Via Out World in Data – Taxation – by Esteban Ortiz-Ospina and Max Roser

“The way in which governments raise and spend revenue has a substantial impact on the economic and social development of nations. In this entry we analyze available data and empirical research on a prime source of government revenue: taxation. While taxation is not the only source of government revenue, it is by and large the most important source in nearly all countries. According to the most recent estimates from the International Centre for Tax and Development, total tax revenues account for more than 80% of total government revenue in about half of the countries in the world – and more than 50% in almost every country. We begin this entry by providing an overview of historical changes in taxation patterns, and then move on to an analysis of available data from the last couple of decades, discussing recent trends and patterns in taxation around the world. From a historical perspective, the growth of governments and the extent to which they are able to collect revenues from their citizens, is a striking economic feature of the last two centuries. The available long-run data shows that in the process of development, states have increased the levels of taxation, while at the same time changing the patterns of taxation, mainly by providing an increasing emphasis on broader tax bases. Taxation patterns around the world today reveal large cross-country differences, especially between developed and developing countries. In particular, developed countries today collect a much larger share of their national output in taxes than do developing countries; and they tend to rely more on income taxation to do so. Developing countries, in contrast, rely more heavily on trade taxes, as well as taxes on consumption. Moreover, the data shows that developed countries actually collect much higher tax revenue than developing countries despite comparable statutory taxation rates, even after controlling for underlying differences in economic activity. This suggests that cross-country heterogeneity in fiscal capacity is largely determined by differences in compliance and efficiency of tax collection mechanisms. Both of these factors seem to be affected by the strength of political institutions. In the last part of this entry we provide an overview of empirical evidence regarding the equity and efficiency implications of taxation. In particular, we show that taxation does have a powerful redistributive effect, but it is important to consider how taxation also affects behavior of individuals, by changing economic incentives. For example, recent studies have found that taxation may lead to efficiency losses by inducing migration of ‘super stars’. These potential efficiency losses highlight the importance of designing taxation systems that achieve redistributive objectives at the smallest possible cost…”