Declining tax ratios to GDP have emerged in some countries – as many as a third of OECD members in 1999 – although reductions in the tax ratio from the peak levels of 1985 or 1990 in most cases (including Ireland, Japan, New Zealand and Sweden) have been small. In transition countries recent data also suggest falling tax revenues related to GDP, although this may partly reflect erosion of the tax base while they grapple with the transition process.
Very few countries have consistently resisted the trend of rising tax ratios since 1965. Only in the Netherlands are they below their 1975 level, while in Mexico, the United Kingdom and the United States tax receipts have developed broadly in line with GDP over a long period. Tax ratios in the European Union, averaging 42.1% of GDP on a weighted average in 1999, are generally higher than those elsewhere.
Of non-European OECD countries, only Canada and New Zealand have tax ratios above 30% of GDP. The decline in tax ratios largely reflects public expenditure trends, although in some countries a favourable cyclical position has buoyed the tax take as a percentage of GDP despite tax cuts.
Still, tax ratios are high; so how has the money been raised? The largest part of the increase in tax to GDP ratios since 1965 has come from higher social security contributions needed to finance expanded social insurance systems, notably in Europe. Higher personal income taxes also played a significant role, though chiefly before 1975.
Taxes on corporate income and wealth, more constrained by the potential geographical mobility of their bases than social security contributions, have risen more modestly, as have taxes on goods and services. The vast bulk of tax revenue, more than 80%, currently stems from three main sources, of roughly equal size: personal income tax, taxes on goods and services, and social security taxes.
Special sections on tax in some OECD surveys of individual countries show that the reasons for the changes differ widely. Greece and Portugal, for example, show increases in their tax burdens well above the OECD average increase. But their tax ratios are still below the OECD average and these countries could be seen as being involved in a catch-up process within the EU, in particular as they have been developing their social policy systems and infrastructure. In the 1990s these countries were also faced with the need to curb deficits to meet the criteria for joining Economic and Monetary Union (EMU).
Among emerging and transition market economies, Korea and Poland have seen tax burden growth close to the OECD average, although Poland, like other transition countries, has reduced its burden in the past few years. Among industrial countries, Switzerland also shows increases in its tax burden above the OECD average, although its tax ratio remains below the OECD average. The rise is at least partly due to an increase in social security contributions reflecting record unemployment in the 1990s and increasing health costs.
Some countries have reduced their tax burdens since 1990, but for very different reasons and from varying starting positions. In Mexico, for instance, overall tax levels have fluctuated sharply to offset volatility of oil-related non-tax resources, but tax fell from 17.3% of GDP in 1990 to 16.5% in 1999. This decline to some extent reflects a deliberate policy choice to lower VAT and import tariffs, but also difficulties of developing a tax base. Japan’s tax reduction occurred in several steps from 1994 onwards, mostly in a bid to stimulate economic growth. Reductions in the tax burden in New Zealand, on the other hand, from 38.1% of GDP in 1990 to 35.2% in 1998, reflect deliberate policy decisions to reduce the size of the state in the economy.
• For a broad view of developments in tax policy in OECD countries, see “Surveillance of Tax Policies: A Synthesis of Findings in Economic Surveys” by Paul van den Noord and Christopher Heady, OECD Economics Dept. Working Paper No 303, OECD 2001, http://www.oecd.org/eco/wp/onlinewp.htm.
• A shortened version of the working paper appeared as a chapter on “Challenges for Tax Policy in OECD Countries” in OECD Economic Outlook 69, June 2001.
©OECD Observer No 228, September 2001