Tax Policy – Sources of Tax Revenue: U.S. vs. OECD
A recent report on tax revenue sources shows the extent to which the United States and other OECD countries rely on different taxes for government revenues. Policy and economic differences among OECD countries have created differences in how they raise tax revenue, with the United States deviating quite substantially from the OECD average.
In the United States, individual income taxes (federal, state, and local) were the primary source of tax revenue in 2017, at 38.63 percent of total tax revenue. Social insurance taxes made up the second largest share, at 23.05 percent, followed by consumption taxes, at 15.85 percent, and property taxes, at 15.4 percent. Corporate income taxes accounted for 7.07 percent of total tax revenue.
Compared to the OECD average, the United States relied significantly more on individual income taxes and property taxes. While OECD countries on average raised 23.9 percent of total tax revenue from individual income taxes, the share in the United States was 38.6 percent, a difference of almost 15 percent. This is partially because more than half of business income in the United States is reported on individual tax returns. OECD countries on average raised 5.7 percent of total tax revenue from property taxes, compared to 15.4 percent in the United States.
The United States relied much less on consumption taxes than other OECD countries. Taxes on goods and services accounted for only 15.9 percent of total tax revenue in the United States, compared to 32.4 percent in the OECD. This is because all OECD countries, except the United States, levy value-added taxes (VAT) at relatively high rates. State and local sales tax rates in the United States are relatively low by comparison.
Every country’s mix of taxes is different, depending on factors such as its economic situation and policy goals. However, each type of tax impacts the economy in a different way, with some taxes being more adverse than others. Generally, consumption-based taxes are a more efficient source of revenue because they create less economic damage and distortionary effects than taxes on income.
Source: Tax Policy – Sources of Tax Revenue: U.S. vs. OECD
Tax Policy – Colorado Inches Forward on “Wayfair Checklist,” but Complexity and Legal Questions Remain
After the U.S. Supreme Court handed down its landmark 2018 South Dakota v. Wayfair decision, many states quickly adopted laws like South Dakota’s to establish good legal standing for remote sales tax collection. For some states, this process was as simple as adopting a de minimis exemption to protect small retailers conducting only limited business in a state. For other states, this task remains ongoing—and the process has been anything but simple.
Colorado, notorious for having one of the most complex sales tax systems in the country, is one of the states still grappling with this challenge. On July 1, 2017 (prior to the Wayfair decision), Colorado began enforcing a notice-and-reporting law, requiring remote sellers with in-state sales of at least $100,000 a year to provide notice to customers and report to the Colorado Department of Revenue when customers owe use tax on transactions for which the retailer was not legally required to collect sales tax. In 2018, Colorado issued regulations requiring remote sellers with $100,000 in sales or 200 transactions in Colorado to collect and remit state sales taxes, as well as state-administered local sales taxes. The 200 transactions threshold has since been dropped, so retailers only have “substantial nexus” in Colorado if they make at least $100,000 in sales into the state. These collection requirements took effect December 1, 2018, but a grace period is in effect through May 31, 2019, although notice and reporting regulations are still being enforced.
In recent weeks, legislators in the Centennial State have been hard at work considering legislation to incorporate several South Dakota-style features into their own sales tax laws. These policy changes will put the state in better legal standing to require out-of-state retailers to collect state sales taxes and state-administered local sales taxes, but further simplification options ought to be considered.
By way of background, Colorado has a longstanding tradition of strong local governance. Article XX of the Colorado State Constitution gives municipalities the right to adopt a “home rule” charter, giving cities and towns broad authority to enact local laws that go beyond the scope of state-enabling laws, so long as those local laws are not in conflict with the State Constitution. This authority extends even to sales tax administration; Colorado’s home rule jurisdictions have broad authority to create their own sales tax systems, with very little in the way of guidance, intervention, or limitation. Many Coloradoans take pride in the home rule tradition, but when it comes to taxation, the complexity that ensues is enough to cause some home rule jurisdictions to opt for a more streamlined alternative.
Currently, nearly 100 of Colorado’s 271 municipalities have a home rule charter. Dozens of home rule municipalities have voluntarily handed over local sales tax collection authority to the state. But 72 home rule cities and towns and two counties continue to self-administer their sales tax, with broad authority not only to collect and audit and set their own rates, but also to establish their own sales tax bases, require municipality-specific sales tax licenses and fees, and establish unique collection procedures. Roughly 68 percent of Colorado’s population resides within home rule municipalities for which the local sales tax is administered by the local government.
