Testimony: Oregon Should Reevaluate the Proposed Gross Receipts Tax to Raise Revenue for Public Education

Testimony: Oregon Should Reevaluate the Proposed Gross Receipts Tax to Raise Revenue for Public Education

Tax Policy – Testimony: Oregon Should Reevaluate the Proposed Gross Receipts Tax to Raise Revenue for Public Education

Co-Chair Roblan, Co-Chair Smith Warner, Co-Vice Chair Knopp, Co-Vice Chair Smith, and Members of the Committee:

My name is Garrett Watson, and I’m an economist and the Special Projects Manager at the Tax Foundation, the nation’s leading nonpartisan, nonprofit tax research organization that has informed smarter tax policy at the state, federal, and global levels since 1937. We have produced the Facts & Figures handbook since 1941, we calculate Tax Freedom Day each year, we produce the State Business Tax Climate Index, and we have a wealth of other data, rankings, and analysis at our website, www.TaxFoundation.org.

I am pleased to submit written testimony on House Bill 3427, which provides a plan to improve Oregon’s public schools and dedicates $2 billion per biennium in additional funding for the Oregon public school system. While I take no position on this bill, I will argue that Oregon should not adopt the proposed Corporate Activity Tax, a gross receipts tax, as the funding mechanism to improve Oregon’s public schools.

Gross Receipts Taxes Are Unsound Tax Policy

Gross receipts taxes, which are levied on the receipts from the sales a business makes, do not live up to the principles of sound tax policy.[1] Taxes on gross receipts create tax pyramiding, which is when the same economic value is taxed multiple times as business inputs are taxed at each stage in the production process. This raises the effective tax rate on consumers, who will bear the burden of higher prices for goods and services.

While businesses are legally required to remit the Corporate Activity Tax, the economic impact of the tax will be borne by consumers, workers, and shareholders. In addition to higher prices felt by consumers, the proposed tax will result in fewer jobs for Oregonians and lower portfolio valuations for those invested in businesses paying the tax.

The key problem with gross receipts taxes is they do not exempt business-to-business transactions from the tax base. This creates tax pyramiding and incentivizes firms to integrate vertically to avoid the tax. The tax affects industries differently, more heavily impacting industries with high production volumes and low profit margins.

Deductions for Business Inputs and Labor Costs

The proposed Corporate Activity Tax would provide firms subject to the tax a 25 percent deduction for the cost of business inputs or labor compensation. This will help mitigate some of the tax pyramiding and negative economic effects of the tax but does so by creating complexity for businesses that must file and remit the tax.

The experience Texas has with its Margin (Franchise) Tax is instructive.[2] Like the proposed Corporate Activity Tax, the Margin Tax provided a deduction for the greater of a firm’s labor costs and the cost of business inputs, among other options. This created complexity for businesses operating in Texas and resulted in the tax failing to raise the anticipated revenue for the first two years of collections. Texas has since reduced its Margin Tax rates, and the state legislature expressed its intent to repeal the tax.

In addition to the tax complexity, the offered deductions in House Bill 3427 do not offset the negative effects the tax will create for Oregonians. The Oregon Legislative Revenue Office (LRO) finds that prices will increase by about 0.39 percent if the Corporate Activity Tax rate is levied, which is close to the 0.40 percent increase in prices projected if the legislature adopted a gross receipts tax with no deductions permitted.[3] There are also negligible differences in employment levels and household incomes. The results are similar because the proposed deductions narrow the tax base and reduce expected revenue, which requires a higher tax rate to raise about $2 billion per biennium. The higher tax rate mostly offsets the benefits of the available deductions.

Oregon-HB3427-Flowchart Oregon Business Tax Oregon Tax

The Proposed Gross Receipts Tax Will Harm Low-Income Oregonians

The proposed Corporate Activity Tax will harm low-income Oregonians.[4] The proposed reductions in Oregon’s individual income tax rates will help mitigate the cost of the tax for many middle-income and upper-income households, but these tax rate reductions will not reach the least well-off in Oregon. This happens for two reasons. First, those households often have little to no state individual income tax liability to reduce. Second, while the income tax rates at the lower end of the rate schedule are being reduced, high-income filers have income in those brackets as well. Lowering rates does not actually target relief effectively.

