Post on 14-Apr-2017
Taxation in the UK
CVS SURVEYORS
OutlineOverview of the UK tax system in historical, international and theoretical
contexts:
1. Level and composition of revenues2. Structure of the major taxes3. Economic aspects of the overall tax (and benefit) system:
– Effect on the income distribution– Effect on incentives to work– Effect on incentives to save and invest
For more on 1 and 2: S. Adam & J. Browne, A survey of the UK tax system– www.ifs.org.uk/bns/bn09.pdf
The tax burden in the UK
30%
32%
34%
36%
38%
40%
42%
44%
46%
79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11
% o
f GD
P
Public sector total receipts Net taxes and SSCsLine 3 Line 4
Source: HM Treasury
Tax to GDP ratiosTaxes and social security contributions
0%
10%
20%
30%
40%
50%
60%
UK EU15 OECD USA FRA GER JAP SWE IRE AUS CAN ITA
19792003
Source: OECD
Composition of revenuesCurrent receipts, 2006-07
Income tax + CGT
National Insurance
VAT
Other indirect taxes
Corporation tax
Recurrent buildings taxes
Other capital taxes
Other receipts
Source: HM Treasury
Composition of revenuesCurrent receipts
0%10%20%30%40%50%60%70%80%90%
100%
1978-79 2006-07
Other receipts
Other capital taxes
Recurrent buildings taxes
Corporation tax
Other indirect taxes
VAT
National Insurance
Income tax + CGT
Source: HM Treasury
Composition of revenues 2003Taxes and social security contributions
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
UK EU15 OECD USA FRA GER JAP SWE IRE AUS CAN ITA
Other taxes
Other capital taxes
Recurrent buildings taxes
Corporation tax
Other indirect taxes
VAT / retail sales taxes
SSCs + payroll taxes
Income tax + CGT
Source: OECD
Income tax scheduleFor earned income, 2006 prices
£0
£10,000
£20,000
£30,000
£40,000
£50,000
£60,000
£0 £20,000 £40,000 £60,000 £80,000 £100,000
Gross income
Inco
me
tax
liabi
lity
1978-792006-07
Changes to income tax rate structure
• Big reduction in top rates (83/98% 40%)– the start of an international trend
• Reduction in basic rate (33% 22%)– part of an international trend
• Abolition and re-introduction of starting rate (now 10%)– international trend is to reduce number of rates
• Large-scale fiscal drag– some increase in no. of taxpayers– massive increase in no. of higher-rate taxpayers
The income tax burdenFor single worker at multiples of average full-time earnings
0%
5%
10%
15%
20%
25%
30%
35%
UK EU15 OECD USA FRA GER JAP SWE IRE AUS CAN ITA
Inco
me
tax
as %
of g
ross
ear
ning
s
@ 167% of AW@ 100% of AW@ 67% of AW
Source: OECD
Changes to treatment of families
• Independent taxation introduced 1990– part of an international trend away from family
taxation• Abolition of additional tax allowances for married
people and those with children• Tax credits bring support for children and low
earners into the tax system– spread of means-testing revives joint assessment– major delivery problems with latest (2003) reforms
National Insurance scheduleCombined employer and employee NICs, 2006 prices
£0£20£40
£60£80
£100£120£140
£160£180£200
£0 £200 £400 £600 £800 £1,000Weekly earnings
Wee
kly
NIC
s
1984-852006-07
Changes to National Insurance
More like income tax:• Abolition of ‘entry fee’• Entry point aligned with tax allowance• End of cap on contributions• Extension to benefits in kind• Erosion of the contributory principle
The burden of income tax + NICsFor single worker at multiples of average full-time earnings
0%
10%
20%
30%
40%
50%
60%
UK EU15 OECD USA FRA GER JAP SWE IRE AUS CAN ITA
PIT
+ S
SC
as
% o
f gro
ss e
arni
ngs
@ 167% of AW@ 100% of AW@ 67% of AW
Main corporation tax rate
0%
10%
20%
30%
40%
50%
60%
1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005
Changes to corporation tax
• Main rate cut (52%30%)• Small companies’ rate cut (40%19%)
– ill-fated experiment with 0% starting rate• Reduced capital allowances
– aim is to tax profit = revenue – expenses– expenses should include true economic depreciation– hard to measure so give fixed capital allowances instead– these deduct capital spending bit by bit over several years
• R&D tax credit introduced 2000• Rate cuts and base broadening is in line with international
trends
Taxation of corporations and shareholders 2005
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
UK79 UK05 EU15 OECD USA FRA GER JAP SWE IRE AUS CAN ITA
Top net income tax rate on dividendsMain corporation tax rate
Source: OECD
The corporation tax burdenEffective average tax rates and capital allowances 2005
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
UK79 UK05 USA FRA GER JAP SWE IRE AUS CAN ITA
Capital allowances (p.d.v.), plant and machineryEATR, equity-financed plant and machinery
Source: Klemm (2005)
VAT
• Main rate 8%15% in 1979 and 17.5% in 1991– part of international move towards uniform
VAT
• UK has lots of zero-rated items– but uses reduced rates less than other
countries
VAT rates and bases
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
UK1980UK2003 EU15 OECD FRA GER JAP SWE IRE AUS ITA NZ
main VAT rate
c-efficiency ratio: revenue / (main rate x national accounts consumption)
Source: OECD
VAT
• Is this narrow base a good idea?• Atkinson-Stiglitz: if leisure is weakly separable from all
other goods, uniform VAT is optimal• May still be arguments for differential rates…
– if not separable, tax complements with leisure more to offset usual distortion towards leisure
– externality or merit good arguments
