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News : International Last Updated: Dec 19th, 2007 - 13:17:15


Tax revenues on the rise in many OECD countries, OECD report shows; Irish tax burden virtually unchanged in period 1995-2005
By Finfacts Team
Oct 11, 2006, 10:14

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OECD REVENUE STATISTICS 1965-2005 - ISBN9264028129 - © OECD 2006  
  Table A. Total tax revenue as percentage of GDP
  1975 1985 1990 1995 2000 2003 2004  2005 Provl
Canada 32.0 32.5 35.9 35.6 35.6 33.6 33.5 33.5
Mexico   17.0 17.3 16.7 18.5 19.0 19.0 19.8
United States 25.6 25.6 27.3 27.9 29.9 25.7 25.5 26.8
                 
Australia 25.8 28.2 28.5 28.8 31.1 30.7 31.2 n.a
Japan 20.9 27.4 29.1 26.9 27.1 25.7 26.4 n.a
Korea 15.1 16.4 18.9 19.4 23.6 25.3 24.6 25.6
New Zealand 28.5 31.1 37.4 36.6 33.6 34.4 35.6 36.6
                 
Austria 36.7 40.9 39.6 41.1 42.6 42.9 42.6 41.9
Belgium 39.5 44.4 42.0 43.6 44.9 44.7 45.0 45.4
Czech Republic       37.5 36.0 37.6 38.4 38.5
Denmark 1 39.3 46.5 46.5 48.8 49.4 47.7 48.8 49.7
Finland 36.7 39.9 43.9 45.6 47.7 44.6 44.2 44.5
France 1 35.5 42.4 42.2 42.9 44.4 43.1 43.4 44.3
Germany 2 35.3 37.2 35.7 37.2 37.2 35.5 34.7 34.7
Greece 21.3 28.0 28.7 31.7 37.3 36.3 35.0 n.a
Hungary       42.1 38.7 38.1 38.1 37.1
Iceland 30.0 28.2 31.0 31.2 38.3 37.8 38.7 42.4
Ireland 28.7 34.6 33.1 32.5 31.7 28.7 30.1 30.5
Italy 25.4 33.6 37.8 40.1 42.3 41.8 41.1 41.0
Luxembourg 32.8 39.5 35.7 37.0 39.1 38.2 37.8 37.6
Netherlands 39.6 41.0 41.1 40.2 39.5 37.0 37.5 n.a
Norway 1 39.3 43.0 41.5 41.1 43.0 42.9 44.0 45.0
Poland       37.0 32.5 34.9 34.4 n.a
Portugal 19.7 25.2 27.7 31.7 34.1 35.0 34.5 n.a
Slovak Republic 1         33.1 31.2 30.3 29.4
Spain 1 18.4 27.2 32.5 32.1 34.2 34.3 34.8 35.8
Sweden 41.6 47.8 52.7 48.1 53.4 50.1 50.4 51.1
Switzerland 27.4 26.1 26.0 27.8 30.5 29.4 29.2 30.0
Turkey 16.0 15.4 20.0 22.6 32.3 32.8 31.3 32.3
United Kingdom 35.3 37.7 36.5 35.0 37.2 35.4 36.0 37.2
Unweighted average:                
OECD Total 29.9 32.9 34.2 35.1 36.6 35.8 35.9 n.a
OECD America 28.8 25.0 26.8 26.7 28.0 26.1 26.0 26.7
OECD Pacific 22.6 25.8 28.5 27.9 28.8 29.0 29.4 n.a
OECD Europe 31.5 35.7 36.5 37.6 39.1 38.3 38.3 n.a
EU 19 32.4 37.7 38.4 39.1 39.8 38.8 38.8 n.a
EU 15 32.4 37.7 38.4 39.2 41.0 39.7 39.7 n.a
n.a indicates not available.                
Note: EU 15 area countries are : Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,
            Netherlands, Portugal , Spain, Sweden and United Kingdom.        
           EU 19 area countries are: EU 15 countries plus Czech Republic, Hungary, Poland and Slovak Republic.  
1. The total tax revenue has been reduced by the amount of the capital transfer that represents uncollected taxes.
2. Unified Germany beginning in 1991. Starting 2001, Germany has revised its treatment of non-wastable tax credits in the 
    reporting of revenues to bring it into line with the OECD guidelines. The impact of this change is shown in   
    Table D in Part I of this report.              
*. Secretariat estimate, including expected revenues collected by state and local governments.     
               