The LRO estimates that Oregonians with household incomes below about $20,500 will experience a 0.2 percent decrease in their incomes in the long run, which translates to about $85 annually.[5] While this may be a small amount for those households with higher incomes, it could be critical for these households to make ends meet. By contrast, LRO estimates that Oregonians making above about $34,300 will experience increases in household income between 0.1 percent and 0.4 percent due to improvements in Oregon’s public school system and long-run labor force productivity.[6]

While some adjustments have been made to mitigate the regressivity of the Corporate Activity Tax, more work is needed. Ideally, the gross receipts tax would be replaced to avoid the tax pyramiding and price increases that harm low-income households, but in the interim, a refundable tax credit targeted at those with low incomes would also help these households.

Alternatives to Raise Additional Revenue

If the legislature wishes to raise $2 billion per biennium to support Oregon’s public education system, there are better options available to raise the revenue than via a gross receipts tax. A value-added tax can provide a stable source of revenue while avoiding the problems associated with taxing gross receipts.

Economic value is taxed only once under a value-added tax, which eliminates tax pyramiding and ensures that businesses and industries are treated equally under the tax code. LRO’s preliminary modeling of a value-added tax shows that prices rise less under this tax regime than a gross receipts tax, with fewer jobs lost and slightly higher average household incomes.[7]

LRO has estimated that a value-added tax has fewer negative effects on low-income Oregonians than the proposed Corporate Activity Tax. These households may still experience lower household incomes in the long run, which suggests that a refundable tax credit may also be deployed to ensure that these households are made whole.

While state-level value-added taxes are less common than gross receipts taxes, New Hampshire is a state that has successfully administered this tax and could serve as a model for designing a similar tax for Oregon.

Conclusion

The proposed Corporate Activity Tax in the amendment to House Bill 3427 may harm low-income Oregonians while introducing complexity into Oregon’s corporate tax code. The experience other states have with gross receipts taxes shows that it is not an efficient nor a simple way to raise revenue when compared to a value-added tax. Oregon can raise the revenue needed to improve public education in the state through a value-added tax, reducing the economic harm placed on low-income households and maintaining Oregon’s competitive business tax code.


[1] Garrett Watson, “Resisting the Allure of Gross Receipts Taxes: An Assessment of Their Costs and Consequences,” Tax Foundation, Feb. 6, 2019, https://taxfoundation.org/gross-receipts-tax/.

[2] Garrett Watson and Nicole Kaeding, “Oregon Shouldn’t Adopt a Margin Tax in Its Search for Revenue,” Tax Foundation, April 8, 2019, https://taxfoundation.org/oregon-margin-tax-revenue/.

[3] Oregon Legislative Revenue Office, “Modified Commercial Activity Tax Option 1AL and 2AL,” Oregon Joint Committee on Student Success Revenue Subcommittee Meeting Document, April 8, 2019, https://olis.leg.state.or.us/liz/2019R1/Downloads/CommitteeMeetingDocument/189142.

[4] Garrett Watson, “Oregon’s Proposed Corporate Activity Tax Would Harm Low-Income Oregonians the Most,” Tax Foundation, April 19, 2019, https://taxfoundation.org/oregon-business-tax-proposal/.

[5] Oregon Legislative Revenue Office, “Modified Commercial Activity Tax Option 2AL.”

[6] Ibid.

[7] Garrett Watson and Nicole Kaeding, “Oregon’s Proposed Gross Receipts Tax Is More Damaging Than Proposed Value-Added Tax,” Tax Foundation, March 13, 2019, https://taxfoundation.org/oregons-gross-receipts-tax-proposal-vat//.


Source: Tax Policy – Testimony: Oregon Should Reevaluate the Proposed Gross Receipts Tax to Raise Revenue for Public Education

Minnesota Considers $1.35 Billion Biennial Tax Increase

Minnesota Considers $1.35 Billion Biennial Tax Increase

Tax Policy – Minnesota Considers .35 Billion Biennial Tax Increase

Minnesota is running a surplus, but you wouldn’t know it given that House leaders are pushing a $1.35 billion tax increase, larger and more aggressive than the revenue-raising measures already proposed by Gov. Tim Walz (DFL). The proposal (H.F. 2125), which is advancing in the legislature, contains a laundry list of tax changes, including dramatically higher levels of business taxation, the second highest capital gains tax rate in the nation, resumption of inflation indexing for cigarette taxes, and higher state property tax rates.

Corporate Taxes

Minnesota has high corporate taxes, but due to the state’s single sales factor apportionment method, many large state-based corporations have minimal corporate income tax exposure. A multinational corporation based in Minnesota would only have its income taxed in proportion to the percentage of its sales made in the state—which, for a company with worldwide reach, can be very small. This is a significant factor in the state’s attractiveness to certain businesses despite high statutory tax rates, and H.F. 2125 has the potential to undermine it.

