The tax burden and collected tax revenues in advanced economies are reaching record levels not seen since the financial crisis, according to new OECD research.
The Revenue Statistics 2014 show that the average tax burden – the ratio of total tax revenues to GDP – in OECD countries increased by 0.4 percentage points in 2013 to 34.1 percent.
In 2011 the tax burden stood at 33.3 percent. Historically tax-to-GDP ratios peaked in 2000 and dropped between 2001 and 2004 and again during the financial crisis.
Last year the tax burden increased in 21 of the 30 countries for which OECD data is available, and dropped in the other nine. The figures were the same in 2012 indicating a trend toward higher revenues.
The largest increases in 2013 occurred in Portugal, Turkey, Slovak Republic, Denmark and Finland, while the largest declines were observed in Norway, Chile and New Zealand.
The OECD ascribes the rising tax ratios in the past two years to several factors.
Personal and corporate income taxes account for half of the increase. They are designed in such a way that they typically lead to faster rising revenues than GDP during an economic recovery. However, after the sharp drop in 2008 and 2009, their share of total revenues (33.6 percent in 2012) remains well below the previous high of 36 percent in 2007. The share of social security contributions has increased by 1.6 percentage points to an average 26.2 percent of total revenue.
In addition, discretionary tax increases have also played their part as many government attempted to broaden their base.
The OECD data shows rising tax revenues for central, state and regional governments between 2011 and 2013 following a drop between 2008 and 2010. The average tax ratio for local governments increased slightly but steadily since 2007.
Denmark has the highest tax-to-GDP ratio of all OECD countries (48.6 percent), followed by France (45 percent) and Belgium (44.6 percent).
The composition of the types of tax continues to vary widely across countries, the OECD noted.
The organization has long advocated shifting the tax mix away from more distortive taxes on labor and corporate income toward growth-friendly sources of revenue like consumption taxes and property taxes.
Value-added tax remains an important source of revenue for OECD countries, often representing more than 20 percent of total tax revenues. The average standard VAT rate in OECD countries reached an all-time high of 19.1 percent in January 2014, up from 17.6 percent in January 2009, according to the report Consumption Tax Trends 2014.
Between 2009 and 2014, 21 countries increased their standard VAT rate at least once. OECD members that are part of the European Union have on average higher VAT rates at 21.7 percent.
The report found that few countries widened the application of VAT by limiting the use of reduced rates and exemptions. Although the exemptions are maintained for social objectives, an OECD report on the distributional effects of consumption taxes noted that most exemptions benefit higher income households more than lower income households.
This is particularly the case for reduced VAT rates on restaurant meals, hotel rooms and cultural goods, like books and theater and cinema tickets.
This study, carried out in conjunction with the Korea Institute of Public Finance, suggests that a better way to achieve equity and social objectives would be to remove many of these reduced rates and replace them with better targeted relief measures, such as income-tested benefits and tax credits.
A broadening of the VAT tax base could even lead to a reduction of the standard rate, the OECD said.