10/10/2001 - Tax revenues increased in OECD countries during 1999 and 2000, reflecting strong economic growth and despite widespread recent moves to cut tax rates. According to the latest edition of the OECD's Revenue Statistics, the OECD average tax-to-GDP ratio rose to 37.3% in 1999 from 36.9% in 1998, in part reflecting an increase in the average OECD economic growth rate from 2.7% to 3.2%.
Provisional figures for 2000, covering 27 of the 30 OECD countries, suggest that this revenue growth continued last year, in parallel with an acceleration of average OECD economic growth to 4.1%. In seven of these countries, provisional tax revenue figures suggest that the tax-to-GDP ratio increased by more than one percentage point (see Table 1). However, not all OECD countries experienced an increase, and three of them show reductions in their tax-to-GDP ratio of more than one percentage point. Looking ahead, the current slowdown in OECD growth rates could well result in a reduction in the average tax-to-GDP ratio. This is because lower growth will likely result in a fall in revenues from taxes on personal and corporate income.
The relationship between economic growth and increased tax revenues is complex and does not necessarily conform to a standard pattern. In 1999, while the OECD average ratio of revenues from taxes on personal and corporate income in relation to GDP remained stable, there was an increase in the tax-to-GDP ratio of revenues from general consumption taxes, including Value Added Tax, and taxes on specific goods and services, including excise taxes. In 2000, by contrast, provisional figures suggest that, in four of the seven countries with the largest increase in tax-to-GDP ratios, growth in the ratio of personal and corporate income tax to GDP was a major cause (see Table 2). In the remaining three countries, additional growth in revenues came from consumption taxes or property taxes.
A longer-term view, less influenced by variations in growth rates, shows that the OECD average tax-to-GDP ratio rose by 3.5 percentage points between 1985 and 1999. But this masks considerable variation between countries (see Chart 1). Over the 15-year period, 12 countries experienced a reduction in their tax-to-GDP ratios, while 18 experienced widely varying increases.
The main taxes producing an increase in the OECD average tax-to-GDP ratio during the period 1985-1999 were social security contributions and general consumption taxes, each contributing 1.6 percentage points. The growth of revenues from the first of these taxes have fallen off in the past few years, to such an extent that the ratio of social security contributions to GDP has been practically constant since 1996. Growth in general consumption tax revenue has continued but has been largely offset by reduced revenues from taxes on specific goods and services (e.g. on tobacco), so that overall consumption tax revenue is growing slowly. This is why income tax revenues have played a dominant role in recent changes in total tax to GDP ratios.
Tax-to-GDP ratios give an overall picture of the development over time of the total tax burden for a single country. Their value in comparisons among countries is more limited because of differences in institutional arrangements. For example, countries differ in the mix of tax reliefs and cash benefits that they use to pursue social objectives.
In almost all OECD countries, over 80% of tax revenues come from three taxes: income tax, social security contributions and consumption taxes on goods and services (see Table 3 and related charts). However, the relative importance of different tax revenue sources varies widely from one country to another. For example, Australia and New Zealand do not collect social security contributions, while Denmark's revenue from this source is well below that in other countries. Overall, the countries of the European Union rely more on consumption taxes and social security contributions and less on income tax that the OECD average. In contrast, the United States collects a higher proportion in income taxes and property taxes but less in consumption taxes and social security contributions. Japan is similar to the United States in its low share of consumption taxes but relies much less on income tax, offsetting this with a greater reliance on social security contributions.