Under both Gov. Walz’s proposal and H.F. 2125, the accumulated post-1986 deferred foreign income of multinational corporations would be apportioned based on the sales of all related companies, with the apportioned share taxed in Minnesota. This “deemed repatriation” would be a $361 million hit on Minnesota companies in the coming biennium, and $219 million in the following biennium. And it’s almost impossible to apportion the income in an even remotely fair way, since it’s taking income from three decades and subjecting it all to the tax system that exists now—even though the state’s tax code has changed many times in the intervening years.

Both Gov. Walz and the sponsors of H.F. 2125 would also tax so-called GILTI income, though the House takes an uncommonly aggressive approach. GILTI stands for Global Intangible Low-Taxed Income, but the term is a bit of a misnomer; really, it’s a guardrail in the new “territorial” system of income taxation (which, as a general rule, only taxes income generated domestically), intended to tax high returns on foreign investment that were only subject to relatively low rates of foreign tax.

The design is more complex and doesn’t always work as intended. Minnesota, however, would make it even worse. At the federal level, there’s a deduction to apply a lower effective rate to GILTI income. Minnesota wouldn’t offer it. The federal government allows a credit for much of the foreign tax paid. Minnesota would not. And, under H.F. 2125, instead of treating GILTI as foreign dividend income like most states that have chosen to tax GILTI (which provides somewhat preferential treatment), Minnesota would simply consider the foreign subsidiaries part of the larger company and tax an apportioned share of foreign income just as if it were a domestic corporation, a proposal being called “worldwide combined reporting,” which intended to raise $384 million in the next biennium alone.

And whereas, at the federal level, there’s an offsetting deduction for foreign derived intangible income (FDII), Minnesota would forgo it under H.F. 2125—closing the door on an offset worth more than $100 million.

Meanwhile, the state would conform to the federal government’s new limitations on the net interest deduction, but require an 80 percent add-back of the accelerated expensing provisions in the federal law, which is supposed to serve as an offsetting provision. All told, taxes on corporations would be about $860 million higher over the next biennium.

Capital Gains Surtax

Currently, only Massachusetts taxes capital gains income at a higher rate than it taxes ordinary income. (Connecticut is considering doing likewise.) In Minnesota, where ordinary income is already taxed at a top marginal rate of 9.85 percent, capital gains and dividend income greater than $500,000 would be taxed at a rate of 12.85 percent, lower only than California’s top rate of 13.3 percent.

Curiously, the higher rate would only apply to long-term capital gains, not short-term gains, the inverse of the federal policy of taxing long-term gains at a preferential rate but short-term gains at the ordinary rate. This choice is largely one of convenience for the state—it can piggyback on the federal definition of net capital gains income, which is the net of long-term capital gains and losses less short-term capital losses—but makes very little sense from a policy standpoint.

Long-term capital gains are subject to preferential rates at the federal level in acknowledgment of the fact that they represent double taxation, as a tax on capital income after the corporate and individual income tax, and that gains are not adjusted for inflation, meaning that a significant portion of the taxable gain may not represent any gain at all. Minnesota would throw all this out the window, actually penalizing long-term investment by the state’s highest earners (and thus most mobile residents).

As we recently noted regarding the Connecticut proposal, singling out capital gains for an additional tax also doubles down on an extremely volatile source of revenue. Capital gains are already responsible for a significant share of forecasting error in individual income taxes. A task force co-chaired by former Federal Reserve Board Chairman Paul Volker and former New York Lt. Governor Richard Ravitch (D) found that “capital gains are the most erratic [tax base component] as they depend not only on stock market performance but also on taxpayers’ choices about whether and when to sell assets,” noting that during the Great Recession, overall adjusted gross income in New York (including income from capital assets) fell 18 percent, but capital gains subject to income fell a full 75 percent.

Nationally, the realization of capital gains slid 71 percent between 2007 and 2009; 55 percent just in 1987; and 46 percent in 2001. Massachusetts, the only state with a surtax on capital gains income (and then only on short-term gains), has sought to insulate itself from some of the volatility by prohibiting any budget from relying on more than $1 billion in capital gains revenue, dedicating anything in excess of that amount to the state’s Rainy Day Fund. The state projects about $381 million in revenue over the biennium from a capital gains tax hike, but that estimate comes with an enormous margin of error, with revenues swinging wildly over the years.

