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Global tax take approaches record levels as VAT rises

26th January 2015

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Tax revenues have increased to near record levels in advanced countries as VAT levels soared.

Latest OECD data for 2013 shows how the average tax burden in countries that are part of the organisation increased in 2013 to 34.1 per cent. This was up from the 33.7 per cent in 2012 and 33.3 per cent in 2011. The tax burden is defined as the ratio of total tax revenues to GDP.

Tax revenues are recovering following a drop in the aftermath of the financial crisis. After years of stagnation, growth in some major economies, notably the US and UK, has steadily improved since 2011. Concerted efforts by the OECD and G20 to bear down on tax collection is also apparently yielding results.

“About half of the increase is attributed to personal and corporate income taxes, which are typically designed so that revenues rise faster than GDP during periods of economic recovery. Discretionary tax changes have also played a role, as many countries raised tax rates and/or broadened tax bases,” the OECD explained in a release accompanying the statistics.

Value added tax has played a crucial role. The OECD notes there has been a strong increase in standard VAT rates over the past five years, with the average standard VAT rate reaching an all-time high of 19.1 per cent in January 2014. This was up significantly from 17.6 per cent in January 2009. Between 2009 and 2014, 21 countries raised their standard VAT rate at least once.

Efforts to shift the tax mix away from “distortive taxes on labour and corporate income in many countries towards more ‘growth friendly’ sources of revenue, like consumption taxes and property taxes” is a welcome one for the OECD.

However, while nations have increased VAT, only a few have taken measures to broaden their VAT base. The OECD suggests that broadening the VAT base by limiting the use of reduced rates and exemptions may allow countries to increase revenue without raising the standard rate. This would also reduce compliance and administrative costs, while countries could even reduce standard rate by broadening the tax base.

The largest increases in tax revenues occurred in Portugal, Turkey, Slovak Republic, Denmark and Finland. Norway, Chile and New Zealand recorded the largest falls.

Denmark recorded the highest tax-to-GDP ratio at 48.6 per cent, closely followed by France and Belgium at around 45 per cent each.

The lowest tax burdens are in Latin America. At about 20 per cent, Mexico and Chile have the lowest tax-to-GDP ratios among OECD countries, followed by South Korea and the US at roughly 25 per cent.

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