Charity Investment

Seven surprising facts about tax revenues around the world

New data collated by the OECD compares how governments raise taxes, yielding some notable findings.

31/07/2018

Duncan Lamont

Duncan Lamont

Head of Research and Analytics

Schroders

Taxes are always a hot topic for the individuals and companies who pay them. It is therefore perhaps unsurprising that an attempt by the OECD, an organisation made up of mostly rich nations, to collate and compare taxation in 35 countries will attract some attention.

Here, we pull out some of the most telling facts.

1. Most economies are taxed more now relative to GDP than at any point since 1990

Around 80% of the countries covered have experienced an increase in taxation between 1990 and 2016. Higher tax income across all major sectors, particularly VAT and corporation tax, has pushed the ratio of tax to GDP to a record high of 34%.

The reasons for this are complex, particularly the sharp rise since the financial crisis of 2008. It isn’t necessarily a result of indebted governments increasing tax rates to raise more money, as we explain below.

Tax as a percentage of gdp: OECD average

Source: OECD Global Revenue Statistics Database, Schroders. OECD average is for 2015 data.

2. This overall rise in taxation has happened despite corporate tax rates falling by around half since the 1980s

One high-profile story has been the “rates war” on corporation tax. Countries have battled to offer the lowest rates in an attempt to attract companies. To help show that, we’ve pulled in a chart from a recent academic paper. It shows how the average corporate tax rate has experienced a savage decline over an extended period of time. It’s also worth noting that higher pre-tax profits have increased overall corporation tax revenues despite lower tax rates.

World average corporate tax rate

3. Corporation taxes are a fairly insignificant source of government revenues

Contribution to total tax revenue: OECD average

Source: OECD Global Revenue Statistics Database, Schroders. OECD average is for 2015 data.

This is nothing new. Despite the decline in corporate tax rates, corporate taxes have not fallen at all relative to GDP since 1990. Given its low contribution to overall revenues, cutting corporation tax is a far less directly costly move than cutting income tax, despite growing public opposition. Governments also hope that cutting tax rates for companies encourages them to base or expand their presence in a country, employing people who pay income tax and who buy taxed goods and services.

4. Value-added tax (VAT) and other goods and services taxes (e.g. duties) contribute a far higher amount to the coffers

Goods and sales tax income (including VAT) as a multiple of corporation tax

5. The income tax burden, relative to GDP, hasn’t increased in most countries since 2000. Tax hikes have been slipped in by the back door. 

Less attention-grabbing areas such as VAT and social security contributions have been the major areas the burden has been felt.

Percentage of OECD countries which have increased reliance on various taxes since 2000

Source: OECD Global Revenue Statistics Database, Schroders. All data is to end 2016 other than Australia, Greece, Japan, Mexico and OECD average, which are 2015.

6. The UK consumer’s obsession with house prices is matched by the government’s desire to extract revenues from the sector

Tax revenues derived from property are higher in the UK, as a percentage of GDP, than any other major economy, more than double the OECD average.

Tax as a percentage of gdp

Source: OECD Global Revenue Statistics Database, Schroders. All data is to end 2016 other than Australia, Japan and OECD average, which are 2015.

7. Greece and Italy are much criticised but generate more in taxes, as a percentage of GDP, than most other major economies. 

Raising the tax burden much further is not a realistic option. Fiscal health can only be improved by spending cuts (such as a reduction in their very generous benefits) and/or efforts to raise productivity, such as relaxation of employment law. The Italian political climate in particular makes neither an easy option, at least in the near term.

Tax revenues as a percentage of GDP

The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Limited 12 Moorgate, London, EC2R 6DA. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored. 

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