Other Provisions

In addition to the aforementioned changes, the bill would also freeze the estate tax threshold at $2.7 million, instead of allowing it to rise to $3 million; reinstate inflation indexing of the cigarette tax; and increase the (highly unusual) state property tax levy by $55 million in the coming biennium and $176 million in the one after that. Most states only have local property taxes, and only twelve states still impose an estate tax, particularly given the evidence that estate taxes encourage inefficient tax planning and the outmigration of high-net-worth elderly individuals, many of whom would have otherwise paid state taxes for several more years at least.

Conclusion

All told, H.F. 2125 represents a $1.35 billion tax increase over the biennium, including $860 million in new taxes on corporations and $249 million on pass-through businesses (rising to $506 million in the subsequent biennium). Minnesota’s businesses already experience fairly high levels of taxation, but single sales factor apportionment has shielded many of them from its worst effects to date. Under H.F. 2125, businesses and individuals alike would experience significant, economically harmful tax hikes—all at a time when the state is running a surplus.


Source: Tax Policy – Minnesota Considers .35 Billion Biennial Tax Increase

Connecticut Lawmakers Mull Capital Gains Surtax

Connecticut Lawmakers Mull Capital Gains Surtax

Tax Policy – Connecticut Lawmakers Mull Capital Gains Surtax

Governor Ned Lamont (D) is sounding a skeptical note, but in Connecticut’s legislature, a capital gains surtax proposal may be gaining steam. Under the proposal, capital gains—both short- and long-term—for filers subject to the state’s current top rate (6.99 percent) would be subject to an additional 2 percent on the income tax, yielding a capital gains tax rate of 8.99 percent. If adopted, it would make Connecticut only the second state to adopt a higher rate on short-term capital gains than on ordinary income, and the only state to impose a higher rate on long-term capital gains (though under a recent proposal, Minnesota would do likewise).

At 8.99 percent, Connecticut would have the sixth-highest top rate on long-term capital gains and the fifth-highest rate on short-term capital gains in the country, which could pose problems for a state already struggling with an outmigration of high earners.

Highest Top Marginal Rates on Capital Gains
State Short-Term Gains Long-Term Gains Ordinary Income
California 13.3% 13.3% 13.3%
Massachusetts 12.0% 5.05% 5.05%
New Jersey 10.75% 10.75% 10.75%
Oregon 9.9% 9.9% 9.9%
Minnesota 9.85% 9.85% 9.85%
Connecticut (proposed) 8.99% 8.99% 6.99%

Concerns grow when you consider that Connecticut has the third-most hedge fund managers in the country, after New York and California, and the second largest pool of assets under management ($390 billion). Thirteen percent of all hedge fund assets are in Connecticut, even though the state only accounts for 1 percent of the nation’s population. The state is home to many wealthy individuals with significant capital gains income—and they’re highly mobile, already paying a lot.

Connecticut’s proposed higher tax on capital gains income would be the opposite of federal treatment, where capital gains receive a preferential rate. This is even more significant a difference when it is recognized that, even with a lower federal rate on long-term capital gains, the tax code is biased against saving and investment. The federal government is attempting to mitigate that bias with preferential rates; Connecticut would exacerbate it.

Capital gains taxes represent an additional layer of tax on capital income after the corporate and individual income tax; any tax on them is double taxation. Moreover, gains are not adjusted for inflation, so investors are often taxed on phantom gains. This is bad for investors—a group that includes worker pension and retirement fund holders—and for entrepreneurs alike, the former because it cuts into gains, the latter because it reduces return on investment and skews what sort of investments are made.

Singling out capital gains for an additional tax also doubles down on an extremely volatile source of revenue. Capital gains are already responsible for a significant share of forecasting error in individual income taxes. A task force co-chaired by former Federal Reserve Board Chairman Paul Volker and former New York Lt. Governor Richard Ravitch (D) found that “capital gains are the most erratic [tax base component] as they depend not only on stock market performance but also on taxpayers’ choices about whether and when to sell assets,” noting that during the Great Recession, overall adjusted gross income in New York (including income from capital assets) fell 18 percent, but capital gains subject to income fell a full 75 percent.

Nationally, the realization of capital gains slid 71 percent between 2007 and 2009; 55 percent just in 1987; and 46 percent in 2001. Massachusetts, the only state with a surtax on capital gains income (and then only on short-term gains), has sought to insulate itself from some of the volatility by prohibiting any budget from relying on more than $1 billion in capital gains revenue, dedicating anything in excess of that amount to the state’s Rainy Day Fund.

