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Roughly speaking, governments finance policy from taxes, grants typically in the form of 'development assistance' transfers , and debt more precisely budget deficits, or reductions of budget surpluses. The diagram below, from Prichard et al. As we can see, these revenues include grants, direct taxes such as taxes on income, profits, property, etc. Classification of different sources of government revenues — Figure 2 in Prichard et al. The following visualization shows a map of total tax revenues.
More generally, this map shows that there is a clear correlation between GDP and tax revenues — richer countries tend to collect through taxes a much larger share of their domestic production. This is a remark that we address in more detail in the following sections.
Click to open interactive version The visualisation below uses the same data, but plots the evolution of tax revenues for individual countries. You can add countries by clicking on the option 'add country'; and you can switch between the 'map' and 'chart' views by clicking on the tabs at the top of the graph. The time series show that most high income countries have had relatively stable levels of tax revenues in the last decade; while trends and patterns are less clear across the developing world.
In many cases, especially among upper-middle income countries, tax revenues have been going up consistently. The case of Turkey stands out: in it collected about In any case, despite specific cases such as Turkey, differences today remain large and there is no clear evidence of global convergence. In many developing countries levels are very low and trends have not been persistently going up by a significant margin. Click to open interactive version How do developing and developed countries compare in terms of tax revenue?
The table below, from Jha 9 , shows differences in tax revenues as a share of GDP for various country groups. The table pools countries within groups, across two periods of time: and For each time-group pool of countries, the author ranks countries by tax revenue as share of national income, and reports the level for the country in the middle i.
This gives us an idea of the 'typical' country in that region, at that point in time. As we can see, developed countries collect almost twice as much as developing countries in tax revenue. And developing countries, in turn, collect almost half as much as transition economies. Also, we can see that developed countries had little change in tax-to-gdp ratios in the second half of the 20th century, where as in developing countries there seems to be a broad negative trend.
We have already discussed the fact that levels of taxation differ greatly across world regions — both in levels and trends. Now we focus on differences in the composition of tax revenues. The following visualization presents a breakdown of tax revenue sources, comparing figures from and The estimates are provided for a selection of country groups you can switch country groups by clicking on the option 'change country group' , and are expressed as a share of GDP.
The data comes from Todaro and Smith 11 , and includes direct taxes corporate and income taxes , as well as indirect taxes general, commodity and excise taxes and social security contributions. Although these estimates are somewhat dated, they do provide a rough idea of taxation patterns by world regions. As it can be seen, developing countries depend significantly on indirect taxes, particularly taxes on trade and consumption.
This can be contrasted with the case of OECD countries, where direct taxation — especially personal income taxation — is comparatively more important. Click to open interactive version More recent data suggests that direct taxation, and specifically income taxation, remains more important in developed countries than in developing countries.
The following visualisation plots total revenue from taxes on income and profits horizontal axis against revenue from taxes on goods and services vertical axis. As we can see, there is a positive correlation on the aggregate, and European countries marked in yellow are consistently located further towards the top right.
It can also be checked that most countries in the OECD are close, or below a hypothetical line with slope equal to one i. Recent trends in the taxation of incomes How have income tax revenues evolved around the world? The following visualization provides an overview of revenues from income taxation specifically taxes on incomes, profits and capital gains during the period The estimates correspond to direct taxation of individuals and corporations, and are expressed as share of GDP.
A selection of countries is included by default, but you can add more countries by clicking the 'add country' option. The data shows large and persistent cross-country heterogeneity, even within relatively similar countries, such as those in the OECD. In comparison to developing countries, the data also shows that in developed countries the direct taxation of corporations and individuals accounts for a larger share of national production.
And this has been consistently the case throughout the last couple of decades. As noted before, an important part of government revenue in developed countries comes from direct forms of taxation, so it is not surprising that the evolution of income taxation tracks closely the stable evolution of tax revenues that we discuss above. Some specific countries are particularly interesting. In China, for example, the share of GDP that is collected by taxing individuals and corporations almost doubled in the period Click to open interactive version How have statutory tax rates for the rich evolved in the last few decades?
One important feature of tax systems is the statutory rate of taxation that applies to the highest bracket of incomes. This measure, usually known as the 'top marginal rate of taxation', corresponds to the tax rate that applies to the 'last dollar' of income earned by the rich. The two visualizations below provide evidence of how top marginal income tax rates have evolved around the world.
As we can see, at the turn of the 20th century the top earners in these countries faced almost zero taxation on the last part of their incomes; but this changed drastically around , when high top marginal rates were introduced. Interestingly, however, this lasted only until about , when again all countries substantially reduced rates.
