Taxes Take Smaller Bite in OECD Countries, Thanks to Lower Rates, Economic Slowdown

22/10/2003 - The tax man took a smaller piece of the pie in OECD countries for the second year in a row in 2002, according to the latest edition of Revenue Statistics. The main reasons: tax cuts and the economic slowdown.

Tax burdens fell in 16 of the 27 OECD countries for which data are available (see Table A). Most of those countries are in the European Union, where tax revenues amounted to 40.5% of gross domestic product, down from 41.0% in 2001. This marked the second straight year of declines after a five-year period of increasing tax burdens and show a clear reversal of the upward trend. 

The changes varied from country to country with the tax ratio declining by more than one percentage point in seven countries: Austria, Hungary, the United Kingdom, Canada, Ireland, Greece and Turkey. On the other hand, it rose more than one percentage point in three countries: Luxembourg, the Slovak Republic and New Zealand. A wave of tax cuts since 2000 explain part of the overall decline in tax burdens. Fifteen OECD countries reduced their top personal income tax rates during that period. Twelve countries lowered their main corporate tax rates.

Economic doldrums are the other main reason for the drop. Just as high growth increases corporate profits rapidly, the recent period of slow growth has had the reverse effect. A similar thing occurs with personal income because of progressive tax schedules: slower economic growth translates into lower income and a lower tax bracket for many people. As Table B shows, the decline in revenue from income taxes explains a large part of the lower tax-to-GDP ratios in Austria, Canada, Greece, Ireland, Turkey and the United Kingdom, while higher revenue from income taxes played an important role in the increased tax ratios for Luxembourg and New Zealand.

A special feature in this year's Revenue Statistics looks in depth at how countries use tax allowances and credits to achieve government policies, and how this affects tax ratios. Many countries give tax credits for children. Germany, for instance, in 2002 provided a credit of more than 1,800 euros for each child in a family to help offset the added cost of rearing youngsters. The credit is deducted from parents' tax bill. 

Journalists may obtain a copy of the report via the OECD's password protected website, or from the Media Relations Division (tel. (33) 1 45 24 97 00). For further information journalists are invited to contact Christopher Heady, OECD's Centre for Tax Policy and Administration (tel. (33) 1 45 24 93 22).

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