Slump relieved 'tax burdens' around the world, study shows
Wednesday, December 15, 2010
The economic downturn drove tax receipts in the United States to their lowest level in more than 40 years when measured as a percentage of the economy, according to a new study that showed widespread declines in national "tax burdens" throughout the developed world.
Falling incomes and profits trimmed public revenue in many countries, even as governments turned to tax rebates and other forms of relief to try to keep their economies afloat.
The result: Taxes claimed a steadily smaller percentage of economic output as the recession took hold. The declines continued through the beginning of the economic recovery last year, according to the study compiled by the Paris-based Organization for Economic Cooperation and Development.
In some cases the change was substantial. U.S. taxes as a percent of gross domestic product fell from 27.8 percent in 2007 to below 24 percent in 2009, the lowest level since at least 1965, according to the OECD. Nations such as Spain and Iceland, where the recession hit even harder, saw their tax burdens fall by more than 5 percentage points.
Throughout the 34 nations, most of them developed, in the OECD, the average tax take fell from 35.4 percent of economic output in 2007 to 33.7 percent in 2009 - ranging from a high of 48.2 percent in Denmark to a low of 17.5 percent in Mexico.
The U.S. rate in 2009 was the third lowest among OECD members.
It is normal for tax receipts to drop during a recession, as overall economic activity contracts, and the trend can help offset the impact of a downturn by leaving households and corporations with a larger share of their income.
But falling tax receipts can also force governments to borrow more. In this instance, the drop-off has been accompanied by rising concern over high levels of public debt in the United States and Europe, and intense debate over how forcefully governments should act to curb it.
Although tax receipts are likely to rebound as economies grow again, OECD tax policy director Jeffrey Owens said developed world governments now have to decide the degree to which tax rate increases should be used to help balance budgets, and how tax structures might change to better encourage growth.
The OECD, along with the International Monetary Fund, has encouraged countries to try to shift to consumption-based taxes - such as a sales or value-added tax - and cut income and corporate tax rates to spur investment and economic growth.
Throughout the OECD, taxes "are are now at their lowest since the early 1990s," Owens said. "The direction individual countries go depends on how they want to resolve their deficits."
In Europe, governments have cut spending but also have relied on tax-rate increases to bring their government books more into balance. So far in the United States, however, the emphasis has been on ensuring that economic growth stays on track, with President Obama recently agreeing to extend the tax cuts enacted under his predecessor nearly a decade ago, and also proposing further short-term reductions.