Spain is one of the Organization for Economic Cooperation and Development (OECD) countries where tax pressure has grown the most in the last decade. Between 2010 and 2021, this indicator —which measures the weight of taxes and social contributions on the economy— has advanced 7.1 points to reach 38.4% of GDP. This is the largest increase among the States that are part of the organization, only behind Slovakia and South Korea. The rebound has also been notable between 2020, marked by the pandemic, and a 2021 characterized by a strong recovery: Spain was the sixth country in the club where the ratio of taxes to GDP advanced the most in the period, by almost two points, three times higher than the OECD average.
The upward trend has been widespread. The tax burden has grown in most OECD countries in the last ten years —from 31.5% of GDP to 34.1% on average. It has also rebounded in 2021, after the covid hit, by 0.6 points, according to the report Revenue Statistics 2022 that the multilateral organization publishes this Wednesday. The biggest drop in the decade has occurred in Ireland, but it is explained more by the denominator effect caused by the strong increase in GDP due to the post-covid recovery.
In fact, an increase in the tax burden is not necessarily generated by a tax increase. It may be because the GDP grows below the collection. Or vice versa, if the economy advances at a rate higher than the income from taxes and contributions, the tax burden is reduced without the need for tax changes.
In Spain, the most sudden increase occurred between 2019 and 2021, with a rise of almost four points that has halved the existing gap with the euro area average and has placed the country four points above the tax burden. OECD average. This increase has not been achieved through large tax increases. Analysts attribute it more to the effect of inflation and the emergence of the underground economy during the pandemic, when it was necessary to have a regular activity to have access to public aid.
The global snapshot, on the other hand, remains more or less constant. Denmark continues to record the highest tax burden of the OECD countries, at 46.9% of GDP in 2021, followed by France (45.1%). Five other countries have an indicator above 40% of GDP: Austria, Belgium, Finland, Italy and Sweden. At the other extreme is Mexico, with 16.7% of GDP, followed by Colombia (18.8%) and Chile (19.4%).
The tax structure has also remained relatively stable, despite notable differences between each country. Social contributions and income tax account for half of public revenue on average in the OECD. VAT represents another 20%, corporation tax 9% and property taxes slightly less than 6%.
The OECD warns about the distortions that reduced rates —and exemptions— applied to indirect taxation, particularly VAT, can create. The body stresses that most of the club countries contemplate reduced rates of value added tax for a “wide range of goods and services”, which tend to “pursue various political objectives.” Among them, improving equity, taxing basic necessities less, such as water, food, health services or education. They have also been used to stimulate the consumption of “goods of merit”, such as cultural goods, promote certain activities, such as tourism in Spain, which has a reduced VAT of 10%, or to address environmental externalities.
“However, empirical evidence suggests that exemptions and reduced VAT rates are not the most effective way to achieve these objectives and may even be regressive,” the organization warns in the report. Consumption Tax Trends 2022, which also publishes this Wednesday. “Other measures, such as providing targeted support through income tax and/or transfers and benefits, tend to be more effective in addressing equity and pursuing policies other than increasing tax revenue.”
This is because wealthier households tend to benefit more in absolute terms from reduced VAT rates than lower-income households, because they consume more. The agency points out that this effect also occurs with the reduced VAT rates used to “stimulate employment (for example, in the tourism or hospitality sectors), or to support cultural activities (for example, theater) or pursue other objectives non-distributive”.
The OECD had already warned about this effect in a recent report on the measures implemented by many countries, Spain included, to deal with the current energy crisis. He recommended running away from generalized tax cuts and favoring measures focused on low incomes. The agency warned that subsidizing gas and electricity prices without differentiating by income is unfair, because it benefits those who consume the most, it places a burden on public accounts and goes against the green transition, because it does not discourage energy consumption.
Trend since 1965
Between 1965 and 2020, the average tax burden in the OECD area grew from 24.9% to 33.6%, an increase of 8.7 points. Revenues rose almost uninterruptedly before the first oil shock of 1973. After the slowdown caused by the crisis and the second oil shock (1979), European countries once again increased their tax burden in the 1980s to finance a greater spending on social security and control budget deficits.
In the mid-1980s, many OECD states began to reduce nominal personal income tax and corporate tax rates in the wake of liberal policies, and the negative impact on revenue was often offset by lower or lower abolition of tax breaks. In 1999, the average ratio of taxes to GDP was 33%, the highest level ever recorded. Between 2001 and 2004 it fell slightly, but grew again before the Great Recession. Considering all these fluctuations, the average tax level in the OECD area increased by 1.4 points between 1995 and 2020. “The trend towards higher tax levels during this period reflects the need to finance a significant increase in sector spending public,” says the agency.
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