Low VAT doesn't always help poor - OECD

PARIS, Dec 10 (Reuters) - Lower rates of value added tax do not always benefit the poor, the OECD think tank said on Wednesday in a report urging governments instead to consider means-tested and other direct benefits to boost income equality.

The conclusion challenges a widely-held belief among policy makers that one way to help low-income groups is to reduce VAT and other forms of indirect taxation. It came after a separate OECD study this week said that rising income inequality was hurting economic growth.

The Paris-based Organisation for Economic Co-operation and Development found that reduced VAT rates on certain goods and services disproportionately benefit the rich when the impact is measured as a proportion of household spending rather than the often used benchmark of household income.

It said the discrepancy was most stark in relation to discount rates offered by many countries on hotel accommodation, restaurant meals and cultural goods such as books, theatre and cinema tickets - services often used more by the rich.

“Many governments have sought to protect the poor by giving reduced rates,” said David Bradbury, Head of the Tax Policy and Statistics Division at the OECD’s tax centre.

“But through reduced rates in this area, you are delivering a cash hand-out to the wealthiest,” he added, singling out the impact of reduced tax rates on meals served in restaurants.

The report highlighted that cheaper rates on food, water supply and energy products did provide more support to the poor relative to the rich in the countries where they are used.

But to distribute wealth more equally, the OECD recommended countries widen their VAT tax base by cutting out reduced rates and exemptions while giving targeted benefits to the most needy.

However Bradbury acknowledged political and practical difficulties involved in implementing income-tested systems.

The OECD on Tuesday issued a report concluding that moves by national governments to reduce inequality would lift economic growth, writing that high levels of income inequality had a “negative and statistically significant impact” on growth.

In most developed nations the gap between rich and poor reached its highest level in 30 years in 2014, with the top 10 percent of the population earning 9.5 times the income of the poorest 10 percent, the OECD found.

Separately, the OECD estimated the average tax burden in its member countries rose to 34.1 percent of GDP in 2013, up 0.4 percentage points on the year. About half the gain came from rising revenue from personal and corporate income tax. (Reporting by Hannah Murphy; editing by Mark John)