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Taxation in the UK:

Taxation in the UK CVS SURVEYORS

Outline:

Outline Overview of the UK tax system in historical, international and theoretical contexts: Level and composition of revenues Structure of the major taxes 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:

The tax burden in the UK Source: HM Treasury

Tax to GDP ratios Taxes and social security contributions:

Tax to GDP ratios Taxes and social security contributions Source: OECD

Composition of revenues Current receipts, 2006-07:

Composition of revenues Current receipts, 2006-07 Source: HM Treasury

Composition of revenues Current receipts:

Composition of revenues Current receipts Source: HM Treasury

Composition of revenues 2003 Taxes and social security contributions:

Composition of revenues 2003 Taxes and social security contributions Source: OECD

Income tax schedule For earned income, 2006 prices:

Income tax schedule For earned income, 2006 prices

Changes to income tax rate structure:

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 burden For single worker at multiples of average full-time earnings:

The income tax burden For single worker at multiples of average full-time earnings Source: OECD

Changes to treatment of families:

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 schedule Combined employer and employee NICs, 2006 prices:

National Insurance schedule Combined employer and employee NICs, 2006 prices

Changes to National Insurance:

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 + NICs For single worker at multiples of average full-time earnings:

The burden of income tax + NICs For single worker at multiples of average full-time earnings

Main corporation tax rate:

Main corporation tax rate

Changes to corporation tax:

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:

Taxation of corporations and shareholders 2005 Source: OECD

The corporation tax burden Effective average tax rates and capital allowances 2005:

The corporation tax burden Effective average tax rates and capital allowances 2005 Source: Klemm (2005)

VAT:

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:

VAT rates and bases Source: OECD

VAT:

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:

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:

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:

Environmental tax revenue, 2006-07

Property / local taxes:

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 system Excluding most ‘business taxes’:

Distributional effect of the tax and benefit system Excluding most ‘business taxes’ Source: Authors’ calculations from ONS (2006)

Effect of tax and benefit system on income inequality 1998, personal taxes and benefits only:

Effect of tax and benefit system on income inequality 1998, personal taxes and benefits only Source: Immervol, Levy, Lietz, Mantovani, O’Donoghue, Sutherland and Verbist (2005)

Effect of tax and benefit system on income inequality Excluding most ‘business taxes’:

Effect of tax and benefit system on income inequality Excluding most ‘business taxes’ Source: ONS (2002, 2006)

Effect of tax and benefit changes on income inequality Personal direct taxes and benefits only, 1997-98 population:

Effect of tax and benefit changes on income inequality Personal direct taxes and benefits only, 1997-98 population Source: Clark and Leicester (2004)

Work incentives among workers Personal taxes and benefits only:

Work incentives among workers Personal taxes and benefits only Source: Adam (2005)

Work incentives among workers 1998, personal taxes and benefits only:

Work incentives among workers 1998, personal taxes and benefits only Source: Immervol, Kleven, Kreiner and Saez (2005)

Taxation of savings:

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:

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: Tax earnings, ignore savings completely: NICs Tax expenditure, ignore income completely: VAT Tax expenditure, calculated as: earnings – net contributions into saving accounts

Income tax treatment of saving:

Income tax treatment of saving Default is to tax returns to saving (interest, dividends, capital gains) as well as earnings But… 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:

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:

Company-level EMTRs, 2005 Source: CVS (2005)

Conclusions:

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:

Taxation in the UK Stuart Adam

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