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Institute for the Study
Global Reform of Personal Income Taxation,
1981-2005: Evidence from 189 Countries
IZA DP No. 4228
Klara Sabirianova Peter
Global Reform of Personal
Income Taxation, 1981-2005:
Evidence from 189 Countries
Klara Sabirianova Peter
Georgia State University,
CEPR and IZA
Georgia State University
Georgia State University
Discussion Paper No. 4228
P.O. Box 7240
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IZA Discussion Paper No. 4228
Global Reform of Personal Income Taxation, 1981-2005:
Evidence from 189 Countries
In this paper we use a panel of 189 countries to describe the salient trends that have
emerged in national personal income tax systems spanning the twenty five year period from
1981 to 2005. Using complete national income tax schedules, we calculate actual average
and marginal tax rates at different income levels as well as time-varying measures of
structural progressivity and complexity of national tax systems. We show that frequent
alterations of tax structures have reduced tax rates at higher levels of income and diminished
the overall progressivity and complexity of national tax systems; however, the degree of this
change varies considerably across countries. We also find that the relationship between the
tax rates and revenue is positive for high income countries; however, the strength of the
relationship declines with weaker institutions and lower levels of economic development.
JEL Classification: C8, E62, H2, H87, N10, O1
Keywords: personal income tax, marginal rate, average rate, tax complexity,
progressivity, flat tax, revenue, global trends
Klara Sabirianova Peter
Department of Economics
Andrew Young School of Policy Studies
Georgia State University
P.O. Box 3992
Atlanta, GA 30302-3992
About one hundred years ago, Seligman (1908) observed that “the tendency toward
progressive taxation is almost everywhere on the increase”. However, income tax progressivity
at the beginning of the 20th century was rather moderate by contemporary standards. The top
personal income tax (PIT) rate in 15 surveyed countries hardly exceeded 10%. “The highest
point known to history as actually enforced is thirty-seven and a half percent”, which lasted only
a year in Holland in 1796. Referring to this case, Seligman remarks “the progression was so
severe as to become a confiscation”.
By 1981, the 37.5% top PIT rate was no longer the highest historical point – 4 of every 5
country had the top PIT rate exceeding 37.5%, with the maximum of 90% in Iran. The GDP-
weighted average top statutory marginal PIT rate was 62% among 108 countries. National PIT
systems were frequently plagued by multiple tax schedules, complicated tax formulas,
surcharges, numerous exemptions, and escalating highly-partitioned tax scales.
However, many governments made significant changes to their national PIT systems,
since 1981. The GDP-weighted average top statutory marginal PIT rate fell from 62% in 1981 to
42.9% in 1991 and by 2005 reached a twenty five year low of 36.4%. There was also a sizeable
drop in marginal and average PIT rates at higher levels of individual income and an overall
decline in structural progressivity of the PIT systems. We observe a growing trend toward the
use of one-rate flat personal income taxation1 and find some evidence of the increased simplicity
of several characteristics of the PIT structure. It is apparent that the current tax rates are lower
while tax structures are flatter and, to a certain degree, simpler than they were 25 years ago.
1 Although this trend is more popular among transitional countries at the moment, there is ongoing debate in other
parts of the world about the merits of making the switch (Paulus and Peichl 2008).
This study adds to the taxation literature by providing a careful methodological
documentation of the changes that have taken place in personal income taxation over the last 25
years. The analysis we provide is important for a number of reasons. First, the coverage of the
analysis is unprecedented as we describe the changes that have taken place in almost 190
countries worldwide. Relying on such a large panel of countries means that the trends we
describe are not likely to suffer from a sample selection bias. More importantly, we are able to
document the variation in the personal income tax (PIT) evolution across countries at different
stages of economic development.
Second, we calculate and analyze the time varying marginal and average tax rates at
different points of the income scale. These tax measures represent a significant improvement
over the commonly used top statutory PIT rate. The existence of deductions, allowances, tax
credits, surtaxes, and local taxes means that there is often a big difference between the effective
and statutory tax rates. This, along with excessive income inequality, implies that the top rate
does not apply to most individuals in many countries. We address this issue by using more
common levels of earned income in calculating tax rates and by making adjustments for
deductions, allowances, tax credits, and other legal rules. As such, our tax rate measures are
much closer to the actual rates that individuals are supposed to pay.
