Government Revenues as a share of national income, Number of countries having implemented value added taxes, Relative weight of two forms of consumption taxation, Share of domestic budget funded by domestic taxes, Taxes on income vs. taxes on goods and services, Taxes on incomes of individuals and corporations, Top marginal income tax rates, selected countries, Two sources of data on tax revenue as share of GDP, Recent trends in the incidence of taxation, International Centre for Tax and Development, the statutory burden of a tax does not necessarily describe who really bears the economic burden of the tax, taxes on goods and services tend to be less important in high-income countries, which are different to marginal tax rates, OECD Revenue Statistics in Latin America dataset, CEPALSTAT Revenue Statistics in Latin America database, International Centre for Tax and Development (ICTD), http://www.ictd.ac/datasets/the-ictd-government-revenue-dataset, https://stats.oecd.org/Index.aspx?DataSetCode=RS_GBL, American government finance in the long run: 1790 to 1990, ICTD Government Revenue Dataset ICTD working paper 19, The Distribution of Household Income and Federal Taxes, 2013, How Progressive Is the U.S. Federal Tax System? And at the other extreme, we have countries such as Libya and Saudi Arabia, where taxes account for less than 2% of national income. For example, if a taxed good has a substitute that is not taxed, some consumers will shift to the substitute to avoid the tax. Kleven, H. J., Landais, C., & Saez, E. (2013). 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. OECD (2016) Consumption Tax Trends 2016, OECD Publishing, Paris. The vertical axis is expressed by default in a logarithmic scale, so that the correlation is easier to appreciate you can change to a linear scale by clicking the Log button. Frankfurt: Campus Verlag. 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. It is also worth noting the important role of social security revenues in advanced economies: at 10% of GDP in 1996, social security revenues are almost 10 times larger than in developing countries. All of our charts can be embedded in any site. Foreign aid and revenue: Still a crowding-out effect?. For example, recent studies have found that taxation may lead to efficiency losses by inducing migration of super stars. 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. We will always indicate the original source of the data in our documentation, so you should always check the license of any such third-party data before use and redistribution. (2014). This is a remark that we address in more detail in the following sections. In many cases, especially among upper-middle income countries, tax revenues have been going up consistently. Here we provide further evidence of this, and show how the taxation of incomes became increasingly important to collect revenues in these countries, also in relation to other sources of revenue. 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. Edward Elgar Publishing, Incorporated, 2008.
Most VAT systems around the world adopt multi-rate systems with one or more reduced rates applying to particular goods. You have permission to use, distribute, and reproduce these in any medium, provided the source and authors are credited. Help us do this work by making a donation. We begin this entry by providing an overview of historical changes in taxation patterns, and then move on to an analysis of available data from the last couple of decades, discussing recent trends and patterns in taxation around the world. Benedek, D., Crivelli, E., Gupta, S., & Muthoora, P. (2014). The next visualisation, from Piketty and Saez (2007)19 shows estimated average tax rates in France, the US and the UK, at two points in time: 1970 and 2005. ICTD Government Revenue Dataset ICTD working paper 19.
The Distribution of Household Income and Federal Taxes, 2013. As pointed out above, early-industrialized countries increase tax revenues after the First World War specifically by increasing direct forms of taxation. Below we provide concrete examples of how economists try to estimate the economic incidence of taxation. 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. The marginal rate of taxation is defined as the rate of tax that is applied to the last dollar added to the taxable income. Displayed are rates for the bottom 90% of the income distribution, as well as higher percentiles. Here we want to provide more detail regarding different forms of commodity taxation, in particular consumption taxes. A common mistake is to interpret the top marginal tax rate as the effective rate of taxation applied to the rich. The source for the data is the 2016 OECD Inequality Update as part of the OECD Income Distribution Database (IDD) November 2016 Release: Income inequality remains high in the face of weak recovery. Some studies suggest that, under weak accountability, countries may not only have generally weak taxation systems, but may also be subject to political budget cycles whereby tax collection declines prior to elections, as politicians seek to secure short-term political support (See Prichard 201624 and the references therein for more details). The experience of government expansion in the US shows that there is a link between tax revenues, and government structure more generally. In China, for example, the share of GDP that is collected by taxing individuals and corporations almost doubled in the period 2000-2012.