Gov. Lamont, responding to the proposal, said, “I’ve been pretty strict on not raising tax rates. Everybody comes in and goes, ‘C’mon, Gov, it’s just a half a point. It’s just another point. It’s not that big a deal.’ But it’s the fourth time in 12 years or something like that.” He’s right—and lawmakers would do well to keep any such proposal out of the state budget.


Source: Tax Policy – Connecticut Lawmakers Mull Capital Gains Surtax

Corporate and Pass-through Business Income and Returns Since 1980

Corporate and Pass-through Business Income and Returns Since 1980

Tax Policy – Corporate and Pass-through Business Income and Returns Since 1980

Businesses in America broadly fall into two categories: C corporations, which pay the corporate income tax, and pass throughs—such as partnerships, S corporations, LLCs, and sole proprietorships—which “pass” their income “through” to their owner’s income tax returns and pay the ordinary individual income tax. Understanding the composition and characteristics of American businesses provides important context for tax policy debates.

Pass-through businesses are the dominant business type, and their number has steadily increased relative to C corporations over the past 30 years. In 1980, there were 2.1 million C corporations. There were 2.6 million C corporations by 1986, but the number dropped to 1.6 million by 2013. The number of sole proprietorships, however, increased from about 9 million in 1980 to more than 24 million in 2013, while the number of S corporations and partnerships combined increased from 2 million to almost 8 million. In total, there were just under 32 million pass-through businesses in 2013, almost 20 times the number of C corporations.

One explanation for this growth in pass-through businesses is that the U.S. tax code taxes C corporations more heavily than pass-through businesses. C corporations are taxed twice: once at the entity level by the corporate income tax and once at the shareholder level when profits are distributed as dividends or stockholders realize capital gains. Pass-through businesses, however, are taxed only once, under the individual income tax, meaning they are not subject to any business level tax. Following the 1986 federal tax reform, which dramatically cut individual income tax rates, pass throughs became much more attractive.

Despite this heavier tax burden, as well as being far fewer in number compared to pass-through businesses, corporations still generate more business revenue. In 2013, C corporations accounted for fewer than 5 percent of all business tax returns but generated more than 60 percent of all business revenue. Pass throughs accounted for more than 95 percent of all returns, but less than 40 percent of all business revenue.

Though corporations earn the largest share of business revenues, pass-through businesses outpace corporations when it comes to net income. Noncorporate net income has outpaced corporate consistently since 1997, apart from a brief period in the mid-2000s when corporate net income spiked at the top of a business cycle. In 2013, pass-through businesses accounted for 57 percent of net business income, compared to 43 percent for C corporations.

Both pass-through businesses and C corporations provide important contributions to the American economy. While C corporations may be fewer in number than pass throughs, they generate larger amounts of revenue and net-income per entity. On the other hand, pass-through businesses make up almost three-fifths of net business income. Policymakers who wish to change business tax policy should note the differences between pass-through businesses and C corporations as both types of businesses are crucial to the future economic success of the United States.


Source: Tax Policy – Corporate and Pass-through Business Income and Returns Since 1980

Sources of Government Revenue in the OECD, 2019

Sources of Government Revenue in the OECD, 2019

Tax Policy – Sources of Government Revenue in the OECD, 2019

Key Findings

  • In 2017, OECD countries raised one-third of their tax revenue through consumption taxes such as the Value-Added Tax (VAT), making consumption taxes on average the most important revenue source.
  • Social insurance taxes and individual income taxes were the second and third most important sources of tax revenue in the OECD, respectively, at approximately 25 percent each, a change from 1990, when individual income taxes accounted for more revenue than social insurance taxes.
  • On average, OECD countries collected little from the corporate income tax (9.2 percent) and the property tax (5.7 percent).

Introduction

Developed countries raise tax revenue through a mix of individual income taxes, corporate income taxes, social insurance taxes, taxes on goods and services, and property taxes. However, the extent to which an individual country relies on any of these taxes can differ substantially.

A country may decide to have a lower corporate income tax to attract investment, which may reduce its reliance on the corporate income tax revenue and increase its reliance on other taxes, such as social insurance taxes or consumption taxes. For example, in 2017, Estonia raised only 4.7 percent of total revenue from corporate income taxes, but a combined 76.8 percent of total revenue came from social insurance taxes and consumption taxes.

