Tax reform, hours worked and growth

The new medium-term fiscal strategy requires that average hours worked are kept constant in a context where demographic changes would imply a 2% decline towards 2015. Tax reform could make a significant contribution to achieving this objective, provided that the cuts focus on areas where they could reduce distortions the most and that they are appropriately financed. This chapter analyses the relative merits of the enlarged in-work tax credit introduced in 2008 and the higher threshold for the middle tax to be introduced from 2009. It also presents the results of a new OECD study on hours worked. Finally, it discusses the long-run prospects of maintaining a system where four out of ten full-time employed face a marginal tax wedge of more than 70% resulting from contributions plus income and consumption taxes combined.