Tax revenues, measured as the ratio of tax to Gross Domestic Product (GDP), are rising in many OECD countries despite deep cuts in tax rates, according to a new OECD report, reflecting both the effects of stronger economic growth, which has led to higher corporate profits, and moves in some countries to offset the effects of cuts in tax rates by broadening the tax base and improving tax compliance.

In 2005, according to the latest edition of the OECD’s annual Revenue Statistics publication, tax burdens as a proportion of GDP rose in 17 out of the 24 countries for which provisional figures are available, and fell in only five countries (see Table A). The biggest increases were in Iceland, where the tax burden rose by 3.7 percentage points to 42.4% of GDP, followed by the United States (up 1.3 points to 26.8% of GDP) and the United Kingdom (up 1.2 points to 37.2%). In 2004, the tax ratio rose most steeply in Ireland (1.4 points).

The largest 2005 reduction in overall tax ratios was in Hungary (down one percentage point to 37.1%).

Based on these figures and figures for 2004, OECD analysts say, a trend towards lower tax burdens witnessed from 2000 to 2003 appears to be going into reverse. Between 2000 and 2003, the tax ratio in the OECD area as a whole fell from 36.6% of GDP to 35.8% of GDP, but in 2004 it moved back up slightly to 35.9%.

Source: OECD

Ireland

Table A shows that in 2005, Irish taxation as a percentage of GDP was 30.5% compared with 32.5% in 1995. However, because GDP includes the output of the multinational sector, which is very significant in Ireland (almost 90% of Irish exports are made by foreign-owned firms), it is more useful to use Gross National Product - the total value of final goods and services produced in a country plus income from Irish capital held abroad set-off against transfers of net earnings of multinationals - in effect net income outflows from Ireland . In Other OECD countries, there is only a marginal difference between GDP and GNP.

TABLE C 1995 2005
GDP €53,147m €161,163m
GNP €46,994m €135,914m
Tax as % GNP 36.7% 36.2%

We can see from Table C that the Irish tax burden has changed little since 1995.

While personal taxes have fallen, indirect or stealth taxes have risen.

In addition, as many Irish taxpayers see a necessity to pay private health insurance because of the perceived poor quality of the public health service, the cost is equivalent to a tax but is not included in the taxation figures.

Family health insurance premiums of say  €2,000 net of the tax credit for a family  earning €60,000 gross, costs 3.3% of income.

Tax on personal income and corporate profits is one of the main sources of tax revenues in many OECD countries

Higher revenues from taxes on incomes, including both company profits and personal income, were the main factor behind the higher 2005 tax-to-GDP ratios in Iceland, the United States and the United Kingdom (see Table B). In Iceland, an additional factor was increased revenue from taxes on goods and services. By contrast, the decline in Hungary was mainly due to lower revenue from taxes on goods and services.

Tax on personal income and corporate profits is one of the main sources of tax revenues in many OECD countries. But social security contributions and taxes on goods and services also play a major role, and the relative importance of these various taxes varies across countries (See Chart 1 below). In New Zealand, for example, taxes on income and profits are the largest single source of revenues, while in the Czech Republic social security contributions provide the main single source of revenues and Mexico taxes on goods and services are the main source of revenues.

Recent increases in income tax revenues – both personal and corporate – have come despite the fact that statutory rates of corporate and personal income taxes remain stable or are falling in many OECD countries. There were no increases in personal or corporate tax rates in the three countries with the largest tax ratio increase: Iceland, the United Kingdom and the United States.

That suggests that the higher tax ratios are a result of stronger economic growth in these countries, and more generally across the OECD. Stronger growth increases both the profitability of companies and the level of personal incomes, leading to an increase in the level of taxes that they pay. 

EXTRACT FROM REPORT:

Tax ratios vary considerably between countries, as does their evolution over time. In 2004, in the European region three countries – Belgium, Denmark and
Sweden – had tax ratios of 45 per cent or more of GDP. In contrast, Mexico’s total tax revenues were only 19 per cent of GDP, and four countries – Japan, Korea, Switzerland and the United States – had tax ratios in the 20-30 per cent range.

In 2004, the tax ratio in the OECD area as a whole (unweighted average) reversed the previous year’s decline, rising from 35.8 to 35.9 per cent (see Table A). Overall tax ratios fell in fourteen OECD member countries whereas they rose in fourteen countries. The reduction of the tax ratio was especially strong in Turkey (by 1.5 percentage points of GDP). The tax ratio rose most steeply in Ireland (1.4 points).