Third, the unique information we collected allows us to identify the long-term trends in
such important features of national PIT systems as progressivity and complexity. Our
progressivity measure is the progression slope of either average or marginal rates along the
income scale, which is calculated for each country and year using 100 data points that are formed
around the country’s GDP per capita. This measure has been trending downward in every
country category, with the exception of low income countries. We also summarize the trends in
several observable dimensions of the PIT complexity, including the complexity of allowances
and tax credits, the use of multiple tax schedules, non-standard tax formulas, local taxes, national
surtaxes, and the number of PIT brackets.
Fourth, the existing measures of PIT rates are generally available for a cross section of
countries at a point in time or very short panels with limited time variation. Furthermore, the
existing data sources usually under represent developing countries. The coverage and
comparability of our tax measures go a long way in filling this gap. Because we rely on data
from several sources, we are able to provide a greater level of consistency, both across countries
as well as within country over time, than data from any one source. Having a long panel is also
useful in identifying within-country dynamics of tax measures while controlling for constant
cross-country heterogeneity. We use a simple growth model to illustrate how having a large
representative panel of countries with consistent time-series may have a significant impact on the
inference and policy conclusions regarding the effect of tax rates on economic growth.
Finally, we examine the relationship between the tax rates and collected revenue for a
large subset of countries. The question we are interested in is whether the reduced rates and
progressivity had a considerable negative effect on PIT collection. We find that the relationship
between the tax rates and revenue is positive for high income countries; however, the strength of
the relationship declines with weaker institutions and lower levels of economic development.
The PIT rates do not seem to matter for revenue collection in countries with high levels of
Admittedly, we ignore other components of the tax system such as taxes on corporate
income, domestic consumption, and international trade. Accounting for changes in these other
taxes is important when looking at the impact of the global reform on economic outcomes.
However, collecting and analyzing information on these additional components, while useful,
would prove too monumental a task for one paper. We leave the analysis of other components to
We begin by providing a quick overview of the data followed by an analysis of major
global trends in personal income taxation, in particular, the high frequency of PIT changes, a
ubiquitous decline in top statutory PIT rates, a downward movement in actual marginal and
average rates at higher levels of individual income, increasing simplicity of national tax systems,
decreasing structural PIT progressivity, and the emergence of flat rate tax schedules. This is
followed by an analysis of the effect these changes may have had on PIT collection. We then
discuss the sensitivity of estimation results to the size and composition of the sample of
2. Data Sources and Sample
The data analyzed in the paper covers personal income tax structures in 189 current and
former countries worldwide for the period 1981 to 2005.2 As far as we know, this is the first
panel study of this size that analyzes the historical changes that have occurred in personal
income tax structures over the last 25 years.
Our dataset is comprehensive and contains the complete national PIT schedules with
statutory rates, tax brackets, country-specific tax formulas, basic allowances, standard
deductions, tax credits, multiple tax scales, national surcharges, and local taxes. This
information allows us to compute several important variables including country’s statutory rates,
number of tax brackets, actual average and marginal tax rates at different points of income
distribution, frequency of tax changes, and various measures of PIT progressivity and
2 The number of countries ranges from 108 in 1981 to 180 in 2004.
complexity. In the following sections we give a detailed description of each variable, including
definitions, computation methodology, summary statistics, and trend analysis.
This consolidated PIT dataset was assembled from more than 100 distinct reference
books and datasets. Of these, the most important sources are the tax anthologies published by
international accounting firms (e.g., PricewaterhouseCoopers, Coopers and Lybrand, etc.) as well
as publications and datasets of international organizations (e.g., International Bureau of Fiscal
Documentation, OECD, World Bank, International Monetary Fund, etc.) and public policy
centers (such as University of Michigan’s World Tax Database (WTD), Economist Intelligence
Unit, Heritage Foundation, and Fraser Institute). A wide variety of data sources allows for
significant cross checking, thus minimizing the amount of errors that one will inevitably
encounter in a study of this magnitude. We made every effort to reconcile contradictory
reporting to produce a consistent series for each country across time (see Appendix 1 for the
description of sources and data reconciliation efforts).3 Through careful cleaning of the data, we
have assembled a valuable consolidated personal income tax resource for scholars doing cross-
country empirical research.4
One notable advantage of this consolidated dataset is that it provides a level of world
representation that has not been attained in previous studies of tax structures.5 Our full sample
includes 3613 top statutory PIT rates for 189 current and former countries from 1981 to 2005.
3 The following examples can give a sense of inconsistencies we dealt with. The Russian top PIT rate is coded as
90% in the 1990 WTD while this rate was applied only to the inheritors of book writers for honorariums received.
