Comparing a nation’s tax rate to its gross domestic product (GDP) is one way of estimating the tax burden placed on the nation’s populace. GDP is the total financial value of all goods and services created within a national jurisdiction in a single year. It is a rough measurement of the economic well-being of a country.

The tax rate to GDP ratio compares the income generated by the central government through taxation with the raw value of all goods and services produced by that country. Lower ratios represent a lower total tax burden on all the businesses and citizens of a country. There is significant variation in the type and amount of taxes that residents of developed countries must pay, even within the member nations of the Organization for Economic Cooperation and Development (OECD).  For example, the 2011 income tax rate for corporations in France was 34.4 percent, while its neighbor Switzerland enforced one of the lowest taxes in the world, a mere 8.5 percent.

Comparison of the 10 OECD countries with lowest tax rates to GDP ratio

2008 tax rates by country

Information for this table was collected from various OECD publications available on the online OECD Tax Database.

What is Marginal Income Tax Rate?

The marginal income tax rate is the maximum rate levied on a person’s income. For a country with a flat tax, the marginal rate is equal to the flat rate. However, many countries, including the United States, have a variable income tax rate that depends on the income generated by an individual or business.     

Analysis of Countries with Low Taxes

The Swiss government has a long-standing reputation as a center of business, particularly in entity formation. “This fall, U.S. fast-food giant McDonald’s will move its European headquarters to Geneva from London, joining Kraft Foods, Yahoo! and  Nissan,” according to a Bloomberg Businessweek article titled ‘Lower Your Taxes: Move to Switzerland.’ Switzerland’s low corporate tax rate, which is less than a quarter of the tax levied by the United States, creates an attractive environment for large, international corporations.The United States leads the world in corporate income tax rate at 35 percent, but it is ranked among the 10 countries with lowest tax rate to GDP ratio. This may be due, at least in part, to the conspicuous absence of a value added tax (VAT) in the U.S. It is the only member of the OECD that does not levy a VAT on goods and services.

VAT is applied to a product during each stage of its creation and distribution, so manufacturers, distributers, suppliers and consumers all pay a share of this tax at different points in the production cycle. The price of goods and services often increases in response to a VAT policy, so a large portion of the tax burden inevitably falls on the consumer.

Slovakia is an interesting addition to the list of 10 lowest tax-to-GDP ratio countries due to its recent adoption of a flat tax policy in 2004. Citizens of Slovakia pay a 19 percent income tax, regardless of their total income. According to a Harvard Business School article, “Though Slovakia was not the first country to adopt a flat tax nor is it the biggest economy, Slovakia has raised some important issues regarding tax harmonization within Europe and integration process.”

As the first OECD country to institute a flat tax, the Slovakian experiment is still in its early stages of development. It may take years or decades to see the long-term benefits and drawbacks of a developed country switching to a flat tax system. As public frustration and attention is directed at the corruption and complexity of many western tax systems, particularly in the United States, the viability of instituting a flat tax is becoming an increasingly pressing question. A successful, established flat tax system in Slovakia may provide convincing evidence for proponents of flat taxes in the United States and Europe.

References:

1. OECD. “Tax Database: OECD Tax Revenue Statistics.” http://www.oecd.org/document/60/0,3746,en_2649_34533_1942460_1_1_1_1,00.html
2. Bloomberg Businessweek: “Lower Your Taxes: Move to Switzerland.” Kerry Capell. September 2009. http://www.businessweek.com/magazine/content/09_38/b4147062134006.htm
3. Harvard Business School: “All Eyes on Slovakia’s Flat Tax.” Martha Lagace. April 2007. http://hbswk.hbs.edu/item/5653.html
4. Center for American Progress: “Ten Charts that Prove the United States is a Low-Tax Country.” Michael Linden et al. June 2011. http://www.americanprogress.org/issues/2011/06/low_tax.html

World Taxation - Everything you want to know about world taxation but were afraid to ask.

The basic principles of taxation are nearly as old as human society—the history of taxes stretches thousands of years into the past. Several ancient civilizations, including the Greeks and Romans, levied taxes on their citizens to pay for military expenses and other public services. Taxation evolved significantly as empires expanded and civilizations become more structured.

Origin of Taxation

“The earliest known tax records, dating from approximately six thousand years B.C., are in the form of clay tablets found in the ancient city-state of Lagash in modern day Iraq,” according to a publication on the Association of Municipal Assessors of New Jersey (AMANJ) website. This early form of taxation was kept to a minimum, except during periods of conflict or hardship.

The Greeks, Egyptians and Romans also enforced tax policies that they used to fund centralized governments. The Greeks levied several types of taxes that are still enforced in many developed countries, including taxes on property and goods. Unlike early Greek taxation, the Roman policies began to weigh heavily on its citizens as the power and corruption of the empire’s central government grew. The excessive tax burden on productive Roman citizens during the 4^th and 5^th centuries was a leading cause of the nation’s eventual economic collapse⁵.

Early taxation was not limited to European and Mediterranean civilizations, ancient Chinese societies also levied taxes on their citizens. The Chinese instituted a form of property tax around 600 B.C. that required 10 percent of cultivated land to be dedicated to the central government⁷. All produce generated from the dedicated portion of land was taken as a tax.

History of Taxes in the Middle Ages

Fair taxation was a key issue for many English citizens during the medieval period. Most citizens were subject to a poll tax, which was a flat tax on every adult in a jurisdiction, as well as property and church taxes. Even peasants that did not own land had to pay property taxes on land that they rented. They were also obligated to donate 10 percent of their labor or produce to the church¹.

In 1215, a large portion of the English nobility revolted against their monarch, King John, who had implemented new taxes and increased existing ones to finance his military ambitions in continental Europe. The king levied more taxes to help pay for a large-scale conflict, including hiring a large mercenary force, and to make up for the loss of taxable territories in France during the war⁸. Many land-owning nobles did not trust King John’s leadership and did not feel responsible for supporting the war effort.

While turmoil and provincial strife dominated European politics, a unified and expansive empire emerged in the Middle East. Muslim conquerors took over a large portion of northern Africa and the Mediterranean region during the 14^th and 15^th centuries. They ruled over a diverse collection of populations, including nomads, Jews and Christians, which were subject to special forms of taxation that did not apply to Muslim citizens. Stationary societies that did not convert to the beliefs and traditions of Islam had to pay a special tax, which was more akin to tribute, to their rulers⁶. Muslim officials also taxed nomads by waiting at particular locations, like water supplies, to collect dues from the elusive wandering clans.

History of Taxation During the Colonial Period

Taxation policies developed quickly during the colonial period as wealth began to flow into Europe from colonies in Africa, Asia and the Americas. Great Britain enforced the first general income tax in 1799 to help finance their war against Napoleonic France³. This tax was also scaled according to income, much like the income taxes levied in most modern systems.

The dispute between the American colonists and the English crown that eventually led to the American Revolution is partially attributed to disputes concerning fair taxation. The colonist’s main grievance with the tax policy was distilled into a simple phrase, “No taxation without representation.” While the colonists were forced to pay taxes to England, including hefty duties on staples like tea and stamps, they did not receive any direct representation in Parliament or in the monarch’s court.

Recent Tax History

When the United States was founded, the federal government levied relatively few taxes. The country did not maintain a significant military force during times of peace. Instead, it relied on local militiamen for protection from marauders and local rebellions. The central government was also much smaller than it is now, and required much less money to maintain. As the new country developed, it encountered several crises and conflicts that prompted changes to the tax code.

The first federal income tax in the United States was created shortly after the Civil War to pay for the debts accrued during the costly internal conflict. The tax was not universal; it only applied to citizens above a certain income level⁴. This federal income tax was repealed in the 1870s, but a later administration created new federal tax legislation in 1894.

Many European nations also adopted income taxes during the 19^th century. The unifying Prussian influence over many of the independent German states helped entrench the principles of income tax in continental Europe. France began to levy an income tax during World War 1, in response to the threat of a German invasion³.

References:

1. Association of Municipal Assessors of New Jersey: “A Brief History of Property Tax.” Richard Henry Carlson. September 2004. http://www.amanj.org/files/Carlson.pdf
2. Inter-American Center of Tax Administrations: “Taxes in Ancient Greece.” http://www.ciat.org/index.php/en/news/archived-news/news/1145-los-impuestos-en-la-antigua-grecia.html
3. Encyclopedia Britannica: “Income Tax: History of Individual Income Taxation.” http://www.britannica.com/EBchecked/topic/284849/income-tax/71953/History-of-individual-income-taxation
4. Internal Revenue Service: “Understanding Taxes.” http://www.irs.gov/app/understandingTaxes/teacher/whys_thm02_les03.jsp
5. The Cato Journal, Volume 14 Number 2: “How Excessive Government Killed Ancient Rome.” Bruce Bartlett. Fall 1994. http://www.cato.org/pubs/journal/cjv14n2-7.html
6. Fordham University. Princeton University Press: “The Early Islamic Conquests.” Fred Donner. 1981 http://www.fordham.edu/halsall/med/donner.html
7. Authorama: “Ancient China Simplified, Chapter XVI – Land and People.” Edward Harper Parker. http://www.authorama.com/ancient-china-simplified-17.html
8. Constitutional Rights Foundation: “Meeting at Runnymede, the Story of King John and Magna Carta.” 2001 http://www.crf-usa.org/foundations-of-our-constitution/magna-carta.html

World Taxation - Everything you want to know about world taxation but were afraid to ask.

Personal income tax is one of the oldest forms of taxation. Practically every national and provincial government levies taxes on the income of citizens and businesses that generate money within its borders. In the late 1900s and early 2000s, many developed nations reduced their dependency on personal income tax for financing, although none have completely abolished the tax.

“There has, for instance, been a widely perceived need to provide a fiscal environment that encourages investment, risk-taking and entrepreneurship; and provides improved work incentives,” according to an OECD publication. The principle of the personal income tax reforms has been partially based on the idea that lowering taxes may actually increase total tax revenue over time, as the extra income available to citizens can be used to start businesses and other ventures that can provide additional tax revenue.

International Tax Rates

The following chart is a comparison of tax rates around the world from the current member nations of the Organization for Economic Cooperation and Development (OECD). These rates apply only to taxes levied by the central national government. The amounts do not reflect additional local income taxes that may be levied by state or provincial governments.

OECD Comparison of 2010 Personal Tax Rates by Country and Average Tax Rate of Average Wage (AW) Individual

Information for this table was collected from publications available through the OECD Tax Database in the “Personal income tax rates” section.

1. What is Marginal Tax Rate? According to the Concise Encyclopedia of Economics, marginal tax rate is “the rate on the last dollar of income earned.” Basically, it is the maximum rate that can apply to a single person’s income. Some countries, like Estonia, institute a flat tax on people and businesses regardless of income. However, most countries levy a tax rate that increases with the income of the taxpayer up to a maximum (marginal) rate.
2. What is ‘All-in’ Average Tax Rate at AW? Average wage (AW) as the average annual gross wage earnings of adult, full-time workers. The ‘All-in’ average rate is the comprehensive rate paid in income-based taxes, including provincial (or state) taxes and social security contributions². The ‘All-in’ average rate at AW is the total rate of all income-based taxes paid by average wage households. The rates listed in the column in the table above only apply to single, childless adults. Married couples with or without children and single parents usually have lower average tax rates.

Additional Information about Personal Taxation Around The World

Different countries have different laws regulating the collection and calculation of personal income taxes. Personal income taxes are only one of several taxes that taxpayers in most developed nations are required to pay. Other common types of taxes include property tax and consumption taxes. To learn more about local and federal taxation, and the difference between flat and variable income tax, read our article on Understanding Different Types of Taxation.

World Taxation - Everything you want to know about world taxation but were afraid to ask.

The corporation is a common and established type of business entity that is available in many countries around the world. Most governments treat corporate entities as a distinct, separate identity from its owners. Other common business entities, like limited liability companies and partnerships, are usually associated directly with their owners for taxation purposes. Corporations are held to a higher degree of public accountability and they must meet various structural and management requirements.

Taxation on corporate profits is a primary source of federal income for many developed and developing countries, although there is significant variation in the type and amount of corporate taxation. “Industrial countries raise about four times as much from personal income tax than from corporate income tax,” according to an International Monetary Fund publication.

OECD Member Corporate Tax Rates

The Organization for Economic Cooperation and Development (OECD) is an international organization made up of over 30 developed countries. The OECD evaluates and compares economic data from national economies to develop global economic solutions and improve tax policies. The following table compares the corporate tax rates of OECD member countries to their United Nations Human Development Index (HDI) rating.

The HDI is a composite evaluation of a population’s well-being and development. This index is calculated based on three primary categories: health, education and standard of living. Health score is measured by calculating the average life expectancy of a country’s citizens when they are born. Education score is based on two statistics: the average amount of schooling the public receives and the amount they are expected to receive. Living standard score is measured by comparing national income to total population. HDI rating is a comparative tool that provides a simple way to compare the quality of life of different countries and economies.

OECD Comparison of Corporate Tax Rates Worldwide by Country and Human Development Index Rating

Table Information

The above table only shows the national government’s income tax rate on incorporated entities. It does not represent additional local taxes that may apply in some countries. In the United States, many state governments also levy income tax on businesses that are incorporated with the state. Several other nations, including Korea, Germany and Japan, also have significant local taxes on corporations.

The tax data in the table is from an OECD publication found on the Tax Database section of the official OECD website. Human Development Index ratings for non-OECD countries and comprehensive description of index rating procedures are found in the Human Development Report 2011, which is published through the United Nations Development Program.

Comparison: Lowest and Highest Corporate Taxes

The United States levies the highest federal tax on corporate income of all the OECD members, but this does not necessarily make it a hostile environment for business formation. “Although the U.S. statutory tax is higher, the average effective rate is about the same, and the marginal rate on new investment is only slightly higher,” according to Congressional Research Service publication.

In contrast, the small European country of Switzerland sports one of the lowest corporate tax rates in the world. Switzerland’s tax on corporate income is less than one quarter of the U.S. tax. It is interesting to note that both countries have high Human Development Index ratings. The United States was ranked 4^th worldwide in 2011, while Switzerland ranked 11^th.

World Taxation - Everything you want to know about world taxation but were afraid to ask.