Wealthy nations are back to taxing more

London: The tax burden in wealthy countries has nearly recovered to pre-crisis levels, as the economic recovery boosted receipts and governments took steps to rebuild the public finances.

Average tax revenues have risen as a share of national income for the past four years, although individual countries showed “widely differing trends”, according to the Organisation for Economic Cooperation and Development.

The Paris-based think tank said the average tax burden — defined as the ratio of tax revenues to gross domestic product — declined by 1.5 percentage points to 32.7 per cent over the two years to 2009. By 2013 it had risen to 34.1 per cent — just below the pre-crisis level — after increasing by 0.4 percentage points during the year.

But in three countries — Iceland, Israel and Spain — the tax to GDP ratio was still down by more than 3 percentage points in 2013, compared with before the crisis in 2007. At the other end of the scale, the ratio increased over the period by 5.2 percentage points in Turkey, with three other countries — Finland, France, and Greece — reporting increases of 2.5 percentage points or more.

Pascal Saint-Amans, the top tax official at the OECD, said it was possible that increased compliance was having a significant effect in some countries. But it was “very hard to draw general lessons” about the data, he said.

About half of the increase in revenue between 2012 and 2013 was the result of rising revenues from personal and corporate income tax. Yet, their combined share of total revenues has dropped by 2.4 percentage points since 2007 to 33.6 per cent. Meanwhile, the share of social security contributions has increased by 1.6 percentage points to an average of 26.2 per cent of total revenue.

Consumption taxes have returned to pre-crisis levels after many governments pushed up their value added tax rates from an average of 17.6 per cent to 19.1 per cent in the four years to January 2014.

The OECD urged governments to consider paring back consumption tax breaks. It argued that although reduced VAT rates on food and energy increased the progressivity of the system, they were “a very poor tool” for targeting support to poor households.

It also said there was a “strong case” for countries to broaden their VAT bases to raise revenue and reduce compliance costs and distortions, adding that shifting the tax mix towards consumption tax potentially boosted growth.

“At best, rich households receive as much aggregate benefit from a reduced VAT rate as do poor households; at worst, rich households benefit vastly more in aggregate terms than poor households,” the OECD said.

The think tank noted the reduced rates were part of the reason that governments collected just 65 per cent of the maximum revenues that they could theoretically obtain from a given tax rate. It was particularly critical of reduced rates on books, hotel accommodation and restaurants which often provided a large benefit to rich households.

Looking back over nearly 50 years, the OECD reported a big increase in taxation reflecting “the need to finance sizeable increase of public sector outlays in almost all OECD countries”. In 1965, measures of tax to GDP ratios in OECD countries ranged from 10.6 per cent in Turkey to 33.6 per cent in France. By 2012, the corresponding range was from 19.6 per cent in Mexico to 47.2 per cent in Denmark.

— Financial Times