Today the levels are between half and a third of what they used to be at the highest point. The second graph shows estimates of top marginal income tax rates for a larger selection of countries years and As we can see, the sharp trend of reducing top marginal tax rates after the s was a global phenomenon, expanding both developed and developing countries.
The interpretation of these graphs often leads to confusion. A common mistake is to interpret the top marginal tax rate as the effective rate of taxation applied to the rich. This is incorrect, because the top marginal rate applies as the 'marginal' name suggests only to the last portion of income earned by the rich. And by implication, lower marginal rates do not directly imply lower economic incidence of taxation for the rich.
Having said that, additional evidence does seem to suggest that the above-mentioned reduction of top marginal income tax rates has been one of the ingredients contributing to lower effective tax rates for the rich. We discuss this additional evidence in the next section. Click to open interactive version How do marginal rates of taxation compare to average rates of taxation in the US? This means that marginal rates apply only to the portion of taxable income that exceeds the lower income threshold for that marginal rate.
In contrast, the average, or effective rate of taxation is defined as the ratio of total taxes paid by total income earned — that is, the share of income that is paid in income taxes. The distinction between these two concepts is important because for many people, a portion of their income is taxed at one rate, and the rest is taxed at another rate.
Using the US federal income tax schedule, the following visualization shows the marginal and average rates for the income of married couples filing jointly. These figures use estimated tax brackets for from the Tax Foundation.
This visualization shows that average and marginal income tax rates are clearly different. Specifically, while both average and marginal rates are increasing, average rates are smoother and generally lower. A similar chart showing marginal and average rates for the income of single individuals — as opposed to married couples filing jointly — can be found here. Marginal and average tax rate on incomes in the US — Our World in Data, with estimates from the Tax Foundation Recent trends in the taxation of consumption How is consumption taxed?
We have already outlined above the main instruments used by governments to collect revenue. Here we want to provide more detail regarding different forms of 'commodity taxation', in particular consumption taxes.
In the OECD nomenclature, consumption taxes taxes on production, sale, transfer, leasing and delivery of goods and rendering of services include two sub-categories: general taxes on goods and services taxes on general consumption including VAT, sales taxes and other general taxes on goods and services as well as taxes on specific goods and services consisting primarily of excise taxes as well as customs and import duties and taxes on specific services, such as taxes on insurance premiums and financial services.
For more details see OECD In other words, they have a different statutory burden. As we discuss below, the statutory burden of a tax does not necessarily describe who really bears the economic burden of the tax. How has the taxation of goods and services evolved around the world? The following visualization provides an overview of revenues from the taxation of goods and services during the period The estimates account for sales taxes, value added taxes and excise duties; and are expressed as a share of GDP.
The data shows some cross-country heterogeneity; although relative to revenue from income taxation , heterogeneity in commodity taxation is much smaller, especially among high-income countries.
As can be seen, most of the countries with particularly low tax-to-GDP ratios are in Africa. Click to open interactive version How important are different forms of commodity taxation in OECD countries? We have already noted that taxes on goods and services tend to be less important in high-income countries than in low-income countries.
Here we want to focus on the relative importance of different forms of commodity taxation.
The figures correspond to OECD averages and all values are expressed as percentage of total taxation. These figures give us an idea of the evolution of the importance of different forms of commodity taxation in OECD countries.
As we can see, the composition of consumption taxes has fundamentally changed in the OECD over the last few decades: the weight of consumption taxes has been stable, because the substantially increased importance of VAT has been effectively balanced by a reduction in importance of other taxes on specific goods and services, the bulk of which are excise taxes. Click to open interactive version How do statutory consumption tax rates compare across countries?
The following visualization shows how value added tax rates compare between world regions. These figures come from the World Development Report , and include corporate tax rates as a benchmark.
This visualization shows that value added tax rates are similar in developed and developing countries, which suggests that the differences we observe in revenue between regions, are likely due to differences in compliance. In fact, this is not only specific to commodity taxation — Besley and Persson 13 show that developed countries tend to raise much more income-tax revenue than developing countries with comparable statutory rates, which suggests that the tax base in low-income countries is more strongly affected by compliance difficulties.
In summary, the evidence suggests that fiscal capacity i. Most VAT systems around the world adopt multi-rate systems with one or more reduced rates applying to particular goods.
As can be seen, in most countries that use VAT exceptions, reduced rates tend to apply to basic products in which low-income households spend a larger share of their income such as food ; as well as to products with perceived positive social spillovers such as newspapers, books and medicines. Many countries also use reduced rates for other reasons.
From this chart, it seems like providing support to specific industries, such as tourism, is another important factor considered by governments. This implies that, to assess who bears the burden of a tax, it is not sufficient to look at statutory tax rates.
