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Categories of public sector revenues

Governments raise revenues from a combination of revenue sources, but in most countries, however, these revenues mostly originate from taxation.

As there are different types of taxes, it is useful to look more closely at how they contribute to government revenues.

In countries of the Organisation for Economic Development and Cooperation (OECD), the average contributions of different types of taxes to public revenue is quite revealing:

  • About a third of tax revenue comes from consumption taxes, ie, taxes that are levied on the sale of goods and services to consumers. These taxes include the Value Added Tax (VAT) that is charged on top of the sale price in countries such as France, Germany and the UK, and the Sales Tax that is charged on the sale price in the US.
  • About a quarter of tax revenue comes from Personal Income Tax, ie, the taxes that are levied on the income that individuals earn, such as salaries and wages, income from property and income from financial investments.
  • About a quarter of tax revenue comes from Social Insurance Taxes (or Social Security Taxes), ie, the taxes that are levied on employers and employees to fund public pension schemes and various social security schemes, such as unemployment benefits.
  • Less than one tenth of tax revenues comes from Corporate Income Tax, ie, the taxes that are levied on the profit that companies make (where profit is the difference between companies’ revenues and costs).
  • The rest of tax revenues originate from various other sources, such as taxes on property (for example, the Council Tax that is paid to local governments on one’s real estate) and inheritance tax.

We should not discount the role of other sources of public revenues, however. Over the last decades, for example, many countries have implemented privatisation policies that have resulted in a growing amount of public revenues originating from franchises and concessions of public services and assets (for example, when a business pays the government for using infrastructure such as harbours, airports or highways). In many countries, some public sector providers have started charging users for part of public services (for example, some public hospitals charge patients for the cost – or at least for part of the cost – of health care services).

In some countries, revenues from natural resources provide a large share of public sector revenues. Oil and gas revenues, for example, provide more than 80% of revenues in countries such as Saudi Arabia, Brunei, Equatorial Guinea, Oman, Libya, Kuwait and Bahrain. Mining revenues provide a large component of government revenues in Botswana, Guinea, Zambia, Mongolia, Chile and Ghana. We should note, however, that fluctuations of commodity prices in the world markets make revenues from natural resources highly volatile.

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This article is from the free online course:

Understanding Public Financial Management: How Is Your Money Spent?

SOAS University of London