This paper proposes a method for computing effective average rates of taxation on consumption and factor incomes based on data from revenue statistics and national accounts. The method estimates the wedges that distort optimal plans in a representative agent framework by computing percentage differences in measures of aggregate post- and pretax incomes and prices. It is used to compute time series of tax rates for the group of seven largest industrial countries covering the period 1965-88. The paper then compares these tax rates with existing estimates of effective marginal tax rates and examines the relationship between the tax rates and savings, investment, net exports, hours worked, and unemployment. This analysis highlights the features that distinguish the stance of tax policy among industrial countries and suggests some potential implications of tax-harmonization policies.
The estimates of effective average tax rates show that labor income, capital income, and consumption taxes have fluctuated noticeably in response to changes in statutory taxes and policies regarding credits and exemptions. Capital and consumption taxes do not exhibit a marked trend. The tax on labor income, on the other hand, has increased over time in all of the countries studied. Taxes on consumption and labor income tend to be higher in European countries relative to Japan and the United States, while taxes on capital income in the United States have been higher than in other countries--except the United Kingdom and, in recent years, Japan. Despite significant differences in tax systems, tax rates have tended to converge for groups of countries--particularly in the case of consumption taxes in European countries (except France); labor income taxes in North America, Japan, and the United Kingdom; and capital income taxes in Canada, France, Germany, Italy, and the United States.
The statistical analysis relating the tax rates to macroeconomic variables indicates that capital income tax rates are negatively related to savings rates, and consumption and labor income tax rates are negatively correlated with the number of hours worked, as predicted by neoclassical equilibrium models. Moreover, the level and trend of the rate of unemployment are positively correlated with the tax on labor income, as predicted by models of equilibrium unemployment or the “natural rate.” These relationships are stronger in panel tests that combine time-series and cross-sectional information, but they remain strong even for time series of several individual countries. These empirical regularities are also documented using detrended and non-detrended data. The relationships between macroeconomic variables and tax rates are generally stronger at low frequencies relative to business cycle frequencies.