Taxation in the UK James Browne Senior Research Economist Institute for Fiscal Studies
• • Outline Overview of the UK tax system in historical, international and theoretical contexts: 1. Level and composition of revenues 2. Structure of the major taxes 3. Economic aspects of the overall tax (and benefit) system: – Effect on the income distribution – Effect on work incentives – How close to an expenditure tax? References – Survey of the tax system (more on 1 & 2) www.ifs.org.uk/bns/bn09.pdf – Adam, Browne and Heady (2010), chapter 1 of ‘Dimensions of Tax Design – The M irrlees Review’, available from http://www.ifs.org.uk/mirrleesreview/dimensions/ch1.pdf
The tax burden in the UK 48% 46% 44% 42% % of GDP 40% 38% 36% 34% 32% 30% 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 Public sector total receipts Net taxes and SSCs Source: HMT
Tax to GDP ratios Taxes and social security contributions 60% 1978 2006 50% 40% 30% 20% 10% 0% UK EU15 OECD USA Fra Ger Jap Swe Ire Aus Can Ita Source: OECD
Breakdown of net taxes and NIC s, 2010-11 Other er i indirec ect tax axes es Income t e tax ax VAT Local al t tax axes es Cap apital al t tax axes es Nat ational al Cor orpor oration on t tax Ins nsuranc nce Source: HMT
C omposition of revenues Net taxes and NICs 100% Other indirect taxes 90% 80% VAT 70% Other capital taxes 60% Rates/Poll Tax/Council Tax 50% 40% Corporation tax 30% National Insurance 20% 10% Income tax + CGT 0% 1978-79 1997-98 2010-11 Source: HMT
C omposition of revenues, 2006 Taxes and social security contributions 100% Other taxes 90% Other capital taxes 80% Recurrent buildings 70% taxes Corporation tax 60% 50% Other indirect taxes 40% VAT / GST 30% SSCs + payroll tax 20% Income tax + CGT 10% 0% UK EU15 OECD USA Fra Ger Jap Swe Ire Aus Can Ita Source: OECD
Income tax schedule For earned income, 2012 prices 100% 90% 1978-79 2012-13 80% Marginal income tax rate 70% 60% 50% 40% 30% 20% 10% 0% £0 £25,000 £50,000 £75,000 £100,000 £125,000 £150,000 £175,000 Gross income
• • • C hanges to income tax structure Big reduction in top rates (83/98% 40%) between 1978 and 1988 – the start of an international trend – partly reversed in 2010 with 50% rate above £150,000, to be cut to 45% from next year – withdrawal of personal allowance above £100,000 creates small band where marginal income tax rate is 60% Reduction in basic rate (33% 20%) – part of an international trend Large-scale fiscal drag – some increase in no. of taxpayers – massive increase in no. of higher-rate taxpayers
• • • • Is this an optimal income tax system? M irrlees optimal tax systems tend to have U-shaped marginal rate schedule – High marginal tax rates at the bottom and top, lower in the middle – When we take steep benefit withdrawal rates at the bottom into account, do have broadly this pattern of marginal tax rates in the UK What about 60% marginal income tax rate at £100,000? Possible that optimal tax system has higher rate just below the top than at the very top: – Very high income individuals may be more responsive to marginal tax rates than those slightly lower down – M ay be relatively few people in this band compared to number above But unlikely that optimal schedule has ‘spikes’ in it like current UK system
The income tax burden, 2007 For single worker at multiples of average full-time earnings 35% @ 167% of average earnings @ 100% of average earnings Income tax as % of gross earnings 30% @ 67% of average earnings 25% 20% 15% 10% 5% 0% UK EU15 OECD USA Fra Ger Jap Swe Ire Aus Can Ita Source: OECD
• • • C hanges to treatment of families Shift from joint to independent taxation in 1990 – part of an international trend away from family taxation Abolition of additional tax allowances for married people and those with children Shift towards providing support for children and low earners through tax credits
National Insurance schedule Combined employer and employee NICs, 2012 prices £250 1984-85 2012-13 £200 Weekly NICs £150 £100 £50 £0 £0 £100 £200 £300 £400 £500 £600 £700 £800 £900 £1,000 Weekly earnings
• • • • • • C hanges to National Insurance M ore like income tax: Abolition of ‘entry fee’ Contributions now continue above the upper earnings limit Alignment of NI threshold with income tax personal allowance between 2001 and 2008 Upper earnings limit aligned with income tax higher rate threshold since 2009 Benefits in kind now subject to National Insurance Contributory principle undermined