Countries may also be situated near natural resources that allow them to rely heavily on taxes on related economic activity. Norway, for example, has a substantial oil production industry on which it levies a high (78 percent) income tax and thus raises a significant amount of corporate income tax revenue.

These policy and economic differences among Organisation for Economic Co-operation and Development (OECD) countries have created differences in how they raise tax revenue.

Average OECD Revenue Sources

Figure 1.

OECD average sources of tax revenue, 2019 government revenue

Per the most recent data from the OECD (2017),[2] taxes on consumption and labor made up the largest shares of tax revenue among OECD countries. On average, countries raised 32.4 percent of their tax revenue from consumption taxes. This is unsurprising given that all OECD countries (except the United States) levy Value-Added Taxes (VAT) at relatively high rates.

The next significant source of tax revenue is social insurance taxes at 26.2 percent of revenue on average. Individual income taxes accounted for 23.9 percent of total revenue across the OECD. The smallest shares of revenue were from corporate income taxes (9.2 percent) and property taxes (5.7 percent).

OECD Revenue Sources, 2017 Compared to 1990

Figure 2.

OECD tax revenue sources, 2019 government revenue

When comparing average 2017 and 1990 OECD tax revenue sources, the most notable change is a decrease in individual income taxes versus increases in social insurance and consumption taxes. Revenue sources from corporate income taxes have also increased compared to 1990 (despite declining corporate income tax rates[3]). The relative importance of property taxes as a source of revenue has stayed constant.

Sources of Tax Revenue

Consumption Taxes

Consumption taxes are taxes on goods and services. These are in the form of excise taxes, Value-Added Taxes (VAT), or retail sales taxes. Most OECD countries levy consumption taxes through VATs and excise taxes. The United States is the only country in the OECD with no VAT. Instead, most U.S. state governments and many local governments apply a retail sales tax on the final sale of products and excise taxes on the production of goods such as cigarettes and alcohol.[4]

In 2017, Chile relied the most on taxes on goods and services, raising approximately 54.8 percent of its total tax revenue from these taxes. Chile was followed by Turkey (43.4 percent) and Estonia (42.9 percent) (Table 1, below).

The United States raised the least amount of tax revenue from consumption taxes in the OECD at 15.9 percent in 2017. Japan raised slightly more, at 20.4 percent, followed by Switzerland, at 22.3 percent.

Social Insurance Taxes

Social insurance taxes are typically levied in order to fund specific programs such as unemployment insurance, health insurance, and old age insurance. In most countries, these taxes are applied to both an individual’s wage and an employer’s payroll.

The Slovak Republic relied the most on social insurance taxes (44.1 percent), followed by the Czech Republic (43 percent) and Lithuania (41.4 percent) (Table 1, below).

Denmark raised the least, at 0.1 percent, because social programs in Denmark are mostly funded from taxes other than dedicated social insurance taxes. Australia and New Zealand are the only countries that do not levy specific social insurance taxes on workers to fund government programs.

Individual Income Taxes

Income taxes are levied directly on an individual’s income, beginning with wage income. Many nations also levy their individual income tax on investment income such as capital gains, dividends, interest, and business income. These taxes are typically levied in a progressive manner, meaning that an individual’s average tax rate increases as income increases.

The country with the highest reliance on individual income taxes in 2017 was Denmark (53.4 percent), followed by Australia (40.8 percent) and the United States (38.6 percent) (Table 1, below).

Chile (9.7 percent), the Slovak Republic (10.3 percent), and the Czech Republic (11.6 percent) relied the least on individual income taxes.

Corporate Income Taxes

The corporate income tax is a direct tax on corporate profits. All OECD countries levy a tax on corporate profits. However, countries differ substantially in how they define taxable income and the rate at which they apply the tax. Generally, the corporate income tax raises little revenue compared to other sources.

Chile relied the most on its corporate income tax, at 21.1 percent of total tax revenue. Mexico (21 percent) and Australia (16.5 percent) also relied heavily on their corporate income tax compared to the OECD average of 9.2 percent (Table 1, below).

In 2017, Estonia (4.7 percent), Slovenia (4.9 percent), and Hungary (4.9 percent) relied the least on the corporate income tax.

Property Taxes

A much smaller source of tax revenue for most OECD countries is the property tax. The property tax is levied on the value of an individual’s or business’s property. Other types of property taxes include estate, gift, and inheritance taxes, and net wealth taxes.

The United States relied the most on property taxes in the OECD (15.4 percent), followed by the United Kingdom (12.6 percent) and Canada (11.9 percent) (Table 1, below).

