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How to measure tax burden in an internationally comparable way?

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Abstract

In this paper we address the issue of tax burden and its measurement, beginning with a discussion of use of tax-to-GDP ratio for this purpose. We show that this commonly used indicator has a number of flaws, related to the methodology of calculation of taxes and GDP in national accounts. Firstly, tax revenue calculated in accordance with ESA95 methodology is not perfectly in line with the economic concept of taxes, i.e. levies imposed by the government, which are compulsory and unrequited. Secondly, both tax revenue and GDP include a government component, which distorts the true picture of tax burden. Taxes paid on government expenditure have no impact on the deficit, do not affect incentives, do not constitute a ‘burden‘ on economic activity and may also distort cyclical adjustment of the budget. We propose a number of adjustments to deal with these problems and apply them to data for Hungary, Poland and Slovakia. The results indicate that in these countries, the underlying (methodologically and cyclically adjusted) tax burden imposed on economic activity has followed different trends from those implied by the headline tax-to-GDP ratios. The results show that it is also important to look at the headline and adjusted measures of the tax burden in disaggregated terms, namely dividing the tax burden into labour, corporate and indirect tax components.

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Bibliographic Info

Paper provided by National Bank of Poland, Economic Institute in its series National Bank of Poland Working Papers with number 56.

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Length: 35
Date of creation: Mar 2009
Date of revision:
Handle: RePEc:nbp:nbpmis:56

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Keywords: tax burden; cyclical adjustment;

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References

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  1. Péter Bakos & Péter Benczúr & Dóra Benedek, 2008. "The Elasticity of Taxable Income: Estimates and Flat Tax Predictions Using the Hungarian Tax Changes in 2005," MNB Working Papers 2008/7, Magyar Nemzeti Bank (the central bank of Hungary).
  2. Peter A. Diamond & J. A. Mirrlees, 1968. "Optimal Taxation and Public Production," Working papers 22, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production II: Tax Rules," American Economic Review, American Economic Association, vol. 61(3), pages 261-78, June.
  4. David Newbery & Tamas Révész, 2000. "The Evolution of the Tax Structure of a Reforming Transitional Economy: Hungary 1988–98," International Tax and Public Finance, Springer, vol. 7(2), pages 209-240, March.
  5. Joel Slemrod, 1991. "Optimal Taxation and Optimal Tax Systems," NBER Working Papers 3038, National Bureau of Economic Research, Inc.
  6. Bouthevillain, C. & Van Den Dool, G. & Langenus, G. & Mohr, M. & Momigliano, S. & Tujula, M. & De Cos, P.H. & Cour-Thimann, Philippine, 2001. "Cyclically Adjusted Budget Balances: an Alternative Approach," Papers 77, Quebec a Montreal - Recherche en gestion.
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Cited by:
  1. Gábor P. Kiss & Róbert Szemere, 2012. "Comparison of the Redistribution Level and Structure of Functional Expenditure in the Visegrád Countries," Public Finance Quarterly, State Audit Office of Hungary, vol. 57(1), pages 116-139.
  2. Zuzana Machova & Igor Kotlan, 2013. "World Tax Index: New Methodology for OECD Countries, 2000-2010," DANUBE: Law and Economics Review, European Association Comenius - EACO, issue 2, pages 165-179, June.
  3. Gábor P. Kiss & Zoltán Reppa, 2010. "Quo vadis, deficit? How high the tax level will be when the economic cycle reverses?," MNB Bulletin, Magyar Nemzeti Bank (the central bank of Hungary), vol. 5(3), pages 47-56, October.
  4. Gábor P. Kiss, 2011. "Moving target indication: Fiscal indicators employed by the Magyar Nemzeti Bank," MNB Occasional Papers 2011/92, Magyar Nemzeti Bank (the central bank of Hungary).

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