While this broad authority contributes to much of Colorado’s sales tax complexity, even Dillon’s rule (or statutory) municipalities–or those deriving their local authority from state-enabling statutes–have authority not only to set their own rates but also to tax up to 15 different goods that are currently exempt from the state sales tax. For example, state-administered local tax jurisdictions can choose to tax groceries, residential energy, and other specified goods for personal consumption, as well as machinery, farm equipment, pesticides, and other business inputs, even though all these goods are exempt from the state sales tax.
With so many different sales tax administration authorities, as well as variations in state, local, and special district rates, bases, and definitions, sales tax compliance is complex, with retailers having to navigate five different databases to determine sales taxes owed. Even the state Department of Revenue has a history of accidentally registering businesses in the wrong taxing jurisdiction.
In an effort to address these concerns, Colorado legislators have convened a Sales and Use Tax Simplification Task Force to study state and local sales and use tax simplification options. Recently, Senate Bill 19-006, recommended by the Task Force, was signed into law. This new law, known as the Retail Sales Tax Simplification Act, requires the Colorado Department of Revenue and Office of Information and Technology to work together to develop an electronic sales and use tax simplification system to calculate the appropriate sales and use tax for any Colorado address. This new law builds upon a 2018 law soliciting information related to the development of software that provides a single application process for sales tax licenses, a single remittance form and point of remittance, and a taxability or exemption matrix.
Access to such software, assuming it operates as intended, holds great potential to make remote sales tax compliance easier in the future than it is today. However, further legislative action will be needed to provide certain audit protections to retailers who will rely on the forthcoming software. Until such software becomes available, retailers are left to their own devices to either purchase their own sales tax compliance software or consult the state’s five sales tax databases for guidance. Currently, a hold harmless provision exists for retailers who rely on the state’s databases; in light of the Wayfair decision, this protection should be extended to the state-provided software.
While software development is an important step, it is not a cure-all for Colorado. While Colorado’s software will aim to consolidate sales tax remittance by providing a single state-level administration, a single point of remittance, and a single sales tax licensing process for remote sellers, Colorado legislators have not yet addressed the issue of variations in state and local sales tax bases. The forthcoming software purportedly aims to make the base variations a non-issue by allowing the software, rather than taxpayers, to handle this complexity, but some legal uncertainties exist given the favor shown by the U.S. Supreme Court toward South Dakota’s uniformity of state and local sales tax bases and its use of software. While Colorado’s state-administered local sales tax jurisdictions share common definitions, policymakers could further simplify the system by achieving uniformity among the 15 sales tax exemptions for which variation is currently allowed. Further, the Wayfair decision favors a simplified tax rate structure, but Colorado’s state-administered local sales taxes vary widely in rate.
It is also important to keep in mind that the Retail Sales Tax Simplification Act is narrow in scope, as home rule jurisdictions would be encouraged, but not required, to use the state-provided software. While this software can be expected to improve collection of the state sales tax, state-administered local sales taxes, and special district sales taxes (which are all administered by the state), the state’s remote sales tax regulations do not (and should not) extend to locally-administered local sales taxes, as this would very likely violate the dormant Commerce Clause. State policymakers ought to consider expressly prohibiting self-collecting jurisdictions from attempting to impose local sales tax collection requirements on remote sellers and should add clarifying language to provide more explicit guidance for remote sellers who will likely end up collecting state sales taxes, but not local sales taxes, from residents of self-collecting jurisdictions.
When sales taxes are not collected by retailers, use tax compliance is low, which is one of the reasons states were so eager to require remote sellers to collect in the first place. From a revenue standpoint, it is therefore in the best interest of home rule localities to consider the benefits of allowing the state to collect their local sales tax, as this would be expected to result in an influx in previously under-collected sales tax revenue for those jurisdictions. It remains to be seen whether more self-collecting home rule municipalities will agree to certain uniformity and simplification requirements for the sake of this potential influx in revenue.