Estonia relied the least on property taxes, raising only 0.7 percent of total revenue. Austria, Lithuania, and the Slovak Republic (all at 1.3 percent) also relied very little on property taxes.

Revenue Sources of Selected Countries Compared to the OECD Average

The OECD averages described above reflect overall tendencies in revenue collections of developed countries. However, many OECD countries deviate from these averages quite substantially, reflecting social and economic differences across countries. The following country profiles illustrate different distributions of tax revenue sources.

Figure 3.

Sources of tax revenue in South Korea, 2019, South Korea government revenue

South Korea relies less on individual income and consumption taxes than the OECD average. Instead, corporate income and property taxes account for a larger share of tax revenue. Social insurance taxes are slightly lower than the OECD average.

Figure 4.

Sources of tax revenue in Spain, Spain government revenue

In 2017, social insurance taxes accounted for more than one-third of Spain’s tax revenue, compared to an OECD average of approximately one-fourth, making it the country’s most important revenue source. Spain’s share of property tax revenue was also above the OECD average. At the same time, the country relies less on revenue from individual income taxes, corporate income taxes, and consumption taxes.

Figure 5.

sources of tax revenue in Sweden, Sweden government revenue

Sweden, the country with the fourth highest tax burden in 2017 as measured by total tax revenue as a percentage of GDP,[5] also deviates in its revenue source distribution from the OECD average. Sweden’s individual income tax revenue share is above the OECD average, and it levies a high payroll tax, which generates 11.9 percent of its tax revenue. Sweden relies less on corporate income taxes, social insurance taxes, property taxes, and consumption taxes.

Conclusion

In general, OECD countries lean more on tax revenue from consumption taxes, social insurance taxes, and individual income taxes than on corporate income taxes and property taxes. Compared to 1990, OECD countries have on average become more reliant on consumption taxes and less reliant on individual income taxes. These policy changes matter, considering that consumption-based taxes raise revenue with less economic damage and distortionary effects than taxes on income.

Table 1: “Source of Tax Revenue, OECD Countries, 2017”

(a) Data for Australia, Japan, and Mexico is from 2016 because 2017 data was not available yet.

(b) For Greece, only the aggregate Taxes on Income, Profits and Capital Gains was available for the year 2017. To split this aggregate into the three subcategories—Individual Income Taxes, Corporate Income Taxes and Other Income Taxes—each subcategory’s average share of the three years prior (2014-2016) was used to weigh it.

Source: “OECD Global Revenue Statistics Database,” https://stats.oecd.org/Index.aspx?DataSetCode=RS_GBL.

  Individual Taxes Corporate Taxes Social Insurance Taxes Property Taxes Consumption Taxes Other
Australia (a) 40.8% 16.5% 0.0% 10.8% 27.1% 4.9%
Austria 21.7% 5.9% 34.8% 1.3% 28.2% 8.2%
Belgium 27.2% 9.3% 30.5% 7.9% 24.3% 0.9%
Canada 35.9% 10.6% 14.3% 11.9% 24.0% 3.3%
Chile 9.7% 21.1% 7.3% 5.4% 54.8% 1.8%
Czech Republic 11.6% 10.6% 43.0% 1.4% 32.9% 0.5%
Denmark 53.4% 6.6% 0.1% 4.0% 31.9% 4.1%
Estonia 17.3% 4.7% 33.9% 0.7% 42.9% 0.5%
Finland 29.1% 6.3% 27.9% 3.6% 32.8% 0.2%
France 18.5% 5.1% 36.4% 9.5% 24.4% 6.1%
Germany 27.2% 5.4% 37.9% 2.7% 26.2% 0.6%
Greece (b) 15.4% 5.7% 29.6% 8.1% 39.1% 2.1%
Hungary 13.3% 4.9% 33.9% 2.8% 42.5% 2.5%
Iceland 38.5% 7.4% 9.3% 5.4% 33.3% 6.1%
Ireland 31.4% 12.2% 17.0% 5.6% 32.5% 1.2%
Israel 20.7% 10.1% 16.2% 10.0% 34.7% 8.4%
Italy 25.7% 5.0% 30.4% 6.0% 28.4% 4.4%
Japan (a) 18.6% 12.0% 40.4% 8.3% 20.4% 0.3%
Korea 17.9% 14.2% 25.7% 11.7% 27.7% 2.8%
Latvia 21.8% 5.2% 27.7% 3.3% 41.4% 0.6%
Lithuania 13.0% 5.1% 41.4% 1.3% 38.5% 0.8%
Luxembourg 23.6% 13.6% 28.6% 9.6% 24.3% 0.3%
Mexico (a) 20.4% 21.0% 13.0% 1.9% 38.8% 5.0%
Netherlands 21.6% 8.5% 35.7% 4.0% 29.1% 1.1%
New Zealand 37.7% 14.7% 0.0% 6.0% 38.4% 3.2%
Norway 26.3% 12.0% 27.1% 3.3% 31.1% 0.1%
Poland 14.7% 5.7% 37.9% 3.6% 34.4% 3.7%
Portugal 18.8% 9.4% 26.8% 4.0% 39.8% 1.2%
Slovak Republic 10.3% 9.8% 44.1% 1.3% 33.4% 1.1%
Slovenia 14.2% 4.9% 40.0% 1.8% 38.6% 0.5%
Spain 21.9% 6.9% 34.2% 7.5% 29.1% 0.5%
Sweden 29.9% 6.0% 22.0% 2.2% 28.0% 11.9%
Switzerland 30.7% 11.5% 23.6% 7.1% 22.3% 4.8%
Turkey 14.5% 6.8% 29.3% 4.5% 43.4% 1.3%
United Kingdom 27.4% 8.5% 19.2% 12.6% 31.5% 0.8%
United States 38.6% 7.1% 23.1% 15.4% 15.9% 0.0%
OECD Simple Average 23.9% 9.2% 26.2% 5.7% 32.4% 2.7%


