The Great Recession’s impact on taxation
By Economics Correspondent Sean Whelan
The OECD has published a working paper looking at the effect of the Great Recession on tax policy in member states over the past five years.
The short version is: tax revenues fell initially, but have largely recovered in OECD countries. But the composition of taxes has shifted away from income tax and corporation tax, and towards higher VAT and social security contributions.
Some of the gory details:
Top tax rates –
Over half the OECD countries have raised the top rate of personal income tax and VAT, while more than half the states cut the main corporation tax rate.
In terms of personal income tax, 18 countries raised the top rate, nine made no change, while seven cut the rate.
For the main corporate income tax rate, six raised the rate, nine made no change, while 19 cut the corporate tax rate.
And for the standard VAT rate, 18 increased the rate, 15 made no change while only one country cut VAT (Iceland).
The OECD says countries cut corporate tax rates to try and encourage investment spending to boost the economy.
Impact of the recession –
Corporate tax revenues since 2007 fell in all states except Turkey. Spain saw the biggest drop.
When it came to taxes on labour, there was little change in the overall tax wedge in OECD states.
While labour taxes have generally remained stable, top rates of personal income tax have tended to rise since the crisis, with top tax rates up in 16 states – including Ireland – and down in six.
While the increases have been pretty modest, they do represent the reversal of a general downward trend that started in the 1980s and lasted until the mid 2000’s.
The top tax rate went up in the following states between 2007 and 2011:
Slovakia, Mexico, Korea, Luxembourg, Greece, UK, Iceland, USA, Ireland, Italy, Canada, Israel, Slovenia, Spain, France and Portugal.
In terms of the economic background, not only was the crash of 2008/9 particularly severe, but the recovery afterwards has been particularly slow and weak, compared with previous recessions.
Eleven of the 34 OECD states (including Ireland) are forecast to be still operating below the 2007 level of GDP in 2014.
Government budget deficits have fallen back since the peak across the OECD, but are still much higher than pre crisis levels.
Total gross debt to GDP ratios for OECD states have gone up from 73% to a forecast 113% in 2014. (The US, UK and Euro area are remarkably similar in this regard).
On average across the OECD, taxes on income and profits contribute about one third of revenues. It’s the same for taxes on goods and services.
Taxes on payroll and social security contributions contribute about a quarter of government revenues.
Since 2008, no country has increased the share of revenue from taxes on incomes and profits.
Many countries have raised taxes on capital gains and capital income as a contribution to fairness in sharing the burden.
There has been little radical change to income tax and social security regimes, because they produce so much revenue for governments, and they don’t want to tinker with them in difficult times.
But some countries have brought in tax incentives for employers to take on low paid, low skilled employees (such as the employers PRSI cut here).
Many countries have tried to broaden their tax base by abolishing tax breaks – but the OECD says only the low hanging fruit has been gathered so far.
Few countries have tried to raise significant extra revenue from recurrent taxes on property. As a tax base, it is not affected by tax competition and globalisation – the trends that have been pushing tax revenues down in most other categories.
Despite a pressing need for extra revenue and a good case for environmental taxes, few countries have raised these kind of taxes, and across the OECD as a whole, the ratio of environment taxes to GDP has fallen.
Favourable tax treatment for debt over equity has not been addressed through tax reform since 2008. In the property bubble, such a favourable treatment encouraged the increase in leverage that has left the OECD as a whole saddled with high debt levels. The OECD thinks this may be because states don’t want to reduce the attractiveness of ultra low interest rates in helping to stoke aggregate demand.