A similar argument can be made if the tax is levied on consumers, since in a market economy the tax will lower demand, and this will have a consequence also for producers. The key point is that, in order to analyze the economic incidence of taxation in a market economy, we need to look beyond statutory tax rates.
Below we provide concrete examples of how economists try to estimate the economic incidence of taxation. How much taxes do rich households pay in the US? To do this, they make the following assumptions: i Taxes on earnings are borne by workers; ii Taxes on individual income are borne by the households that pay them; iii Taxes on corporate income are borne by individuals in proportion to their capital income; iv Taxes on consumption are borne by individuals in proportion to their consumption.
The following visualization, plotting CBO estimates of average tax rates, shows that the federal tax system in the US has been generally progressive: those located higher in the ranking of incomes, pay a higher share of their income in taxes. Across time, we can also see that progressivity has not been constant — the period saw important reductions in tax rates for the rich, without comparable reductions for the poor. The hike in tax rates towards the end corresponds primarily to significant changes in tax rules in Average federal tax rates, by before-tax income Group, to — Figure 2 in CBO 18 How progressive is taxation at the top of the income distribution in developed countries?
The visualization above shows that, according to the estimates from the Congressional Budget Office , richer individuals in the US generally tend to bear a larger burden of taxation than the poor.
Here we examine whether this is also true within the top of the income distribution — that is, whether the 'ultra rich' shoulder a larger tax burden than the 'rich'. The next visualisation, from Piketty and Saez 19 shows estimated average tax rates in France, the US and the UK, at two points in time: and Notice that these are average rates i. Again, we can see in these estimates that the systems in question are progressive — increasingly higher percentiles in the income distribution pay increasingly higher effective rates of taxation.
Residence is often defined for individuals as presence in the country for more than days. Most countries base residence of entities on either place of organization or place of management and control.
The United Kingdom has three levels of residence. Defining income[ edit ] Most systems define income subject to tax broadly for residents, but tax nonresidents only on specific types of income. What is included in income for individuals may differ from what is included for entities.
The timing of recognizing income may differ by type of taxpayer or type of income. Income generally includes most types of receipts that enrich the taxpayer, including compensation for services, gain from sale of goods or other property, interest, dividends, rents, royalties, annuities, pensions, and all manner of other items.
Most tax systems exclude from income health care benefits provided by employers or under national insurance systems. Deductions allowed[ edit ] Nearly all income tax systems permit residents to reduce gross income by business and some other types of deductions.
By contrast, nonresidents are generally subject to income tax on the gross amount of income of most types plus the net business income earned within the jurisdiction. Expenses incurred in a trading, business, rental, or other income producing activity are generally deductible, though there may be limitations on some types of expenses or activities. Business expenses include all manner of costs for the benefit of the activity. An allowance as a capital allowance or depreciation deduction is nearly always allowed for recovery of costs of assets used in the activity.
Rules on capital allowances vary widely, and often permit recovery of costs more quickly than ratably over the life of the asset. Most systems allow individuals some sort of notional deductions or an amount subject to zero tax. In addition, many systems allow deduction of some types of personal expenses, such as home mortgage interest or medical expenses.
Business profits[ edit ] Only net income from business activities, whether conducted by individuals or entities is taxable, with few exceptions.
Many countries require business enterprises to prepare financial statements  which must be audited. Tax systems in those countries often define taxable income as income per those financial statements with few, if any, adjustments. A few jurisdictions compute net income as a fixed percentage of gross revenues for some types of businesses, particularly branches of nonresidents.
Credits[ edit ] Nearly all systems permit residents a credit for income taxes paid to other jurisdictions of the same sort. Thus, a credit is allowed at the national level for income taxes paid to other countries.
Many income tax systems permit other credits of various sorts, and such credits are often unique to the jurisdiction. Alternative taxes[ edit ] Some jurisdictions, particularly the United States and many of its states and Switzerland , impose the higher of regular income tax or an alternative tax.
Switzerland and U. Nearly all jurisdictions require those paying employees or nonresidents to withhold income tax from such payments. The amount to be withheld is a fixed percentage where the tax itself is at a fixed rate. Alternatively, the amount to be withheld may be determined by the tax administration of the country or by the payer using formulas provided by the tax administration.
Payees are generally required to provide to the payer or the government the information needed to make the determinations. Withholding for employees is often referred to as "pay as you earn" PAYE or "pay as you go. Calculation of the tax to be withheld may be done by the government or by employers based on withholding allowances or formulas. Nearly all systems require those whose proper tax is not fully settled through withholding to self-assess tax and make payments prior to or with final determination of the tax.
Self-assessment means the taxpayer must make a computation of tax and submit it to the government.