Tax revenues fell across the OECD for the first time in a decade during 2019, but a much larger decrease is expected in 2020 as the COVID-19 pandemic drives down economic activity and consumption tax revenues, according to new OECD research published today.
The 2020 edition of the OECD’s annual Revenue Statistics publication shows that the average tax-to-GDP ratio has fallen to 33.8% in 2019, a decrease of 0.1 percentage points since 2018. This was due to decreases in 15 OECD countries that were larger, on average, than the increases in the 20 remaining countries for which 2019 data were available.
The COVID-19 crisis is likely to significantly hit tax revenues in 2020, particularly from consumption taxes, due to the sharp fall in economic activity and consumption following lockdowns and the forced closure of many businesses. Drawing on the lessons from the global financial crisis of 2008, new analysis in Revenue Statistics shows that increases in government consumption and in households’ consumption of essential goods will exacerbate this fall in the short- to medium-term.
“Since the global financial crisis of 2008, we have seen a consistent trend of increasing tax revenues in the OECD, which have decreased slightly in 2019 for the first time,” said Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration. “We expect to see much sharper decreases next year when the impact of COVID-19 starts to become more apparent. At some point, when the health crisis has passed and the economic recovery is underway, governments will need to reconsider whether their tax systems are up to the challenges of the post-pandemic environment.”
Revenue Statistics confirms the longstanding diversity in tax-to-GDP ratios among OECD countries, which remained the case in 2019, ranging from 16.5% in Mexico to 46.3% in Denmark. The largest fall was seen in Hungary (1.7 percentage point), partially due to a decrease in corporate income taxes following the removal of the compulsory tax advance supplement on business taxes. Other large decreases were seen in Iceland (1.1 p.p.), Belgium and Sweden (both 1.0 p.p.). Only one increase of over one percentage point was seen, in Denmark (2.0 p.p.), which overtook France as the country with the highest tax-to-GDP ratio.
The data show that corporate income taxes in the OECD have continued to increase, from 9.2% of total tax revenues on average in 2014 to 10.0% in 2018. However, this is still lower than the peak recorded share of corporate income taxes at 11.5% of total tax revenues in 2007 and are expected to fall again as a result of the current crisis. In 2018, average revenues from taxes on goods and services declined in OECD countries: although revenues from VAT remained steady at 20.4% of total tax revenues, excise tax revenues fell by 0.4 percentage points to 7.2%.
Consumption Tax Trends highlights that standard VAT rates remained stable between 2017 and 2020, at a record high of 19.3% on average. Only one country increased its standard VAT rate (Japan, from 8% to 10%) in 2019, and no reductions were recorded until the COVID-19 outbreak in early 2020, when Germany and Ireland temporarily reduced their standard VAT rate as part of their economic stimulus packages (from 19% to 16 % and from 23% to 21%, respectively). Many countries have also introduced a range of VAT measures to support businesses and the healthcare sector during the crisis, as detailed in a special section of Consumption Tax Trends.
With VAT rates at an all-time high, governments may need to explore base broadening options to restore VAT revenues after the crisis, according to the report. The surge in e-commerce following the COVID-19 outbreak has emphasised the importance of reform to ensure that VAT is properly applied to digital trade.
All OECD countries with a VAT have now implemented or committed to the OECD standards for collecting VAT on online sales of services and digital products. Many OECD countries are further expanding these e-commerce VAT regimes to include online sales of small parcels that are often imported from abroad by foreign electronic marketplaces and other digital vendors.
To access the Revenue Statistics report, data, overview and country notes, go to https://oe.cd/revenue-statistics.
To access the report on Consumption Tax Trends, visit https://www.oecd.org/tax/consumption-tax-trends-19990979.htm.