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Taxation Trends in the UK: Insights and Analysis

Explore the current tax landscape in the UK, examining revenue sources, economic impacts, and distributional effects. Learn about key tax reforms and unique aspects of the UK taxation system.

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Taxation Trends in the UK: Insights and Analysis

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  1. Taxation in the UK Stuart Adam (IFS) James Browne (IFS) