This OCGG Economy Analysis paper sets out the broad facts of taxation in different regions and countries of the world, and assesses how they have developed overtime.
Over the last thirty years, rich countries have generally maintained or extended their overall tax take (as a share of gross domestic product), through increasing both direct (e.g. income tax) and indirect (e.g. VAT) tax revenues. Trade taxes and the associated revenues have all but vanished.
Every poorer region has sought to increase revenues, starting from their much lower base. There has been little positive contribution from direct tax, and the pressure for trade liberalisation has meant this important source of indirect tax has generally fallen. This has led to a general trend of increasing reliance on tax on the sales of goods and services.
Systems of taxation can contribute to societies in three main areas: those of revenue, redistribution and (political) representation. Different countries exhibit differing relative urgency of needs in terms of these factors, and so it is of paramount importance to distinguish the primary goal when considering tax policy:
• Low-income countries, notably in sub-Saharan Africa and south Asia, face overwhelming difficulties in regard to both the level and the stability of revenues.
As such, their requirement is for viable and long-term new sources of funds.
The implications of this are not only the well-known need to stabilise and lengthen the term of aid delivery, but also extend to richer countries’ approach to future WTO talks. Specifically, if further trade liberalisation is to be pursued, the poorest countries must be offered guaranteed long-term alternative revenue support (over and above existing aid levels) in order to prevent further collapse of state
structures and their ability to support human development.
• Human poverty in middle-income countries, above all those in Latin America and the Caribbean, is more clearly the result of levels of income inequality than absolutely low income per se.
This implies priority for redistributive tax measures over an absolute need for revenues, although the latter remains pressing. As such, the goal of medium- and long-term thinking on tax policy must be to address the question of distribution. This mitigates against increasing reliance on indirect taxation, at least on sales; but systems of direct (income, profit and capital gains) tax have not yielded the hoped-for gains, despite extensive efforts to remodel them after (the moving target of) rich country systems.
Most redistribution in rich countries is seen to arise typically from cash transfers, a feature almost completely absent in middle-income countries.
Reconsideration of this channel offers a path to addressing the great inequalities (though putting the emphasis back on levels of revenue).
• Finally, countries rich in sources of non-tax revenue – primarily oil and diamonds – face a less binding revenue constraint, but at the expense of avoiding a typically important channel of pressure for political representation – which has implications not only for inclusion but also for inequality.
The observed pattern of diminishing revenues from each major tax source in the Middle East and North Africa are unlikely not to be associated with existing problems of representation.
One response is to seek to maintain levels of income tax, as a more direct channel to political involvement, even if trade and sales taxes are allowed to fall further.