Trends in tax-to-GDP ratios between 1995 and 2004 and the three decades preceding 1995 are briefly reviewed at the end of this section.

Between 2003 and 2004 the OECD average ratio of revenues from personal and corporate income taxes to GDP rose from 12.4 to 12.5 per cent (see Table B). Norway reports the largest increase in this ratio (by 1.7 percentage points of GDP). At the other extreme, it dropped in Luxembourg (by 1.3 points). Elsewhere in the tax base, there was little change in the average shares of GDP levied in the form of social security contributions, payroll taxes, property taxes and taxes on goods and services.

Provisional estimates of tax ratios in 2005 are available for twenty-four of the thirty OECD countries (see Table A). These estimates suggest that the rise in the average ratio of total tax revenues to GDP is continuing. As compared to 2004, the total tax ratio fell in five of these OECD countries and it increased in seventeen countries. As compared to 2004, tax-to-GDP ratio in Hungary was mainly due to reduced revenue from taxes on goods and services. Readers interested in making detailed comparisons are referred to Tables 6 and 39, which show the tax mix in 2004 and 2005, respectively.

Source: OECD

Between 1965 and 1975, the tax level in the OECD area increased by 4.1 percentage points. Until the first oil shock (1973-74) strong, almost uninterrupted income growth enabled tax levels to rise in all OECD countries, apparently with relatively little political opposition. As personal incomes rose in real terms, there was less resistance to higher taxes on income, perhaps also because of a consensus, particularly in more affluent European countries, in favour of the welfare state, which in turn permitted social security contributions to be raised without much protest. In part, tax levels rose automatically through the effect of fiscal drag on personal income tax schedules that often were not adjusted for inflation.

Between 1975 and 1985, the tax level in the OECD area increased by 3.2 percentage points. After the mid-1970s, the combination of slower real income growth and higher levels of unemployment apparently limited the revenue raising capacity of governments. In three OECD countries the tax-to-GDP ratio actually fell. Once the average growth in voters’ real disposable income began to stall, higher taxes probably more often met with taxpayer resistance. In addition, a new consensus emerged on the “crises” of the welfare state and potentially negative supply-side effects of high statutory tax rates. But during and after the deep recession following the second oil shock (1980), governments in Europe saw tax levels rise further, to finance higher spending on social security and rein in rapidly widening budget deficits.

Between 1985 and 1995, the tax level in the OECD area increased again, this time by 2.2 percentage points. This was the decade of several “tax revolts”, although not necessarily in countries with the highest total tax ratios. Resistance of voters to further tax increases may explain why the tax-to-GDP ratio fell in eleven OECD countries. After the mid-1980s, most OECD countries substantially reduced the statutory rates of their personal and corporate income tax, but the negative revenue impact of widespread tax reforms remained limited because the drain on tax revenues following rate reductions was often offset by reducing or abolishing tax reliefs.

Around the mid-1990s, the average (unweighted) tax-take out of GDP in the OECD-area more or less stabilised, suggesting that the upward drift of the unweighted average tax level was approaching its limit. However, during the years 1995-2000 the tax-to-GDP ratio rose once more by a full percentage point of GDP. Results for the years 2001 to 2004 suggest that at the start of the 21st century the (unweighted) average tax level in the OECD area as a whole may have stopped rising. Chart E shows that between 1995 and 2004 the tax level in the OECD area increased on average by 0.7 per cent.

Such averages for the OECD area as a whole tend to conceal the great variety in national tax levels. Taking a long term view and focusing on major OECD areas, in Canada, Mexico and the United States the tax-take from GDP inched up from an (unweighted) average of 25.2 per cent in 1965 to 26.0 per cent in 2004. In OECD Europe, by contrast, between 1965 and 2004 the overall tax/GDP ratio increased from 26.4 per cent to 38.3 per cent. In Australia, Japan and New Zealand, the corresponding figures were from 21.0 per cent to 29.4 per cent. The trend towards higher tax levels over this period reflects the sizeable increase of public sector outlays in almost all industrialised countries, with recourse of governments to alternative ways to finance their spending – non-tax revenues, borrowing and printing money – being limited for a variety of reasons.