• • • • S ocial insurance and the contributory principle In Britain, National Insurance was traditionally closer to a Beveridge system – flat rate payments gave entitlements to flat rate benefits when out of work etc Link between contributions and payments has become less important over time, on both contributions and payments side Contrasts with Bismarckian system where insurance payments give entitlements to benefits that replace previous earnings This tends to require higher tax rates, but despite this may have smaller effect on work incentives
Total burden of income tax and NI For single worker at multiples of average full-time earnings @ 167% of 60% average earnings PIT + SSC as % of gross earnings @ 100% of 50% average earnings @ 67% of 40% average earnings 30% 20% 10% 0% UK EU15 OECD USA Fra Ger Jap Swe Ire Aus Can Ita Source: OECD
Main corporation tax rate 0.6 Main rate Small companies' rate 0.5 0.4 0.3 0.2 0.1 0 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015
• • • C hanges to corporation tax M ain and small companies rates cut (52% 22% by 2014, 40% 20%) , part of a continuing international trend Share of revenue kept up though This is partly because of reduced capital allowances – aim is to tax profits = revenue – expenses (includes capital consumption) – allowances exist to compensate companies for depreciation – difficult to know what the true economic rate of depreciation is though – allowances may not adequately compensate companies for depreciation of capital therefore (will return to this later)
The corporate tax burden Effective average tax rates and capital allowances 2005 100% Capital allowances (p.d.v.), plant and machinery EATR, equity-financed plant and machinery 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% UK79 UK05 USA FRA GER JAP SWE IRE AUS CAN ITA Source: Klemm (2005)
• • • VAT M ain rate 8% 15% in 1979, 17.5% in 1991 and 20% in 2011 – in first two cases to pay for reductions in other taxes, latest rise part of deficit reduction package – part of international trend towards uniform VAT Atkinson and Stiglitz result from optimal tax theory – if there is weak separability between leisure and all other goods, uniform sales tax optimal But the UK has lots of zero rated items
VAT rates and bases 110% 100% Main VAT rate, 2007 VAT Revenue Ratio, 2005 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% UK1980 UK EU15 OECD Fra Ger Jap Swe Ire Aus Ita NZ Source: OECD
• • • • VAT Zero rating of items often defended on grounds of redistribution Atkinson-Stiglitz result shows that this argument is flawed - always better to use other means of redistribution (assuming consumption and leisure separable and ignoring externalities/merit good arguments) So taxing all goods uniformly and increasing a universal grant will always bring the system closer to optimality Submission to the M irrlees review shows that it is possible to make VAT uniform, compensate the poor and still have £11bn left over…
Distributional effect of uniform VAT and compensation package 4% Percentage change in net income 2% 0% -2% -4% -6% Loss from uniform VAT (raises £23bn) -8% Uniform VAT + compensation package (costs £12bn) -10% Poorest 2 3 4 5 6 7 8 9 Richest Income decile Source: Crawford I., M. Keen and S. Smith (2010), ‘Value added tax and excises’, chapter 4 of ‘Dimensions of Tax Design – the Mirrlees Review’, http://www.ifs.org.uk/mirrleesreview/dimensions/ch4.pdf
• • • • Excise duties Fuel, alcohol and tobacco Rates increased, yet share of revenues declined (as in most other countries) Fuel protests in 2000 led to lower rates of fuel duty – Increases in duty rates frequently postponed and/or cancelled Serious concerns about smuggling, especially with spirits – Believed that raising rates would not increase revenue – Rate frozen in cash terms 1997 – 2008 – But may have also be because taxed more highly than wine & beer per unit of alcohol
• • Environmental taxes Various new environmental taxes introduced: – Air passenger duty (1994, reformed with more bands in 2009) – Landfill tax (1996) – Climate change levy (2001) – Aggregates levy (2002) – London congestion charge (2003) None of these will raise more than £3bn in 2012–13 – compared with £27bn (+ VAT) from fuel duty
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