Taxation and international migration of superstars: Evidence from the European football market. 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 1910-1930, when high top marginal rates were introduced. These figures give us an idea of the evolution of the importance of different forms of commodity taxation in OECD countries. Prichard et al. Specifically, while both average and marginal rates are increasing, average rates are smoother and generally lower. The IDD provides further details regarding how these estimates are constructed. World Development, 80, 48-60. So how large are these behavioral responses? The visualization shows a map of total tax revenues. OECD/KIPF (2014), The Distributional Effects of Consumption Taxes in OECD Countries, OECD Publishing, Paris. When citing this entry, please also cite the underlying data sources. These figures come from the World Development Report (2005), and include corporate tax rates as a benchmark. The vertical axis measures GDP per capita (after accounting for differences in purchasing power across countries), while the horizontal axis measures tax revenues as share of GDP. This means that marginal rates apply only to the portion of taxable income that exceeds the lower income threshold for that marginal rate. This can be contrasted with the case of OECD countries, where direct taxation especially personal income taxation is comparatively more important.
The countries in the sample are Argentina, Australia, Brazil, Canada, Chile, Colombia, Denmark, Finland, Ireland, Japan, Mexico, the Netherlands, New Zealand, Norway, Sweden, Switzerland, the United Kingdom, and the United States. You have the permission to use, distribute, and reproduce these in any medium, provided the source and authors are credited. The extent to which taxes affect behavior is discussed in more detail below. The data shows that across the 35 countries covered, taxes and transfers lower income inequality by around one-third on average (equivalent to around 0.15 Gini points). For example, high tax rates may discourage labor supply; and in the case of very rich individuals, they may even induce migration of talent to countries where the tax burden is lower. For more details see OECD (2016).12.
Our articles and data visualizations rely on work from many different people and organizations. The vertical axis shows the relative frequency of taxation instruments within the sample of countries, and the horizontal axis shows time.2 The red line plots the share of countries with income taxation, the blue line plots the share with income-tax withholding, and the green line plots the share with value added taxation. ), and social contributions. The Journal of Economic Perspectives, 21(1), 3-24. The estimates account for sales taxes, value added taxes and excise duties; and are expressed as a share of GDP. In this interactive chart you can see in detail how VAT, specifically, has spread around the world in the last few decades. The different series correspond to different sources: the blue line denotes estimates using IMF Article IV reports, the orange line denotes estimates from the IMF Government Finance Statistics, the yellow line denotes data from IMF Country Reports, and the green line denotes estimates from the World Bank World Development Indicators. The Bosman ruling banned restrictions on foreign EU players within national leagues and allowed players in the EU to move to another club at the end of a contract without a transfer fee being paid. The 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. 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. This entry can be cited as: Our World in Data is free and accessible for everyone. From a historical perspective, the growth of governments and the extent to which they are able to collect revenues from their citizens, is a striking economic feature of the last two centuries. (2014)34 provide a detailed account of the data limitations identified by the ICTD, and how they tried to address them in the new ICTD Government Revenue Dataset. Developing countries, in contrast, rely more heavily on trade taxes, as well as taxes on consumption. While informative for the purpose of cross-country comparisons, these results have to be interpreted carefully, since the before-tax distribution of incomes is already the result of choices made by individuals who take taxes and transfers into consideration. As we can see, there is a positive correlation on the aggregate, and European countries are consistently located further towards the top right. The chart shows an example of data discrepancies in tax revenues for Ghana. The Distribution of Household Income and Federal Taxes, 2013. 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.
(2014)7, provides a conceptual classification of revenues other than debt. Comparable data, from the same source, is also available for Peru; you can see the corresponding figures by clicking on the option labelled Change.
