Everything you want to know about world taxation but were afraid to ask.
Comparing a nation’s tax rate to its gross domestic product (GDP) is one way of estimating the tax burden placed on the nation’s populace. GDP is the total financial value of all goods and services created within a national jurisdiction in a single year. It is a rough measurement of the economic well-being of a country.
The tax rate to GDP ratio compares the income generated by the central government through taxation with the raw value of all goods and services produced by that country. Lower ratios represent a lower total tax burden on all the businesses and citizens of a country. There is significant variation in the type and amount of taxes that residents of developed countries must pay, even within the member nations of the Organization for Economic Cooperation and Development (OECD). For example, the 2011 income tax rate for corporations in France was 34.4 percent, while its neighbor Switzerland enforced one of the lowest taxes in the world, a mere 8.5 percent.
| Country | Tax Rate to GDP Ratio | Corporate Income Tax Rate | Marginal Personal Income Tax Rate |
|---|---|---|---|
| Mexico | 21 | 30 | 30 |
| Chile | 22.5 | 20 | 40 |
| Turkey | 24.6 | 20 | 35 |
| United States | 26.1 | 35 | 35 |
| Korea | 26.5 | 22 | 35 |
| Australia | 27.1 | 30 | 45 |
| Japan | 28.1 | 30 | 40 |
| Ireland | 28.8 | 12.5 | 41 |
| Switzerland | 29.1 | 8.5 | 13.2 |
| Slovakia | 29.3 | 19 | 19 |
Information for this table was collected from various OECD publications available on the online OECD Tax Database.
What is Marginal Income Tax Rate?
The marginal income tax rate is the maximum rate levied on a person’s income. For a country with a flat tax, the marginal rate is equal to the flat rate. However, many countries, including the United States, have a variable income tax rate that depends on the income generated by an individual or business.
Analysis of Countries with Low Taxes
The Swiss government has a long-standing reputation as a center of business, particularly in entity formation. “This fall, U.S. fast-food giant McDonald’s will move its European headquarters to Geneva from London, joining Kraft Foods, Yahoo! and Nissan,” according to a Bloomberg Businessweek article titled ‘Lower Your Taxes: Move to Switzerland.’ Switzerland’s low corporate tax rate, which is less than a quarter of the tax levied by the United States, creates an attractive environment for large, international corporations.The United States leads the world in corporate income tax rate at 35 percent, but it is ranked among the 10 countries with lowest tax rate to GDP ratio. This may be due, at least in part, to the conspicuous absence of a value added tax (VAT) in the U.S. It is the only member of the OECD that does not levy a VAT on goods and services.
VAT is applied to a product during each stage of its creation and distribution, so manufacturers, distributers, suppliers and consumers all pay a share of this tax at different points in the production cycle. The price of goods and services often increases in response to a VAT policy, so a large portion of the tax burden inevitably falls on the consumer.
Slovakia is an interesting addition to the list of 10 lowest tax-to-GDP ratio countries due to its recent adoption of a flat tax policy in 2004. Citizens of Slovakia pay a 19 percent income tax, regardless of their total income. According to a Harvard Business School article, “Though Slovakia was not the first country to adopt a flat tax nor is it the biggest economy, Slovakia has raised some important issues regarding tax harmonization within Europe and integration process.”
As the first OECD country to institute a flat tax, the Slovakian experiment is still in its early stages of development. It may take years or decades to see the long-term benefits and drawbacks of a developed country switching to a flat tax system. As public frustration and attention is directed at the corruption and complexity of many western tax systems, particularly in the United States, the viability of instituting a flat tax is becoming an increasingly pressing question. A successful, established flat tax system in Slovakia may provide convincing evidence for proponents of flat taxes in the United States and Europe.
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