Another bill, House Bill 19-1240, recently passed the Colorado House of Representatives and awaits consideration by the Senate. This bill would establish economic nexus, starting June 1, 2019, for retailers with $100,000 worth of sales into Colorado. In addition, this legislation would codify existing destination-sourcing requirements while allowing small in-state retailers to continue using origin-sourcing until 90 days after state-provided geographic information system becomes available. Finally, this bill would require marketplace facilitators to collect sales taxes on behalf of marketplace sellers, and it would provide audit protections for marketplace facilitators who can demonstrate they “made a reasonable effort to obtain accurate information regarding the obligation to collect tax from the marketplace seller.” In codifying a $100,000 de minimis exemption and barring retroactive collection, this bill takes important steps toward Wayfair compliance.
All in all, Colorado’s Sales and Use Tax Simplification Task Force has made important progress toward improving Colorado’s readiness for remote collection of state-administered sales taxes. However, until state-provided software is readily available, hold harmless protections are extended to those who rely on the software, a de minimis exemption is codified, and sufficient measures are taken to streamline state-administered sales tax bases, enforcement of remote sales tax collection regulations remains on shaky legal ground.
Source: Tax Policy – Colorado Inches Forward on “Wayfair Checklist,” but Complexity and Legal Questions Remain
Tax Policy – Firm Variation by Employment and Taxes
Understanding business employment and taxes is essential to crafting informed tax policies that affect businesses, their employees, and their customers. In light of policies aimed at influencing the decisions of specific companies—for example, Sen. Bernie Sanders’ (I-VT) “Stop BEZOS Act” and “Stop Walmart Act,” both proposed last year—it is especially valuable for policymakers to know how firms vary by size, employment, income, and taxes.
The following chart shows the share of firms and share of employment by business size in the U.S., including both C corporations and pass throughs. While firms with fewer than 20 employees make up 86.8 percent of businesses, they employ only 17.1 percent of all private sector workers. In contrast, while only 0.4 percent of all firms have 500 or more employees, this small group of businesses employs 47.3 percent of the nation’s private sector workforce.
The biggest firms play a similarly important role in both earning income and paying taxes on it. The following chart shows firms’ share of taxable income and share of income taxes by asset size. In 2013, C corporations and pass throughs together earned approximately $1.3 trillion in taxable income and paid about $293 billion in income taxes. However, businesses with over $2.5 billion in assets paid the majority of corporate income taxes. These corporations earned 76.1 percent of corporate taxable income and paid 69.8 percent of all corporate income taxes.
As these charts illustrate, all businesses shouldn’t be thought of as identical. Most businesses in the U.S. are small, but the largest ones employ nearly half of the private sector workforce. And while firms’ share of corporate income taxes is roughly proportional to the share of taxable income for all asset sizes, the largest firms account for the majority of both taxable income and corporate income taxes. Recognizing the variation in firms by employment, income, and taxes can help policymakers design taxes that raise necessary revenue without distorting the businesses’ decisions that drive the economy.
Source: Tax Policy – Firm Variation by Employment and Taxes
Tax Policy – The Long View on the Top Marginal Income Tax Rate in Austria
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High marginal income tax rates can disincentivize individuals from earning more or cause them to vote with their feet by moving to another location with lower tax rates on personal income. At 55 percent, Austria currently has one of the highest top marginal income tax rates in Europe. This rate applies to earnings over €1 million ($1.1 million US).
Austria has had an income tax for hundreds of years. Though the data are sparse for some periods, we were able to find sources to identify the top marginal income tax rate from 1898-2018 and a few earlier years.
The top rate has climbed significantly over the last 120 years. In 1898, the top marginal rate was just 5 percent and applied to incomes above approximately €571,000 (measured in today’s currency, $642,000 US). As mentioned, today the top marginal rate stands at 55 percent and applies to incomes over €1 million ($1.1 million US.).
There are a few earlier data points that we uncovered in our research. In 1799, for example, the top marginal rate was 20 percent. The same was true in 1849. In 1895, the top rate was 4.5 percent prior to the reform that increased the top rate to 5 percent in 1898.
The highest top marginal rate over the time period from 1898-2018 was during 1971 and 1972, when it was approximately 63 percent. This high rate came after a series of top rate increases and during a time period when individual income taxes were a growing source of Austrian tax revenue. The top rate stayed above 60 percent until a reform brought the rate down to 50 percent in 1989.
In our recent study with the Hayek Institut, we recommended several options for reforming the Austrian individual income tax to lower the tax burden and improve the competitiveness of the Austrian tax system. The most ambitious option would be to adopt a flat tax of 20 percent on a broad base. Alternatively, the government could simply remove the current top rate, leaving in place a progressive structure with a top rate of 50 percent. Policymakers should also adopt other reforms like indexing the tax brackets to inflation to eliminate bracket creep and improving the tax treatment of savings.