Licenses: All visualizations, data, and articles produced by Our World in Data are open access under the Creative Commons BY license. Taxation and international migration of superstars: Evidence from the European football market, The elasticity of taxable income with respect to marginal tax rates: A critical review. feature higher income tax revenues than commodity tax revenues); Denmark is an extreme case, with income tax revenues more than doubling receipts from taxes levied on goods and services. The chart, from OECD-KIPF (2014),14 shows the goods and services that are most commonly subject to reduced VAT rates in OECD countries. 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). Up until that point, and since around 1995, tax rates for the richest 1% went down every year (although they also went down for the lower income groups in the same period). For example, if a tax is imposed on producers, in a competitive market they will raise prices to some extent to offset this tax burden so the producers income will not fall by the full amount of the tax. And this has been consistently the case throughout the last couple of decades. These estimates comes from the International Centre for Tax and Development, and are expressed as a share of GDP. 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. From this chart, it seems like providing support to specific industries, such as tourism, is another important factor considered by governments. 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. This gives us an idea of the typical country in that region, at that point in time. Lindert, P. H. (2012).
The diagram, from Prichard et al. Chapter 55, International Handbook of Development Economics, Volume 1.
The data produced by third parties and made available by Our World in Data is subject to the license terms from the original third-party authors. By clicking on the option labelled Relative, you can see how the share of national revenues rose sharply after the Second World War. After the First World War, however, taxation started growing considerably. You can add countries by clicking on the option The hike in tax rates towards the end corresponds primarily to significant changes in tax rules in 2012. This is the source used to produce the World Development Indicators from the World Bank, and is an input for the production of many other related, but different sources of information, including (i) the OECD Tax Statistics dataset; (ii) the OECD Revenue Statistics in Latin America dataset; and (iii) the CEPALSTAT Revenue Statistics in Latin America database. The chart, from Besley and Persson (2013)23, plots the cross-country relationship between political institutions and tax revenues. In the first financial system, lasting from 1790 until about 1842, state governments played an important role in raising government revenue, mainly by generating asset income through activities such as the sale of land. Add country And this is also true within world regions (represented here with different colors). Yet cross-country differences are substantial, with declines ranging from about 40% in Denmark and Ireland, to about 8% in South Korea. Add country A very detailed account of data quality differences can be found in Prichard et al. The interpretation of this graph often leads to confusion. According to the most recent estimates from the International Centre for Tax and Development, total tax revenues account for more than 80% of total government revenue in about half of the countries in the world and more than 50% in almost every country. As it can be seen, developing countries depend significantly on indirect taxes, particularly taxes on trade and consumption. The visualization provides further evidence of the extent of this correlation. Taxation is, by and large, the most important source of government revenue in nearly all countries. All visualizations, data, and code produced by Our World in Data are completely open access under the Creative Commons BY license. The Journal of Economic Perspectives, 14(1), 61-82. This implies that, to assess who bears the burden of a tax, it is not sufficient to look at statutory tax rates. We can see that there is a strong positive correlation: richer countries tend to have higher tax revenues as a share of their GDP. An important point that should be kept in mind is that these estimates are not directly comparable to those from the Congressional Budget Office discussed above, because they do not take into account government transfers, and rely on different methodological assumptions for example, they do not consider excise taxes (but they do consider estate taxes). Social Contract Budgeting: Prescriptions from Economics and History. We discuss this additional evidence in the next section. As Wallis (2000)5 points outs, in the last two centuries the US has passed through three distinct systems of government finance. 1983. ISBN: 1292002972. Here we provide evidence suggesting that political factors such as the extent of institutionalized constraints on the decision-making powers of policy makers help shape the level and evolution of fiscal capacity of countries. How Progressive Is the U.S. Federal Tax System? It can also be checked that most countries in the OECD are close, or below a hypothetical line with slope equal to one (i.e. 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. A selection of countries is included by default, but you can add more countries by clicking the The visualization, using data from Arroyo-Abad and Lindert (2016)6, shows the composition of tax revenues for Colombia. Prichard, W., Cobham, A., & Goodall, A. Both of these factors seem to be affected by the strength of political institutions. 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. In the last part of this entry we provide an overview of empirical evidence regarding the equity and efficiency implications of taxation. Taxes affect economic interactions by changing the relative prices of goods and services in the economy. By clicking on the option labelled Relative, you can see the relative importance of the different tax instruments. The hypothesis supporting this strand of literature is straightforward: foreign assistance may crowd out domestic tax revenues, as it reduces the incentives for policy-makers to pursue politically costly tax collection. In many developing countries levels are very low and trends have not been persistently going up by a significant margin. However, the lines are much flatter in 2005, which shows that the systems have become less progressive at the top: the average share of income paid by those at the very top of the income distribution has dropped substantially since 1970. The figures correspond to OECD averages and all values are expressed as percentage of total taxation. In the US, for example, if a married couple earns $40,000 a year, they pay federal income taxes at a rate of 10% on the first $18,500 or so, and at a rate of 15% on the rest. Retrieved from http://www.jstor.org/stable/30033699. The chart here shows the sharp trend of reducing top marginal tax rates after the 1980s, as a global phenomenon expanding both developed and developing countries. Saez, E., Slemrod, J., & Giertz, S. H. (2012). Many countries also use reduced rates for other reasons. We have already noted that taxes on goods and services tend to be less important in high-income countries than in low-income countries. The table, from Jha (2008)9, shows differences in tax revenues as a share of GDP for various country groups. As we can see, countries with strong executive constraints collect higher tax revenues, when income per capita is held constant, than do countries with weak executive constraints. In the second financial system, starting around 1840, local governments became more important, contributing an increasing share of government revenue from property taxes. American government finance in the long run: 1790 to 1990. As we discuss below, the statutory burden of a tax does not necessarily describe who really bears the economic burden of the tax.