The historical development of tax ratios for individual OECD countries varies greatly, as shown in Charts B, C, D and E. Each chart relates national changes in the tax level to the OECD average, for the periods 1965-75, 1975-85, 1985-95 and 1995-2004, respectively.

Despite their overall increase, total tax ratios have fallen in some countries. During the 1990s, for example, the tax level in Hungary fell by nearly 7 percentage points of GDP, while New Zealand saw its tax-to-GDP ratios fall by about 4 percentage points (see Table 3 in Section II.A). Ireland, Japan and the Netherlands recorded smaller reductions in their total tax ratios.

Personal Taxes fall

In 2004, personal income taxes were no longer the largest single source of revenue, for OECD countries as a whole their share has shrunk from 30 per cent of total taxes in the early 1980s to 25 per cent today (unweighted averages). The variation in the share of the personal income tax between countries is considerable. In 2004, it ranged from a low 9 per cent in the Slovak Republic, 13 per cent in the Czech Republic, and 14 per cent in Greece and Korea to 41 per cent in New Zealand and 51 per cent in Denmark

Over the last decade, the share of the corporate income tax in the tax mix has increased by over 1 percentage point of total taxes (unweighted average), to exceed the 9 per cent level of the 1960s. As with the personal income tax, the share of the corporation income tax in total tax revenues shows a considerable spread, from 3 per cent (Iceland) to 18 per cent (Australia) and 23 per cent (Norway) of total tax revenues. Apart from the spread in statutory rates of the corporate income tax, these differences are at least partly explained by institutional factors – the degree to which firms in a country are incorporated, taxation of oil revenues – and the erosion of the corporate income tax base, for example as a consequence of generous depreciation schemes and other instruments to postpone the taxation of earned profits.

Taken together, taxes on personal and corporate incomes remain the most important source of revenues used to finance public spending in half of all OECD countries, and in five of them – Australia, Canada, Denmark, New Zealand and Norway – the share of income taxes in the tax mix exceeds 45 per cent.

The declining share of the personal income tax for OECD countries taken together was paralleled by the growing share of social security contributions, which by 2004 accounted for 26 per cent of total tax revenues. In eight countries – Austria, the Czech Republic, France, Germany, Japan, the Netherlands, Poland and Spain – social security contributions are now the largest single source of general government revenue. The expanding share of contributions in the tax mix (up from 18 per cent of total revenues in 1965) seems to be directly linked to the upward pressure on aggregate benefit spending resulting from ageing populations and rising government expenditure on health care programmes. In 2004, the share of social security contributions in the tax mix varied from 2 per cent (Denmark) to 41 per cent (Germany and Poland) and 42 per cent (Czech Republic). Australia and New Zealand report no revenue from social security contributions.

Over the whole period under review in this Report, payroll taxes that do not confer entitlement to social benefits have been negligible in terms of their share in total tax revenues (at present slightly below one per cent).

Over the 1965-2004 period, the share of taxes on immovable property, net wealth and legal transactions fell significantly, from 8 per cent to 6 per cent of aggregate tax revenues, possibly in part as a result of voter resistance against such highly “visible” taxes and a failure to maintain up-to-date the inflation-adjusted valuation of the tax base. In relative terms, property taxes are important – that is, they have a share exceeding 10 per cent of aggregate revenue – in Canada, Japan, Korea, the United Kingdom and the United States.

Despite a small recent fall, the share of taxes on consumption (general consumption taxes plus specific consumption taxes) hardly changed between 1975 and 1995. But the mix of taxes on goods and services has fundamentally changed. A fast growing revenue source has been general consumption taxes, especially the value-added tax (VAT) which is now found in twenty-nine of the thirty OECD countries. General consumption taxes presently produce 19 per cent of total tax revenue, compared with only 14 per cent in the mid-1960s. In fact, the substantially increased importance of the value-added tax has everywhere served to counteract the diminishing share of specific consumption taxes, such as excises and custom duties. Over the 1965-2004 period the share of specific taxes on consumption (mostly on tobacco, alcoholic drinks and fuels, including some newly introduced environment-related taxes) was halved. Rates of taxes on imported goods were considerably reduced everywhere, reflecting a global trend to remove trade barriers.

Nevertheless, Mexico (about one-third), Turkey (one-quarter), Korea (one-sixth), and Luxembourg (one-seventh) still collect a relatively large part of their tax revenues by way of taxes on specific goods and services.

Copyright © OECD 2006


© Copyright 2007 by Finfacts.com

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