[1] EY, “2017 Global Oil and Gas Tax Guide, Norway,” 2017, https://www.ey.com/Publication/vwLUAssets/ey-oil-and-gas-tax-pdf/$File/ey-oil-and-gas-tax-pdf.pdf.

[2] OECD, “Global Revenue Statistics Database,” https://stats.oecd.org/Index.aspx?DataSetCode=RS_GBL.

[3] Daniel Bunn and Elke Asen, “Higher Corporate Tax Revenues Globally Despite Lower Tax Rates,” Tax Foundation, Jan. 22, 2019, https://taxfoundation.org/higher-corporate-tax-revenues-lower-tax-rates/.

[4] Janelle Cammenga, “State and Local Sales Tax Rates, 2019,” Tax Foundation, Jan. 30, 2019, https://taxfoundation.org/sales-tax-rates-2019/.

[5] OECD, “Global Revenue Statistics Database,” https://stats.oecd.org/Index.aspx?DataSetCode=RS_GBL.


Source: Tax Policy – Sources of Government Revenue in the OECD, 2019

Germany Proposes First R&D Tax Break

Germany Proposes First R&D Tax Break

Tax Policy – Germany Proposes First R&D Tax Break

Last week, German Finance Minister Olaf Scholz finalized his proposal for a new research and development (R&D) tax credit. The German federal cabinet is expected to pass the measure in mid-May, after which both houses of the German Parliament will vote on it.

The bill would allow businesses to claim a tax credit worth 25 percent of the wages and salaries paid to research staff, starting in 2020. The base is capped at €2 million (USD $2.3 million), translating to a maximum tax credit of €500,000 ($565,000). All businesses doing basic research, industrial research, and experimental development qualify for the tax credit. The measure would not be limited to four years as initially proposed but instead be made permanent, with an impact evaluation after four years.

According to estimates included in the bill, tax revenue would decline by approximately €5 billion ($5.7 billion) over the first four years. This loss in tax revenue would be split between the federal and state governments.

Germany currently only provides direct government funding for research and development, making it one of just seven out of 36 OECD countries without R&D tax incentives. Over the last years, many OECD countries have shifted from directly funding business R&D to providing R&D tax incentives. The volume of R&D tax incentives increased by 70 percent between 2006 and 2016 in the OECD, reaching €37.5 billion ($42.4 billion). In the same period, direct government support for business R&D increased by only 10 percent, reaching €43.3 billion ($48.9 billion) in 2016.

Direct government funding and tax support for business RD 2016 Germany RD tax credit Germany RD

Direct government funding and tax support for business enterprise R&D (BERD) varies substantially across OECD countries, with France being the top supporter of R&D at about 0.41 percent of GDP in 2016. Implementing the proposed R&D tax credit in Germany would raise its share of direct and indirect R&D support by approximately 0.04 percentage points to 0.11 percent of GDP


Source: Tax Policy – Germany Proposes First R&D Tax Break