Austria has a long history of taxing individual income. This historical data should lead policymakers to question whether top marginal rates have been too high for too long.
 Data for 1898-1913 are from Rudolf Sieghart, ”The Reform of Direct Taxation in Austria,“ The Economic Journal 8, no. 30 (June 1898): 173-182, https://www.jstor.org/stable/2957358?seq=1#page_scan_tab_contents.
Data for 1914-1919 are from Otto Szombathy, “Die österreichische Einkommensteuerreform von 1914,“ FinanzArchiv/Public Finance Analysis 32, no. 2 (1915): 101-189, https://www.jstor.org/stable/40906035?seq=1#page_scan_tab_contents.
Data for 1920-1937 are from Republik Österreich, “Gesetz über Abänderungen des Personalsteuergesetzes vom 25. Oktober 1896, R. G. B. Nr. 220 (Personalsteuernovelle vom Jahre 1920),” Staatsgesetzblatt 1920, no. 110 (Vienna, 1920): 1541-1542, http://alex.onb.ac.at/cgi-content/alex?aid=sgb&datum=1920&page=1623&size=45.
Data for 1938-1944 are from Reichsministerium des Innern, “Bekanntmachung der neuen Fassung des Einkommensteuergesetzes,” Reichsgesetzblatt 1938, Teil 1 (Berlin, 1938): 138, http://alex.onb.ac.at/cgi-content/alex?aid=dra&datum=1938&page=316&size=45.
Data for 1945-1954 are from Republik Österreich, “Anwendung der Vorschriften über die öffentlichen Abgaben,“ Staatsgesetzblatt 3, no. 12 (Vienna, 1945): 17, https://www.ris.bka.gv.at/Dokumente/BgblPdf/1945_12_0/1945_12_0.pdf.
Data for 1955-1999 are from Margit Schratzenstaller and Andreas Wagener, ”The Austrian Income Tax Tariff, 1955-2006,“ Empirica 36, no. 3 (August 2009): 309-330, https://link.springer.com/article/10.1007/s10663-008-9087-y.
Data for 2000-2018 are from OECD, Table I.1., “Central government personal income tax rates and thresholds,” OECD, Paris, https://stats.oecd.org/index.aspx?DataSetCode=TABLE_I1.
 Author’s calculations based on data discussed in Rudolf Sieghart, “The Reform of Direct Taxation in Austria”; a long-term inflation calculator, at http://www.in2013dollars.com/1898-GBP-in-2017?amount=4000; and current exchange rates.
 Emil von Fürth, Die Einkommensteuer in Österreich und ihre Reform (Leipzig: Duncker & Humblot, 1892), 12 and 46.
 Max Menger, Die Reform der direkten Steuern in Oesterreich (Vienna: Alfred Hölder, 1895), 94-96.
Source: Tax Policy – The Long View on the Top Marginal Income Tax Rate in Austria
Tax Policy – Reliance on Corporate Income Tax Revenue in Europe
A recent report on tax revenue sources shows the extent to which OECD countries rely on different tax types. Today’s map looks at the corporate income tax, which, compared to individual taxes, social insurance taxes, and consumption taxes, generates a relatively small share of tax revenue in Europe. In 2017, the most recent year for which data is available, the European countries covered in today’s map raised on average 7.5 percent of total tax revenue from corporate income taxes.
Luxembourg relied the most on its corporate income tax in 2017, at 13.6 percent of total tax revenue, followed by Ireland (12.2 percent) and Norway (12 percent). Estonia (4.7 percent), Slovenia (4.9 percent), and Hungary (4.9 percent) relied the least on the corporate income tax.
Despite declining corporate income tax rates over the last thirty years in Europe (and other parts of the world), average revenue from corporate income taxes as a share of total tax revenue has not declined since 1990. Many countries have been weakening their treatment of capital investment, which has led to broader tax bases and helped to offset the loss in corporate income tax revenue resulting from lower tax rates.
Corporate income taxes are a direct tax on corporate profits, and fluctuating business cycles can significantly impact these profits generated by businesses. This can make the corporate income tax a relatively volatile source of revenue.
Source: Tax Policy – Reliance on Corporate Income Tax Revenue in Europe