Most VAT systems around the world adopt multi-rate systems with one or more reduced rates applying to particular goods. You have permission to use, distribute, and reproduce these in any medium, provided the source and authors are credited. Help us do this work by making a donation. We begin this entry by providing an overview of historical changes in taxation patterns, and then move on to an analysis of available data from the last couple of decades, discussing recent trends and patterns in taxation around the world. Benedek, D., Crivelli, E., Gupta, S., & Muthoora, P. (2014). The next visualisation, from Piketty and Saez (2007)19 shows estimated average tax rates in France, the US and the UK, at two points in time: 1970 and 2005. ICTD Government Revenue Dataset ICTD working paper 19.
The Distribution of Household Income and Federal Taxes, 2013. As pointed out above, early-industrialized countries increase tax revenues after the First World War specifically by increasing direct forms of taxation. Below we provide concrete examples of how economists try to estimate the economic incidence of taxation. 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. The marginal rate of taxation is defined as the rate of tax that is applied to the last dollar added to the taxable income. Displayed are rates for the bottom 90% of the income distribution, as well as higher percentiles. Here we want to provide more detail regarding different forms of commodity taxation, in particular consumption taxes. A common mistake is to interpret the top marginal tax rate as the effective rate of taxation applied to the rich. The source for the data is the 2016 OECD Inequality Update as part of the OECD Income Distribution Database (IDD) November 2016 Release: Income inequality remains high in the face of weak recovery. Some studies suggest that, under weak accountability, countries may not only have generally weak taxation systems, but may also be subject to political budget cycles whereby tax collection declines prior to elections, as politicians seek to secure short-term political support (See Prichard 201624 and the references therein for more details). The experience of government expansion in the US shows that there is a link between tax revenues, and government structure more generally. In China, for example, the share of GDP that is collected by taxing individuals and corporations almost doubled in the period 2000-2012.
Taxation and international migration of superstars: Evidence from the European football market. 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 1910-1930, when high top marginal rates were introduced. These figures give us an idea of the evolution of the importance of different forms of commodity taxation in OECD countries. Prichard et al. Specifically, while both average and marginal rates are increasing, average rates are smoother and generally lower. The IDD provides further details regarding how these estimates are constructed. World Development, 80, 48-60. So how large are these behavioral responses? The visualization shows a map of total tax revenues. OECD/KIPF (2014), The Distributional Effects of Consumption Taxes in OECD Countries, OECD Publishing, Paris. When citing this entry, please also cite the underlying data sources. These figures come from the World Development Report (2005), and include corporate tax rates as a benchmark. The vertical axis measures GDP per capita (after accounting for differences in purchasing power across countries), while the horizontal axis measures tax revenues as share of GDP. This means that marginal rates apply only to the portion of taxable income that exceeds the lower income threshold for that marginal rate. This can be contrasted with the case of OECD countries, where direct taxation especially personal income taxation is comparatively more important.