• But widespread distributional defence is just wrong– progressive income tax is more efficient tool for redistribution
Excise duties
• Fuel, alcohol and tobacco• Rates increased, yet share of revenues
declined (as in most other countries)– Rates fallen since 2000
• Fuel protests in 2000• Serious concerns about smuggling
Environmental taxes
• Various new environmental taxes introduced:– Air passenger duty (1994)– Landfill tax (1996) – Climate change levy (2001)– Aggregates levy (2002)– London congestion charge (2003)
• None of these raised more than £1bn in 2005– compared with £24bn (+ VAT) from fuel duty
• But revenues don’t tell the whole story
Environmental tax revenue, 2006-07
Fuel duty (+ VAT on duty)
Vehicle Excise Duty
Other
Property / local taxes• Council tax:
– Replaced poll tax in 1993 (previously domestic rates)– Based on property values (banded, no revaluation) with discounts for
1-person households and low-income families– UK’s only local tax (councils set average rate only)
• Business rates:– Proportion of estimated market rent (unbanded, revalued) with
discounts for businesses with low rents– Centralised in 1990
• Lyons Inquiry report due on Wednesday
Distributional effect of the tax and benefit systemExcluding most ‘business taxes’
-40%
-20%
0%
20%
40%
60%
80%
Poorest 2nd 3rd 4th 5th 6th 7th 8th 9th RichestDecile group of equivalised household disposable income
Benefits - Taxes as % of original (private) income
Source: Authors’ calculations from ONS (2006)
Effect of tax and benefit system on income inequality1998, personal taxes and benefits only
0.0
0.1
0.2
0.3
0.4
0.5
0.6
UK EU15 Aus Bel Den Fin Fra Ger Gre Ire Ita Lux Neth Por Spa Swe
Gin
i coe
ffici
ent
Private income Disposable income
Source: Immervol, Levy, Lietz, Mantovani, O’Donoghue, Sutherland and Verbist (2005)
Effect of tax and benefit system on income inequality
Excluding most ‘business taxes’
0.0
0.1
0.2
0.3
0.4
0.5
0.6
79 81 83 85 87 89 91 93 95 97 99 01 03 05
Gin
i coe
ffici
ent
Private incomePrivate + benefitsPrivate + benefits - direct taxesPrivate + benefits - all taxes
Source: ONS (2002, 2006)
Effect of tax and benefit changes on income inequality
Personal direct taxes and benefits only, 1997-98 population
-0.01
0.00
0.01
0.02
0.03
0.04
0.05
0.06
79 81 83 85 87 89 91 93 95 97 99 01
Cum
ulat
ive
chan
ge in
Gin
i
relative to RPI upratingrelative to RPI uprating of taxes, GDP uprating of benefits
Source: Clark and Leicester (2004)
Work incentives among workers
Personal taxes and benefits only
40%
45%
50%
55%
60%
65%
70%
79 81 83 85 87 89 91 93 95 97 99 01 03
Mean effective marginal tax rateMean participation tax rate
Source: Adam (2005)
Work incentives among workers1998, personal taxes and benefits only
30%
35%
40%
45%
50%
55%
60%
65%
70%
75%
80%
UK EU15 Aus Bel Den Fin Fra Ger Gre Ire Ita Lux Neth Por Spa Swe
Mean effective marginal tax rate Mean participation tax rate
Source: Immervol, Kleven, Kreiner and Saez (2005)
Taxation of savings• Starting point not obvious
– Tax all income (earnings and savings) equally?– Savers are rich so tax them more?– No…
• Saving is just deferral of consumption• Atkinson-Stiglitz again: under various assumptions, should tax
consumption today and consumption tomorrow the same• This implies no net tax on the normal return to saving• The assumptions are unrealistic, but it’s a useful benchmark
How not to tax saving
• Present value of lifetime earnings and expenditure are the same if all saving earns the normal return r
– Ignoring bequests: a tricky issue!
So three mechanisms:
1. Tax earnings, ignore savings completely: NICs2. Tax expenditure, ignore income completely: VAT3. Tax expenditure, calculated as:
earnings – net contributions into saving accounts
Income tax treatment of savingDefault is to tax returns to saving (interest, dividends, capital
gains) as well as earningsBut…• ISAs: returns tax-exempt (wage tax treatment)• Housing & other durables: ditto• Pensions: expenditure tax treatment
– contributions deducted from taxable income– returns within the fund untaxed– withdrawals (pension income) mostly taxed
These account for most saving for most people
Other taxes on saving• Savings cut entitlement to means-tested benefits• Other capital taxes
– council tax, inheritance tax, stamp duties
• Corporation tax– lots of savings are invested by companies– effective marginal tax rate (EMTR) depends on how far investment
and returns can be deducted from taxable profits– this varies:
• different types of investment (plant & machinery, buildings, R&D,…)• different methods of finance (debt, equity)
Company-level EMTRs, 2005
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
UK1979 UK2005 USA FRANCE GERMANY JAPAN
Equity-financed plant and machineryDebt-financed plant and machineryEquity-financed industrial buildings
Source: CVS (2005)
Conclusions• UK mostly in line with international trends
– Rise in overall tax burden since 1979– Income tax rates cut– Shift from excise duties to VAT– Corporation tax rates cut, base broadened – Shift from family to individual taxation
• Whether reforms have increased inequality depends what you mean by a “reform”!– Labour’s reforms (relative to price-indexation) have been progressive
but weakened work incentives• Distortions between different savings vehicles and forms of
investment have been reduced
Taxation in the UK
Stuart Adam