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Taxes are compulsory, unrequited payments made to governments by individuals, businesses, or institutions. They are described as unrequited because governments provide nothing specifically in return for them, although they may use the funds received to provide goods or services to individuals or communities. The sources of the revenue received by governments and the relative contributions of these sources are determined by policy choices about where and how to impose taxes and by changes in the structure of the economy. Tax policy may reflect concerns about distributional effects, economic efficiency (including corrections for externalities), and the practical problems of administering a tax system. There is no single correct model for distributing tax revenues among sources, nor is any distribution likely to remain constant over time.
The definitions used here are those used by the International Monetary Fund (IMF) in its Manual on Government Finance Statistics. Taxes traditionally have been classified either as direct—taxes levied directly on the income, profits, or property of individuals and corporations—or indirect—sales and excise taxes and duties. Indirect taxes have been construed as those that could be passed on by increasing the prices of goods or services sold to intermediate or final purchasers. But it is extremely difficult to determine the incidence of taxes, so the distinction has been dropped both from the United Nations System of National Accounts and by the IMF, although it remains useful for general discussion.
The level of taxation is typically measured by tax revenue as a share of GDP. Comparing levels of taxation across countries provides a quick overview of the structure of fiscal incentives facing the private sector. In this table tax data measured in local currencies are normalized by scale variables in the same units to ease cross-country comparisons. Data for 1980 are included to give a quick impression of changes over time. The table relies on central government data, which may considerably understate the total tax burden, particularly in countries where provincial and municipal governments are important.
Ratios of tax to GDP may reflect weak administration and large-scale tax avoidance or tax evasion. They also may reflect the presence of a substantial parallel economy with unrecorded and undisclosed incomes. These ratios tend to rise with level of income, with more developed countries relying on taxes to finance a much broader range of social services and social security than less developed countries are able to provide. Many of the poorest countries have low tax revenues relative to GDP, and so must rely heavily on external assistance.
As countries develop, they typically expand their capacity to tax residents directly, and indirect taxes become less important as a revenue source. Thus the share of taxes on income, profits, and capital gains is one measure of a tax system's level of development. In the early stages of development governments tend to rely on indirect taxes because the administrative costs of collection are relatively low. There are two principal sources of indirect taxes: customs revenues and domestic taxes on goods and services. The table shows these domestic taxes as a percentage of value added in industry and services. Agriculture and mining are excluded from the denominator because indirect taxation of these sectors is usually negligible. What is missing here is a measure of the uniformity of these taxes across industries and along the value added chain of production. Without such data no clear inferences can be drawn about how neutral a tax system is between subsectors with respect to incentives. Revenues raised by some governments by charging higher prices for goods produced by state-owned enterprises are not counted as tax revenues.
Export and import duties are shown separately because their burden on growth is likely to be high. Export duties, typically levied on primary (particularly agricultural) products, reduce the incentive to export and encourage a shift to other crops. High import tariffs penalize consumers, promote inefficient production, and implicitly tax exports. By contrast, lowering trade taxes enhances openness—to foreign competition, foreign knowledge, and foreign resources—energizing the development process in many ways. The economies growing fastest over the past 15 years have not relied on tax revenues from exports and, seeing this pattern, many other countries have reduced their export duties. For some countries, such as members of the European Union, most customs duties are collected by the supranational authority; these revenues are not reported in the individual countries' accounts.
The revenues collected by governments are the outcomes of tax systems that are often complex, containing many exceptions, exemptions, penalties, and other inducements that affect tax incidence and thus influence the decisions of workers, managers, and entrepreneurs. A potentially important influence on both domestic and international investors is the progressivity of a tax system, as measured roughly by the highest marginal tax rate on individual and corporate income.
• Tax revenue comprises compulsory, unrequited, nonrepayable receipts for public purposes collected by central governments. It includes interest collected on tax arrears and penalties collected on nonpayment or late payment of taxes and is shown net of refunds and other corrective transactions.
• Taxes on income, profits, and capital gains include taxes levied by central governments on the actual or presumptive net income of individuals and profits of enterprises. Also included are taxes levied on capital gains, whether realized on sales of land, securities, or other assets. Social security contributions based on gross pay, payroll, or number of employees are not included, but social security contributions based on personal income after deductions and personal exemptions are included.
• Domestic taxes on goods and services include all taxes and duties levied by central governments on the production, extraction, sale, transfer, leasing, or delivery of goods and rendering of services, or in respect of the use of goods or permission to use goods or to perform activities. Such taxes include general sales taxes, turnover or value added taxes, excises, and motor vehicle taxes.
• Export duties include all levies collected on goods at the point of export from the country. Rebates on exported goods comprising repayments of previously paid general consumption taxes, excises, or import duties should be deducted from the gross receipts of the appropriate taxes, not from export duty receipts.
• Import duties comprise all levies collected on goods at the point of entry into the country. They include levies for revenue purposes or import protection, whether on a specific or ad valorem basis, as long as they are restricted by law to imported products.
• Highest marginal tax rate is the highest rate shown on the schedule of tax rates applied to the taxable income of individuals and corporations. For some countries the highest marginal tax rate is also the basic or flat rate, and other surtaxes, deductions, and the like may apply. Also presented are the income levels above which the highest marginal tax rates apply for individuals.
Data on tax revenues are from print and electronic editions of the IMF's Government Finance Statistics Yearbook. Data on individual and corporate tax rates are from Price Waterhouse, Individual Taxes: A Worldwide Summary (1996) and Corporate Taxes: A Worldwide Summary (1996).
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