The impact of COVID-19 on OECD tax revenues

OECD data shows tax revenues bounced back in 2021 following a dip in 2020.

OECD data shows tax revenues bounced back in 2021 following a dip in 2020.

On 30 November 2022, the OECD published the 2022 edition of its annual Revenue Statistics publication, which has found that tax revenues in OECD countries rebounded in 2021. The report explores the impact COVID-19 had on OECD member countries’ tax revenues, as well as the impact that tax policy has had on countries’ COVID-19 recoveries. It also includes a special feature looking at the changes in revenues from different tax types in 2020 and 2021, during the first two years of the pandemic. In this article we delve a little deeper into the OECD’s findings.

Tax-to-GDP ratio

In 2021 OECD countries saw strong economic recovery following the initial impact of COVID-19 which caused economies to contract in 2020. Against this backdrop, the OECD’s preliminary data shows that the average OECD tax-to-GDP ratio increased by 0.6 percentage points to 34.1 percent in 2021, the second-strongest year-on-year increase since 1990. Although the average OECD tax-to-GDP ratio also increased in 2020, this was in the context of declining tax revenues and GDP in nominal terms. Conversely, nominal tax revenues and GDP increased in all OECD countries in 2021 from 2020 levels.

Based on the OECD’s preliminary data, 24 of the OECD countries for which data was available saw their tax-to-GDP ratio increase (one of which was the UK), meanwhile 11 saw a decrease, and one remained unchanged. The UK’s tax-to-GDP ratio for 2021 was 33.5 percent, an increase of 1.4 percentage points on 2020.

Impact of tax policy on COVID-19 recovery

The Revenue Statistics report highlights that tax policy has played an important role in the recovery of OECD countries following the initial shock of the COVID-19 pandemic, and that its objectives have changed in line with the evolution of the pandemic. In 2020 the focus of tax policy was largely on protecting workers and businesses, but in 2021 this shifted to put greater focus on policies to promote investment and accelerate economic recovery.

Taking corporate income tax as an example, reforms in 2020 focused on the use of tax measures to increase the liquidity of businesses and help manage their cash flow while they were struggling, whereas in 2021 many OECD countries introduced more generous corporate tax incentives, particularly for capital expenditure and research and development, to encourage investment. In respect of VAT, many OECD countries reduced specific VAT rates in 2020 to facilitate healthcare responses and support businesses and households during the pandemic. Most of these reductions were withdrawn in 2021 as countries emerged from the pandemic.

Changes in revenues from different tax types

Revenues from all tax types increased in nominal terms between 2020 and 2021. The largest increase in mean tax revenues related to corporate income tax, which rebounded from 2020 levels and increased by 23.1 percent in nominal terms. This is in contrast to 2020, in which corporate income tax revenues saw the largest decline of all tax types, falling by 9.8 percent.

The second largest increase was to mean VAT revenues, which increased by 17.3 percent in nominal terms between 2020 and 2021. These higher revenues from corporate income tax and VAT, on average, drove the increase in the OECD tax-to-GDP ratio in 2021.

Note of caution

As noted above, the OECD’s findings are based on preliminary data and so may be subject to future revisions, as is normal. Nevertheless, the report’s findings offer a very interesting initial insight into the impact of the first two years of the COVID-19 pandemic on tax revenues and how COVID-19 has shaped tax policy.

It should also be borne in mind that despite the recovery in tax revenues seen in OECD countries in 2021, the current economic climate is highly challenging. As Grace Perez-Navarro, Director of the OECD Centre for Tax Policy and Administration puts it in the report’s accompanying press release, “this rebound may prove to be short-lived, in the face of mounting global economic headwinds, driven by rising energy costs and inflation.”