Taxes are compulsory payments made by individuals and businesses to government treasuries to finance public services. Some taxes are directed to specific purposes, however, and these are often called “benefit taxes.” As an example of a benefit tax, consider the social security payments made by individuals to fund public pensions and unemployment insurance (employment insurance in Canada), which are made available to the whole population. Individuals must pay the tax (and then receive the benefit as determined by law) without choice.Taxes are not the only source of government revenue. Governments also use non-tax revenues, including royalties paid by companies for the extraction of resources from public lands, profits from Crown corporations, fees paid for use of public services, grants (such as foreign aid), investment income, fines, and voluntary transfers to the state. In some countries, non-tax revenues can make up a significant share of total revenues raised by governments.
Table 1.2 shows that total revenues raised by the OECD countries are uniformly higher than the taxes paid. For example, in 2005 Canada’s total government revenues as a share of GDP were 40.8 percent, while taxes made up only 33.4 percent. Tax revenues account for the bulk of payments made by individuals and businesses, but non-tax revenues constituted 7.4 percent of the GDP in 2005, which is about one-fifth of total revenues. A significant part of non-tax revenues are resource royalty payments and user fees, such as tuition fees at public universities and colleges.
As a broad generalization, government expenditures and aggregate taxes have been rising fairly steadily in almost all developed countries for upward of three centuries. In the early years, these increases reflected the growth in the power of centralized nation states as well as the rising costs of wars. But while the costs of military preparedness has historically been an important factor in explaining the growth of governments, the rapid growth of welfare and social services has been more critical, especially since the Great Depression of the 1930s.
The relatively high ratio of government spending and taxes to GDP in most Western European countries is a reflection of high and growing social welfare costs. This ratio has been reinforced by demographic trends: most countries have an aging population, which tends to consume more health and pension benefits than a youthful one. Indeed, in many countries high social spending plus continuing military costs have led to rising deficits, because government revenues have not risen to cover increased expenses. However, in the 1980s and 1990s, a number of governments in developed countries began to decrease.
