How to measure tax burden in an internationally comparable way?

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.