January 2001     Vol. 2, no. 1

Recent trends in taxes internationally

Zhengxi Lin

In 1997, Canada's overall taxation ranked in the middle of the G-7 countries and the 29 members of the Organisation for Economic Co-operation and Development (OECD) (Table 1). The story is mixed, however, when the various components are compared.

Canada's personal taxes were the highest of the G-7 nations and among the highest in the OECD. Its corporate taxes were in the middle of the G-7 and ninth highest of the 28 OECD countries for which data are available. Canada's payroll taxes were the lowest in the G-7 and the ninth lowest among all 29 OECD member states. Its property taxes were the second highest among both the G-7 nations and the 28 OECD member countries for which data are available. Canada's goods and services taxes (also known as consumption taxes) were the third lowest in the G-7 and among the lowest in the OECD (fifth lowest).

This analysis compares recent trends in Canada's overall taxation and its various components with those of the G-7 and OECD member countries. It examines trends between 1980 and 1997, a period in which Canadian taxation expanded rapidly. Following international practice, the study uses the gross domestic product (GDP) as the tax base to compare effective tax rates (tax-to-GDP ratios) for all components, across all countries, over time.

Many factors can affect the tax-to-GDP ratios. These include the extent to which countries provide social or economic assistance through tax expenditures or direct government spending, differences in the degree of tax avoidance and the size of the underground economy, and differences in GDP measurement (see OECD [1999] for a detailed discussion).

The tax system differs substantially from one country to another (Lin, 2000). Even under the common OECD classification, different bases are used to calculate tax liabilities for different components. Furthermore, the tax liability for each component depends upon not only the tax base and the statutory (legislated) tax rate but also various exemptions, deductions, credits, surtaxes, and so on, which differ not only across different countries at the same point in time but also within the same country over time.

Canada had the second greatest increase in total taxation in the G-7 countries

The total tax-to-GDP ratio rose for 6 of the G-7 countries between 1980 and 1997. Of the 23 OECD countries for which comparable data are available, this ratio increased in 20 and declined in 3. Canada's total tax-to-GDP ratio increased by 4.8 percentage points (from 32.0% to 36.8%) or 15.0% (Table 2). This was the second highest growth in the G-7—lower only than that of Italy—and the seventh largest percentage-point increase among the relevant OECD countries.

Personal taxation dropped in three G-7 countries

During the same period, the personal tax-to-GDP ratio went up for 4 G-7 countries and down for 3. For the 23 OECD countries under study, this ratio increased for 13 and decreased for the remaining 10. Canada's personal tax revenues as a percentage of GDP went up by 3.1 percentage points (from 10.9% to 14.0%) or 28.4%. This was the second largest increase among the 4 G-7 countries whose personal tax-to-GDP ratio had risen—smaller only than that of Italy—and the third greatest percentage-point increase among the 13 comparable OECD countries.

Canada had the smallest increase in corporate taxation

From 1980 to 1997, the corporate tax-to-GDP ratio went up for 4 G-7 countries and declined for 3. Among the 23 OECD nations under study, this tax ratio increased for 19 while it decreased for the remaining 4. Canada's corporate tax revenues as a percentage of GDP went up by 0.1 percentage point (from 3.7% to 3.8%) or 2.7%. This was the smallest increase among the 4 G-7 countries for which the ratio rose, as well as among the 19 comparable OECD countries.

Payroll taxation decreased only in the United Kingdom

From 1980 to 1997, the payroll tax-to-GDP ratio increased in 6 G-7 countries. Of the 23 OECD member countries under study, this ratio rose in 19 and fell in 4. Canada's total payroll tax revenues as a percentage of GDP increased by 2.3 percentage points or 67.6%. This tied with Germany for the third largest percentage-point increase among the 6 G-7 countries for which the tax ratio had increased. It was the seventh largest percentage-point increase among the 19 relevant OECD member states.

Property taxation increased in most G-7 countries

From 1980 to 1997, the property tax-to-GDP ratio went up in 5 G-7 countries and declined in 2. Among the 23 OECD member countries under study, the ratio climbed in 17 and declined in the remaining 6. Canada's property tax revenues as a percentage of GDP went up by 0.8 percentage points (from 2.9% to 3.7%) or 27.6% during this period. This is the second smallest increase in the 5 G-7 countries whose tax ratio had increased, but in the middle of the 17 relevant OECD member states.

Consumption taxation dropped in Canada

From 1980 to 1997, the consumption tax-to-GDP ratio rose in Italy, the United Kingdom and Japan, decreased in Canada and France, and remained unchanged in Germany and the United States. Among 23 OECD member countries, this tax ratio increased in 12, decreased in 9 and remained unchanged in 2. Canada's consumption tax revenues as a percentage of GDP decreased by 1.4 percentage points (from 10.4% to 9.0%) or 13.5%. This was the largest decrease among the G-7 and the second largest percentage-point drop among the 9 OECD member states whose tax-to-GDP ratios declined.

Personal taxes led growth in Canada

As mentioned, Canada's total tax-to-GDP ratio rose by 4.8 percentage points or 15.0% between 1980 and 1997. Of this growth, nearly 65% was accounted for by an increase in the personal tax-to-GDP ratio. Growth in the payroll tax-to-GDP ratio contributed another 48% and the property tax-to-GDP ratio, 17%. A rise in the corporate tax-to-GDP ratio contributed very little (2%). Rises were offset by a 29% drop in the consumption tax-to-GDP ratio (Table 3).

The pattern of change varied substantially from one country to another. On average, among the G-7 countries growth in the payroll tax-to-GDP ratio was the largest contributor, accounting for 43% of the growth in the total tax-to-GDP ratio. Rises in the personal tax-to-GDP ratio and in consumption tax-to-GDP accounted for 18% each. Increases in the property tax-to-GDP ratio and the corporate tax-to-GDP ratio contributed 13% and 6%.

On average, growth in the payroll tax-to-GDP ratio made the largest contribution to the increase in the total tax-to-GDP ratio of 23 OECD countries (accounting for 36%). Increases in the consumption and corporate tax-to-GDP ratios made the second and third largest contributions (accounting for 21% and 20%, respectively). A rise in the property tax-to-GDP ratio contributed 11%. Growth in the personal tax-to-GDP ratio was least important, accounting for just 5%.

References

• Lin, Z., "Taxes internationally." Perspectives on Labour and Income (Statistics Canada, Catalogue no. 75-001-XPE) 12, no. 3 (Autumn 2000): 16-20.
• Organisation for Economic Co-operation and Development. Revenue Statistics, 1965-1998. Paris: OECD, 1999.

Zhengxi Lin is with the Labour and Household Surveys Analysis Division. He can be reached at (613) 951-0830 or linzhen@statcan.gc.ca.

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