We had to change this rate to the second highest rate of 60% charged on incomes from individual economic activity
that was often performed underground. The top marginal PIT rate for Denmark rises from 22% to 68% in the 1988
WTD while in fact it drops from 73% to 68%. The reason for such a discrepancy is omitted surcharges and regional
taxes prior to 1988 in WTD. Significant inconsistencies may affect the overall trends as well as bias the estimates in
the behavioral models based on these data.
4 This dataset is planned to be publicly released as part of the World Tax Indicators v.1 in 2009.
5 Some of the largest samples in earlier studies include 51 marginal PIT rates from developing countries in 1984-
1985 (Sicat and Vermani 1988) and 66 top PIT rates in 1980-1989 (Lee and Gordon 2005).
This is an average of 145 countries per year. Even in the case of highly data-demanding
variables such as tax progressivity measures which require the complete tax schedule, we have
non-missing values for 175 countries, or an average of 123 countries per year (from 75 in 1981
to 157 in 2002). To further highlight the representativeness of our sample, we note that 31% of
the countries included are classified as high income countries, 18% as upper middle income,
30% as lower middle income, and 22% as low income countries.6 These countries are located in
all populated geographic regions and continents,7 and they represent approximately 94% of the
world population and 98.5% of the world output (or more precisely, 86% of the world GDP in
current U.S. dollars in 1981, 89% in 1982, 97% in 1983-1988, and 98-99% in all subsequent
3. Continuous Tax Reform
An examination of the dataset reveals a number of remarkable changes in personal
income taxation over the last twenty five years. The first important observation is that tax rates,
income thresholds, and the overall tax structures are continuously changing. The last column of
Panel A in Table 1 shows that, on average, 45% of the countries in our sample change at least
one element of their national tax scale (statutory rates or tax brackets) every year. Of these
countries, about half make full changes by altering both rates and bracket thresholds
simultaneously. The share of countries with full changes in PIT was particularly high in the late
1980s relative to other periods. We find very few cases where countries modify their statutory
6 Country categories are defined using the World Bank country classification based on historical (time-varying)
income thresholds. For example, the income thresholds used for the 2005 classification are as follows: low income,
$875 or less, upper middle income, $876-$3465, upper middle income, $3466-$10725, and high income, $10725 or
7 The regional breakdown is as follows: Africa – 48 countries, Asia and Oceania – 31, Central and South America –
35, Eurasia – 16, Europe – 43, Middle East – 12, and North America – 4.
8 The major economies with missing PIT rates in the early 1980s are former USSR in 1981-1982 and Italy in 1981.
rates while maintaining old thresholds (2.7% of the sample). However, the share of countries
that adjust tax brackets but keep their statutory rates the same increased significantly in the early
1990s moving from 15% in the 1986-1990 period to 21% in the 1991-1995 period. Changes of
this nature might be an indication that countries are increasingly adjusting their tax schedules for
An investigation of these changes by country type reveals that national PIT scales are
changing more frequently in developed countries (62% of countries in the respective category
per year) followed by upper middle income countries (44%), lower middle income countries
(42%), and low income countries (29%). The significant number of developed countries that
went through major tax reforms in the late 1980s explains the spike in the share of high income
countries with full changes in their tax scales during the 1986-1990 period (42.7%).
The difference between high and low income countries is especially striking with respect
to the share of countries that alter thresholds but not rates. From Table 1 it becomes apparent
that most of the low income countries do not adjust their tax brackets for inflation over the whole
considered period.9 This is also true for the middle income countries in the 1980s. Without such
inflationary adjustments, the tax structure may become less equitable if taxpayers are being
pushed into higher tax brackets with no accompanying increase in real income. This is known as
the “bracket creep” effect. Even if top statutory PIT rates are falling, the core taxpayers may
actually experience an increase in marginal rates in an inflationary environment that is
commonly present in less developed economies.
Apart from the inflationary adjustments, another explanation for continuous changes in
tax rates and brackets could be that countries are simply attempting to identify the best tax
9 The slow adjustment of tax brackets to inflation in low income countries is likely to be related to widespread
evasion, weak enforcement, and little revenue collected from personal income tax.
structure. Identifying the best tax structure, however, is a normative matter, which can affect the
changes in different ways. Countries that are concerned about equity, for example, may want to
increase their tax rates while those more concerned about efficiency may reduce them. Whatever
the motivation behind the high frequency changes, however, one might expect some negative
feedback for efficiency. This follows from the fact that a constantly changing tax schedule adds
uncertainty to the tax system which is likely to increase complexity and reduce efficiency.10
The important question for us is whether these changes are simply transitory in nature or
is there some well defined direction of change. If changes are being made on the grounds of
efficiency, then one may expect persistent trends to develop over time as countries try to improve
the efficiency of their tax structures by reducing rates. The remainder of the paper will give a
detailed analysis of the resulting trends that have developed over time.