The countries in the sample are Argentina, Australia, Brazil, Canada, Chile, Colombia, Denmark, Finland, Ireland, Japan, Mexico, the Netherlands, New Zealand, Norway, Sweden, Switzerland, the United Kingdom, and the United States. You have the permission to use, distribute, and reproduce these in any medium, provided the source and authors are credited. The extent to which taxes affect behavior is discussed in more detail below. The data shows that across the 35 countries covered, taxes and transfers lower income inequality by around one-third on average (equivalent to around 0.15 Gini points). For example, high tax rates may discourage labor supply; and in the case of very rich individuals, they may even induce migration of talent to countries where the tax burden is lower. For more details see OECD (2016).12.
Our articles and data visualizations rely on work from many different people and organizations. The vertical axis shows the relative frequency of taxation instruments within the sample of countries, and the horizontal axis shows time.2 The red line plots the share of countries with income taxation, the blue line plots the share with income-tax withholding, and the green line plots the share with value added taxation. ), and social contributions. The Journal of Economic Perspectives, 21(1), 3-24. The estimates account for sales taxes, value added taxes and excise duties; and are expressed as a share of GDP. In this interactive chart you can see in detail how VAT, specifically, has spread around the world in the last few decades. The different series correspond to different sources: the blue line denotes estimates using IMF Article IV reports, the orange line denotes estimates from the IMF Government Finance Statistics, the yellow line denotes data from IMF Country Reports, and the green line denotes estimates from the World Bank World Development Indicators. The Bosman ruling banned restrictions on foreign EU players within national leagues and allowed players in the EU to move to another club at the end of a contract without a transfer fee being paid. The 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. 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. This entry can be cited as: Our World in Data is free and accessible for everyone. From a historical perspective, the growth of governments and the extent to which they are able to collect revenues from their citizens, is a striking economic feature of the last two centuries. (2014)34 provide a detailed account of the data limitations identified by the ICTD, and how they tried to address them in the new ICTD Government Revenue Dataset. Developing countries, in contrast, rely more heavily on trade taxes, as well as taxes on consumption. While informative for the purpose of cross-country comparisons, these results have to be interpreted carefully, since the before-tax distribution of incomes is already the result of choices made by individuals who take taxes and transfers into consideration. As we can see, there is a positive correlation on the aggregate, and European countries are consistently located further towards the top right. The chart shows an example of data discrepancies in tax revenues for Ghana. The Distribution of Household Income and Federal Taxes, 2013. 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.
(2014)7, provides a conceptual classification of revenues other than debt. Comparable data, from the same source, is also available for Peru; you can see the corresponding figures by clicking on the option labelled Change.
Licenses: All visualizations, data, and articles produced by Our World in Data are open access under the Creative Commons BY license. Taxation and international migration of superstars: Evidence from the European football market, The elasticity of taxable income with respect to marginal tax rates: A critical review. feature higher income tax revenues than commodity tax revenues); Denmark is an extreme case, with income tax revenues more than doubling receipts from taxes levied on goods and services. The chart, from OECD-KIPF (2014),14 shows the goods and services that are most commonly subject to reduced VAT rates in OECD countries. 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). Up until that point, and since around 1995, tax rates for the richest 1% went down every year (although they also went down for the lower income groups in the same period). For example, if a tax is imposed on producers, in a competitive market they will raise prices to some extent to offset this tax burden so the producers income will not fall by the full amount of the tax. And this has been consistently the case throughout the last couple of decades. These estimates comes from the International Centre for Tax and Development, and are expressed as a share of GDP. 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. From this chart, it seems like providing support to specific industries, such as tourism, is another important factor considered by governments. 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. This gives us an idea of the typical country in that region, at that point in time. Lindert, P. H. (2012).
The diagram, from Prichard et al. Chapter 55, International Handbook of Development Economics, Volume 1.
