How has globalization affected the taxation of labor and capital incomes?
To address this question, we build and analyze a new, global database on
effective macroeconomic tax rates in more than 150 countries since 1965,
combining national accounts data with government revenue statistics,
including from a wide variety of archival records.
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This figure plots the time series of average effective tax rates on labor (red) and capital (blue), as well as the effective tax rate on corporate profits (blue dashed line). The averages weight country-year observations by their share in that year’s total net domestic product, in constant 2019 USD. (N=156 countries.) Until 1994, the dataset excludes communist countries, but nonetheless accounts for 85-90% of world GDP. From 1994, the data includes former communist countries (notably China and Russia) and accounts for 98% of world GDP.
Globally, since 1965, effective labor and capital tax rates have converged, with a 10-point increase in the effective tax rate on labor income and a 5-point decrease in the effective tax rate on capital income.
The global decline in capital taxation is concentrated in high-income countries, driven by the collapse of taxation on corporate profits.
By contrast, capital taxation has increased in developing economies (especially large ones) since the 1990s, albeit starting from a very low level.
Today, effective tax rates on capital income are still lower in low- and middle-income countries than in high-income countries.
In developing countries, trade openness has led to an increase in effective capital taxation. In developed countries, trade has led to a decrease in capital taxation.
Across the sample of all countries, trade has led to an increase in labor taxation. This result is robust to a variety of research designs (see full paper).
Increases in trade also result in a larger share of output produced in the formal corporate sector (where there is higher effective taxation of capital and labor)
Bottom line: Globalization appears to have had asymmetric effects on tax structures, contributing to the decline of tax progressivity in rich countries but also to the growth of tax capacity in developing countries.
Our novel database on effective tax rates extends beyond existing data—in conceptual, historical, and geographic coverage—with comprehensive estimates of disaggregated tax revenue and national income components, for more than 150 countries since 1965. In effect, we built two new databases: one on national income components (factor shares) and the other on public revenues disaggregated by type of tax.
Our factor share database combines two principal data sources. Both come from the United Nations Statistics Division. The first was the SNA2008 online data repository. The second was SNA1968 archival material. Please refer to the full paper for more details on the classification of national income into labor and capital incomes.
Our tax revenue database draws from four founts: the OECD online Government Revenue Statistics; the ICTD and UNU-WIDER Government Revenue Dataset; the IMF Government Finance Statistics Historical Database; and, perhaps most importantly, historical archives. This archival work began in the Government Documents section of the Lamont Library Level D basement archive at Harvard University. For each country in our dataset, we scanned, tabulated, harmonized and merged official data from the public budget and national statistical yearbooks (with occasional complementary material online from official and scholarly sources), to retrieve comprehensive statistics on revenue collection for all countries, even in historical eras.
Having measured and estimated all factor incomes (above), we attribute these observed quantities of tax revenue to either labor or capital income: Corporate income taxes–as well as wealth and property taxes–come from capital income. Payroll taxes and social security contributions come from labor income. Personal income taxes are levied on both labor and capital incomes, as personal income is composed of salaries, capital income and gains, and mixed income. (Details on these assignments are available in the full paper.) The effective tax rates on labor and on capital are computed by dividing tax revenue collected (taxes on labor and taxes on capital) by the size of the respective tax bases (labor income and capital income).
Note that ours is not the first effort to estimate and analyze effective factor taxation (see esp. Mendoza et al 1994), only the most recent–and, in our view, the most comprehensive, including its global historical tax revenue coverage and conceptual integration with factor shares from archival national accounts. To our knowledge, this is the first database to present long-run, global estimates of effective factor taxation, worldwide since 1965.