The data plotted corresponds to historical estimates from Flora 4 up until , and more recent estimates, starting , from the International Centre for Tax and Development.
As we can see, the relative importance of income tax within government budgets fluctuates with time, but there is a clear positive trend in most cases. The experience of government expansion in the US shows that there is a link between tax revenues, and government structure more generally. As Wallis 5 points outs, in the last two centuries the US has passed through three distinct systems of government finance. In the second financial system, starting around , local governments became more important, contributing an increasing share of government revenue from property taxes.
And in the third system, starting with the Great Depression, the federal government became more important, generating increasingly larger revenues through the collection of income taxes.
The visualization shows how this transition took place. It provides details regarding the evolution of government revenues by level of government, expressed as a share of national income — here Gross National Product GNP. As can be seen in the chart, the implementation of new forms of taxation during the 20th century in the US, was associated with underlying changes in the structure of the government.
This is when income tax revenues started expanding. The evidence that we have discussed so far is mainly from high income countries. However, the available long-run data from Latin America suggests that middle income countries have also expanded tax revenues in the process of development — albeit later, and with some differences in the relative importance of specific tax instruments.
The visualization, using data from Arroyo-Abad and Lindert 6 , shows the composition of tax revenues for Colombia. These estimates correspond to central government revenues, and are expressed as a share of national income — specifically GDP. As we can see, tax revenues started growing noticeably in the s, mainly through the collection of consumption taxes. As it can be appreciated, income taxation became an important source of revenue in the second half of the 20th century, although consumption taxation grew faster than income taxation throughout this period.
In the preceding section we discussed the historical evolution of government revenues, and provided evidence of the important role that taxes, specifically, played in the expansion of governments. But what is the full menu of instruments that governments have to collect revenues? The diagram, from Prichard et al. As we can see, these revenues include grants, direct taxes such as taxes on income, profits, property, etc. The 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. The visualisation uses the same data, but plots the evolution of tax revenues for individual countries. 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. The table, 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.
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 visualization presents a breakdown of tax revenue sources, comparing figures from and 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.
More recent data suggests that direct taxation, and specifically income taxation, remains more important in developed countries than in developing countries. The visualization 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 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. The 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.
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 One important feature of tax systems is the statutory rate of taxation that applies to the highest bracket of incomes. The two visualizations 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. 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. 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 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. We have already outlined above the main instruments used by governments to collect revenue.
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 The key distinction between VAT and excise taxes is that VAT is paid by consumers, while excise taxes are paid by producers. 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. The 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. Show baseline: OAVG. Width: px Preview Embedding.
Tax on goods and services Related topics Government. Latest publication Revenue Statistics Publication Indicators Tax revenue Tax on personal income Tax on corporate profits Social security contributions Tax on payroll Tax on property Tax on goods and services Tax wedge. My pinboard Add this view Go to pinboard. Perspectives TOT. Institute transfer pricing arrangements and mechanisms for resolving disputes between taxpayers and revenue administrations that secure a fair share of taxes on profits for developing countries, Vietnam being a recent example.
Expand the tax net to include the digital economy , informal sector and environmental damages. Build trust in the tax system by fighting tax evasion through early detection, smarter auditing, and effective investigation and prosecution that hold evaders accountable. Close wasteful loopholes and reduce unwarranted tax incentives for investors. Depending on the nature of tax burdens in a given country, the World Bank Group can help governments improve competitiveness : Simplify taxes for small and medium-size enterprises — this also can help to address corruption.
Institute e-filing to reduce the time and effort spent on filing. Establish one-stop shops e. Create swift and fair dispute settlement mechanisms that instill confidence among investors. Ensure the predictability of tax policies and their administration, thus reducing corporate risks.
Implement environmental tax designs that support competitiveness like consumption-based carbon taxes, border tax adjustment or output-based tax rebates. The World Bank Group works with governments to create fair and equitable tax systems by reducing the adverse impact of the tax system on the poor, which may include helping to: Increase taxes on wealthy households through taxation of properties and capital gains.
Use the tax system to provide incentives for better social outcomes, for example through tobacco and carbon taxation and smart earmarking of taxes to support social programs in education and health. Institute minimum thresholds for paying taxes and progressive personal income tax regimes which contribute to reducing income inequality.
Philippines : With World Bank support, the government raised tobacco and alcohol taxes over the period The additional resources were used to triple the number of families receiving free health insurance, from 5.
The ongoing engagement has already produced tangible results. Return to main topic.
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