The data produced by third parties and made available by Our World in Data is subject to the license terms from the original third-party authors. By clicking on the option labelled Relative, you can see how the share of national revenues rose sharply after the Second World War. After the First World War, however, taxation started growing considerably. You can add countries by clicking on the option The hike in tax rates towards the end corresponds primarily to significant changes in tax rules in 2012. This is the source used to produce the World Development Indicators from the World Bank, and is an input for the production of many other related, but different sources of information, including (i) the OECD Tax Statistics dataset; (ii) the OECD Revenue Statistics in Latin America dataset; and (iii) the CEPALSTAT Revenue Statistics in Latin America database. The chart, from Besley and Persson (2013)23, plots the cross-country relationship between political institutions and tax revenues. In the first financial system, lasting from 1790 until about 1842, state governments played an important role in raising government revenue, mainly by generating asset income through activities such as the sale of land. Add country And this is also true within world regions (represented here with different colors). Yet cross-country differences are substantial, with declines ranging from about 40% in Denmark and Ireland, to about 8% in South Korea. Add country A very detailed account of data quality differences can be found in Prichard et al. The interpretation of this graph often leads to confusion. According to the most recent estimates from the International Centre for Tax and Development, total tax revenues account for more than 80% of total government revenue in about half of the countries in the world and more than 50% in almost every country. As it can be seen, developing countries depend significantly on indirect taxes, particularly taxes on trade and consumption. The visualization provides further evidence of the extent of this correlation. Taxation is, by and large, the most important source of government revenue in nearly all countries. All visualizations, data, and code produced by Our World in Data are completely open access under the Creative Commons BY license. The Journal of Economic Perspectives, 14(1), 61-82. This implies that, to assess who bears the burden of a tax, it is not sufficient to look at statutory tax rates. We can see that there is a strong positive correlation: richer countries tend to have higher tax revenues as a share of their GDP. An important point that should be kept in mind is that these estimates are not directly comparable to those from the Congressional Budget Office discussed above, because they do not take into account government transfers, and rely on different methodological assumptions for example, they do not consider excise taxes (but they do consider estate taxes). Social Contract Budgeting: Prescriptions from Economics and History. We discuss this additional evidence in the next section. As Wallis (2000)5 points outs, in the last two centuries the US has passed through three distinct systems of government finance. 1983. ISBN: 1292002972. Here we provide evidence suggesting that political factors such as the extent of institutionalized constraints on the decision-making powers of policy makers help shape the level and evolution of fiscal capacity of countries. How Progressive Is the U.S. Federal Tax System? It can also be checked that most countries in the OECD are close, or below a hypothetical line with slope equal to one (i.e. 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. A selection of countries is included by default, but you can add more countries by clicking the The visualization, using data from Arroyo-Abad and Lindert (2016)6, shows the composition of tax revenues for Colombia. Prichard, W., Cobham, A., & Goodall, A. Both of these factors seem to be affected by the strength of political institutions. 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. In the last part of this entry we provide an overview of empirical evidence regarding the equity and efficiency implications of taxation. Taxes affect economic interactions by changing the relative prices of goods and services in the economy. By clicking on the option labelled Relative, you can see the relative importance of the different tax instruments. The hypothesis supporting this strand of literature is straightforward: foreign assistance may crowd out domestic tax revenues, as it reduces the incentives for policy-makers to pursue politically costly tax collection. In many developing countries levels are very low and trends have not been persistently going up by a significant margin. However, the lines are much flatter in 2005, which shows that the systems have become less progressive at the top: the average share of income paid by those at the very top of the income distribution has dropped substantially since 1970. The figures correspond to OECD averages and all values are expressed as percentage of total taxation. In the US, for example, if a married couple earns $40,000 a year, they pay federal income taxes at a rate of 10% on the first $18,500 or so, and at a rate of 15% on the rest. Retrieved from http://www.jstor.org/stable/30033699. The chart here shows the sharp trend of reducing top marginal tax rates after the 1980s, as a global phenomenon expanding both developed and developing countries. Saez, E., Slemrod, J., & Giertz, S. H. (2012). Many countries also use reduced rates for other reasons. We have already noted that taxes on goods and services tend to be less important in high-income countries than in low-income countries. The table, from Jha (2008)9, shows differences in tax revenues as a share of GDP for various country groups. As we can see, countries with strong executive constraints collect higher tax revenues, when income per capita is held constant, than do countries with weak executive constraints. In the second financial system, starting around 1840, local governments became more important, contributing an increasing share of government revenue from property taxes. American government finance in the long run: 1790 to 1990. As we discuss below, the statutory burden of a tax does not necessarily describe who really bears the economic burden of the tax.