4. Top Statutory PIT Rates
One of the frequently cited variables of any income tax system is the top statutory
personal income tax (PIT) rate. This is a legally determined marginal tax rate applicable to the
top bracket of the income tax schedule. This particular tax rate has occasionally been used in
empirical cross-country research as a proxy variable for tax progressivity or as a way of
assessing the overall excess tax burden (e.g., Johnson, Kaufmann, and Zoido-Lobaton 1998,
Friedman et al. 2000, among others).
Figure 1 illustrates how the average top statutory tax rate has dropped considerably over
the last twenty five years. This decline was especially pronounced for the GDP-weighted trend
10 Constantly changing features of the tax schedule cause individuals to be uncertain about their tax liability and thus
increase compliance and administrative costs (Slemrod 1992).
which is more representative of the world economy.11 One interesting observation is that the
most dramatic change occurred during the late eighties and early nineties. The weighted average
top statutory PIT rate fell from a high of 62% in 1981 to 56% in 1986. During the ensuing eight
year period (1986 - 1993), however, the PIT rate plunged by approximately 16 percentage points.
The PIT rate then increased by a modest 2 percentage points before resuming its downward trend
in 1996. Since then, the decline has continued, with average top statutory rates sliding a further
6.5 percentage points over the next 10 years. Together these changes represent a sizeable 41.2%
decline in the weighted top PIT rate from a high of 62% in 1981 to a low of 36.4% in 2005.
Further evidence in support of the worldwide downward trend is reported in Table 2
where we observe that only 17% of unweighted top PIT rates were in excess of 40% in 2001-
2005 compared to over 71% during the early 1980s. The share of countries with top PIT rates in
excess of 60% plummeted from about a quarter in 1981 to less than 1% in 2005. The lower non-
zero rates (1% to 40%), on the other hand, became more popular as the percentage of countries
falling into these categories increased from approximately 15% to over 73% between 1981 and
The reader will notice that there are two changes in the weighted PIT trend that align
perfectly with well known tax changes in the U.S. These are the 1986 and 1993 tax reforms
which reduced and increased the top PIT rates respectively. The weighted top PIT rate fell by
approximately 6 percentage points between 1986 and 1987. Similarly, the 2 percentage point
increase in the top PIT rate between 1993 and 1994 coincides with the U.S. Budget
Reconciliation Act enacted in August 1993. This casual observation would imply, incorrectly,
that the larger countries, as measured by GDP, are driving these trends with little or no change
11 The values are weighted by gross domestic product measured in 1990 U.S. dollars. Underlying numbers are
reported in Appendix Table A1.
taking place elsewhere in the world. However, the summary statistics presented in Table 3 and
Figure 2 show clearly that the changes are ubiquitous. From Table 3, for example, we are able to
highlight that each country category experienced a significant decline in the GDP-weighted top
PIT rate. The greatest decline was among the upper middle income countries, followed by low,
lower middle and high income countries respectively. By 2005, upper middle income countries
had the lowest top PIT rates on average. The downward trend remains statistically significant
after controlling for country fixed effects and accounting for serial correlation.
While the evidence in Panel A proves that the downward movement in top PIT rates was
universal, the trend coefficients in Panel B also suggest that the major changes appear to be
sequential. What started as top tax rate cuts in high income countries during the early and mid
1980s was spread to middle income countries during the late 1980s and early 1990s before
eventually reaching low income countries in the late 1990s.
5. Actual Marginal and Average PIT Rates
The top statutory PIT rate is generally quoted in impressionistic comparisons of national
income tax schedules, and, in particular, as a proxy for the tax burden in some empirical
research. In a sense, it is easy to see why this rate is so widely used, as it is potentially the
maximum marginal tax rate facing the wealthiest taxpayers. However, the top statutory rate in
less developed economies is often irrelevant to the majority of domestic high earners and
entrepreneurs, with the exception of the small number of expatriates and wealthiest local elite.
