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Economics and Business
Exchange
Supported by Deloitte.
Trends in the structure and
impact of the UK tax system
Howard Reed
Economics & Business Exchange
13 June 2006
Outline
•
•
•
•
The overall tax burden
Distributional impacts
Structural trends
Future trends?
The extent of taxation
total tax as share of GDP
55
50
UK
OECD average
EU-15
US
Japan
Canada
Sweden
45
40
35
30
25
20
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
year
Source: OECD
Does the tax “burden”
matter?
• Macro evidence shows little obvious
correlation between tax (or spending)
levels and GDP growth)
• Microeconomic theory suggests taxes can
create distortions and reduce efficiency
• …but can also correct market failures
• Depends how the money’s spent
• Equity and efficiency objectives
Tax share vs GDP growth,
1995-2005, OECD countries
Tax take and economic growth, OECD countries, 1995-2004
Real economic growth (average
% per annum)
9
8
7
6
5
4
3
2
1
0
0
10
20
30
40
50
total tax receipts as % of GDP
Source: OECD
60
Distributional effects of tax
system
Key definitions:
• A proportional tax takes the same proportion of
income from all households (or :families,
individuals)
• A progressive tax takes a larger proportion from
richer households than poorer
• A regressive tax takes a smaller proportion from
richer households than poorer
Distributional effects of tax
system
• Best recent work: John Hills, Inequality and the
State (2004)
• Distributional impact of tax system on weekly
incomes:
–
–
–
–
–
–
Income tax: progressive
NICs: (mostly) progressive
VAT: regressive
Excise Duties: regressive
Local taxation: regressive
OVERALL: regressive for bottom 10% of
distribution, proportional elsewhere
Issues with distributional
analysis
• ‘snapshot’ vs. life cycle
• Incidence (who really pays a tax?)
• When transfers (benefits/ tax credits) are
included, overall redistribution
UK trends: 1970s-1990s
Personal taxes (income tax & NICs)
• Cuts in basic rate IT seen as popular since
1970s
• Parallel rises in NICs (and other taxes…)
• A false dichotomy?
Indirect taxes
• Big rises in VAT 1979 and 1992
• Fuel duty escalator – 1990s
Corporate tax
• Large reductions 1984-1999
UK trends since 1997
Personal taxes (income tax & NICs)
• Continuation of the philosophy that rises in NICs are
preferable to raising IT
• Some redistribution (via NICs) but mainly via tax credit
system
Indirect taxes
• Some new environmental taxes (e.g. Climate Change
levy)
• But fuel duty escalator ended, no major shift towards
‘green taxation’
Corporate tax
• Stable since 1999
• Various micro measures – ‘fine tuning’ or ‘tinkering’?
Recent UK trends: revenue
shares
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
excise
VAT
property/local
payroll
employer NICs
employee NICs
corporate income
Personal income
1975
1985
1995
2003
Source: OECD
Recent international trends
Personal taxes:
• Decreasing number of marginal rates &
bands
• Decreasing top rates
Corporate taxes:
• Trend towards reductions in rates
Future developments?
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•
•
•
•
Overall tax (and spending) pressures
Drive for ‘simplicity’
Flat tax?
Corporate tax ‘race to the bottom’?
The political dimension
Overall tax pressures
20
10
/1
1
20
09
/1
0
20
08
/0
9
20
07
/0
8
20
06
/0
7
20
05
/0
6
42
41
40
39
38
37
20
04
/0
5
% of GDP
HM Treasury estimates for tax as share
of GDP: 2006-2011
financial year
Source: HM Treasury,Budget 2006
Tax simplicity
• Much criticism of increased complexity in tax
system
• Often relates to inherently complex areas
(financial taxation, international corporate tax,
etc)
• But not always (e.g. corp tax micro-measures)
• Also tax credit administrative problems
• Obvious simplifications get ignored
– Merge income tax and NICs?
Flat tax
• Flavour of the month last summer
• A ‘flat tax’ does not necessarily mean a flat
(or simple) tax system
• Can separate marginal rate structure from
simplification arguments
• A ‘Trojan horse’ for tax cuts?
• Seems to improve compliance more than
work effort (World Bank/IFS research on
Russia)
The political debate
Conservatives: ‘flatter, simpler, fairer’
• tax commission reports later this year
Lib Dems: ‘Fairer, simpler, greener’
• cut basic rate income tax
• No more 50p rate
• shift to ‘green’ taxes
Labour: key pledges on income tax
Key future issues to be resolved:
• Spending path from CSR07
• Longer term commitments (e.g. 10-year childcare
strategy)
• Tax competition (particularly corporate tax)
Economics and Business
Exchange
Supported by Deloitte.