view expressed in the central bank's consultative statement to the Ministry of Finance on the report from the expert committee that has evaluated a more proportional tax system (NOU 1999: 7 "Flatter tax").
The committee has assessed various models for a flatter tax based, in part, on the objective of promoting higher value added and a simpler tax system, on the assumption of revenue neutrality. The committee has proposed simplifications that may reduce the administrative costs of the tax system. This applies, for example, to the proposed reduction in the surtax on higher incomes. A reduction in the difference between the highest marginal tax rate applied to income from employment and capital income will reduce the incentives for using resources with a view to redefining income from employment as capital income. Moreover, a high marginal tax on income from employment may result in substantial efficiency losses for the economy as a whole in that it creates a wedge between the amount received by the taxpayer and the value created for society.
Norges Bank concurs with the committee's view that it is important to reduce the difference between the tax on income from employment and capital income. The Bank finds, however, that this approach should be based on a reduction in the taxation of "personal income" and not a higher tax rate for "ordinary income" as proposed by the committee.
Norges Bank emphasises the importance of preserving the coherence of the tax system in accordance with the overriding principles underlying the tax reform of 1992. Norges Bank maintains that increased economic integration and the free movement of capital, labour, etc. between countries place clear constraints on the national taxation of capital. The Bank emphasises that enterprises' choice of location does not appear to have been sufficiently taken into account in the model on which the committee bases its recommendations.
With a revenue-neutral shift towards a more proportional tax system, the Bank points to broad tax bases, effective taxation of economic rent and indirect taxes that rectify market failures as important elements of a good tax system.
Executive Board member Lars Velsand agrees that the difference in the taxation of income from employment and capital income should be reduced, but is of the fundamental view that this should be based on an increase in the taxation of capital income. This member does not give his general support to the taxation of economic rent.
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