For example, in high income countries the top statutory PIT rate is applicable, on average, to the
level of income equivalent to the triple of a country’s GDP per capita. In contrast, the ratio of
the top threshold to a country’s GDP per capita is about 18 in upper middle income countries, 47
in lower middle income countries, and 83 in low income countries. Thus, it is important to
examine the trends in PIT rates at other points of the income distribution that are more relevant
to the majority of population. The problem though, is that it is practically unfeasible to find the
actual income distribution for the large number of countries over the 25-year period. As an
alternative, we use a country’s GDP per capita and its multiples as a comparable income base.
For example, for each country in our sample, we can calculate the marginal rates for the level of
individual income equivalent to 1, 2, 3, and 4 times GDP per capita by using the national PIT
In addition to having rates at different levels of individual earnings, our data also allow us
to calculate the actual marginal tax rates that are generally more preferred to the statutory rates
dictated by national tax schedules. It is not unusual for these two rates to differ significantly. A
local tax, national surtax, or additional tax schedules can raise the actual marginal tax rate above
the officially stated rate. Personal deductions and tax credits, on the other hand, can lower the
actual marginal tax rate below the legal rate. To estimate actual marginal tax rates for each
country in our sample, we first calculate taxable income for 100 different levels of pre-tax
income that are evenly spread in the range from 4% to 400% of a country’s GDP per capita.
Taxable income excludes standard deductions, basic personal allowances, and employee/wage
allowances, which are unconditionally applicable to all single, employed taxpayers.13 Next, we
apply the tax schedule and, whenever relevant, particular tax formulas to the taxable income in
12 This approach was also used by Sicat and Vermani (1988) in comparing marginal rates across 51 developing
13 We use the rates for single taxpayers in calculating taxable income to preserve comparability across countries and
because most of countries have individual-based tax systems. Some countries, like the U.S., Germany, Zimbabwe,
have income tax systems based on the combined family income. However, because the number of countries with
separate rates for married individuals is small in our data (8 to 12 in various years), it is unlikely that using rates for
married taxpayers would alter the aggregate trends.
order to compute the tax liability for each income level.14 The tax liability also includes local
taxes and major national surtaxes if altogether they exceed 5% of the taxable income.15 The final
tax liability figure is adjusted by subtracting the tax credits that are universally applicable to
single taxpayers. Finally, the actual marginal rates are calculated as Δ tax liability / Δ income for
each of the 100 values of gross income.16
Using tax liability figures, we also compute the average tax rate as the ratio of total tax
liability to gross income for each level of income. It is important to emphasize that the average
rate is the tax rate that the individual taxpayers face or are supposed to pay under current tax
laws, not the rate they choose to pay by means of underreporting their income. As such, the
average tax rate gives an upper bound on the effective rate paid by individuals under the PIT.
Figure 3 shows that in any given year the marginal rates are higher than their respective
average rates and that both average and marginal rates increase with the level of income. These
are the two main indications that the personal income tax structure for most of the countries
remains progressive. More important for the current discussion, however, are the observed
trends for the various rates. Irrespective of the rate chosen, one observes a clear downward trend
over the sample period. Furthermore, all of the variables show that the greatest downturn in the
14 In most cases, we apply the standard formula for calculating tax liability, T=(Y-Yr)*tr+R, where Y is taxable
income, Yr is the largest bracket less than Y, R is the tax liability if taxable income were equal to Yr and tr is the
marginal tax rate for the rth bracket. However, in 418 country-year cases we had to use non-standard country-
specific procedures in computing tax liability. Countries may have local taxes and multiple surtaxes, an additional
schedule for salaries (Egypt, Senegal, etc.), or non-standard tax formulas (e.g., Cote d’Ivoire, Denmark, and
Germany). For example, federal tax liability in Denmark is calculated as T= Y*t0+(Y-Y1)*t1+(Y-Y2)*t2, where t0 is
the bottom rate, t1 is the middle rate, t2 is the top rate, Yi is the threshold for each rate and the combined top marginal
rate is limited to 59% as of 2008.
15 The methods used to incorporate local taxes vary from using simple average rates (e.g., Denmark, Finland, and
Sweden) to applying separate local tax schedules such as in Canada (Ontario), Japan, and Switzerland (Zurich).
16 For the level of gross income equivalent to a country’s GDP per capita, actual and statutory marginal rates are
approximately the same in 66% cases (within one percentage point deviation), the statutory rate is greater in 29%
cases, and it is less in 5% cases. The similarities between actual and statutory rates tend to increase with the level of