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OECD Countries See First Drop in Tax Revenues Since 2009

Posted on Dec. 4, 2020

OECD countries witnessed their first decline in tax revenues since the 2008 financial crisis, and a larger decrease in consumption tax revenues is expected in 2020 because of the pandemic, according to an OECD report.

In a December 3 release, the OECD said the average tax-to-GDP ratio was 33.8 percent in 2019,  a decrease of 0.1 percentage point from 2018. According to the OECD’s latest annual "Revenue Statistics" report, published December 3, the overall average dropped as a result of larger revenue decreases in 15 OECD countries, while the 20 remaining OECD countries that reported data experienced increases in revenue.

Hungary had the largest drop in tax-to-GDP ratio among the OECD countries, with a decrease of 1.7 percentage points, says the report, which notes other significant decreases in Iceland, Belgium, and Sweden.

Consumption tax revenues have remained at an average of 10.3 percent of GDP since 2016, according to the OECD's "Consumption Tax Trends 2020" report, also published December 3. The OECD found that VAT rates remained stable from 2017 to 2020, at a “record high” average rate of 19.3 percent.  

“With VAT rates at an all-time high, governments may need to explore base broadening options to restore VAT revenues after the crisis,” the OECD recommended in its report.

Alex Cobham, chief executive of the Tax Justice Network, told Tax Notes that governments should introduce "serious" wealth taxes . “We should ensure that those with the broadest shoulders bear the most, because they can,” he said.

The report says the COVID-19 pandemic will likely affect consumption tax revenues more than the 2008 financial crisis because of lockdowns and mandatory business closures in the tourism and hospitality sector. The report also notes the trend toward e-commerce during the pandemic, saying that OECD countries should reform their VAT regimes to properly apply rules to digital trade.

According to Richard Asquith, vice president of global indirect tax for Avalara, in 2020 a record number of countries followed the OECD recommendation to implement VAT on foreign digital services, and another 17, including Canada, are planning to do so in the next 18 months. "The OECD has been relatively successful at convincing countries to use VAT, instead of controversial digital services taxes,” he said.

According to the OECD release, "drawing on the lessons from the global financial crisis of 2008, new analysis in Revenue Statistics shows that increases in government consumption and in households’ consumption of essential goods will exacerbate this fall in the short- to medium-term.”

But “it would be a serious error for countries to respond to the pandemic by expanding VAT and other regressive, sales-based taxes,” Cobham warned. "Inequalities damage us all, so the eventual revenue-raising must be part of the major redistribution that’s needed. That means focusing on progressive tax measures.”

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