Tax revenues hold up despite economic downturn

 

What did the pandemic mean for tax revenues around the world?

 

Accompanied by an economic downturn, it’s reasonable to assume that tax revenues fell sharply too.

The impact of the COVID-19 pandemic on tax revenues was less pronounced than during previous crises, in part due to government support measures introduced to support housefuls and businesses, according to new research published by the Organisation for Economic Cooperation and Development (OECD) in their 2021 Revenue Statistics report.  It found that the average tax-to-GDP ratio rose slightly to 33.5% last year, up 0.1 percentage points from 2019.

They found that nominal tax revenues fell in most OECD countries but declines in the size of these economies were often more significant, which led to this slight increase in the average tax-to-GDP ratio.

This latest data analysis includes the first comparative analysis on the initial tax revenue impacts of the pandemic across OECD countries, suggesting that government support measures meant the relative stability of tax revenues.

Governments took steps to protect employment and reduce corporate bankruptcies to a far greater extent than during the global financial crisis in 2008 and 2009.

Also in the report is the finding that many of the tax policy measures introduced to help households and businesses had a direct revenue cost via reductions in tax liabilities, enhanced tax credits and allowances, and reductions in tax rates.

2020 was marked by a significant economic downturn, including reduced labour force participation, household consumption and business profits, which further reduced tax revenues.

However, this economic shock was much shorter and more sector-specific than during the global financial crisis, which reduced tax revenues.

Tax-to-GDP ratios in OECD countries ranged from 17.9% in Mexico to 46.5% in Denmark.

Twenty countries saw their tax-to-GDP ratio increase last year, with 16 experiencing a decline.

Spain experienced the most significant increase, up 1.9 percentage points, after having the largest nominal GDP fall and lower tax revenues.

Ireland had the largest decrease, thanks to lower VAT revenues (following a temporary reduction in VAT) and also reduced economic activity.

Across OECD countries, corporate tax revenues were the most negatively affected by the impact of the pandemic, with an average decrease of 0.4 percentage points and declines recorded in 26 countries.

However, personal income taxes and social security contributions increased by an average of 0.3 percentage points.

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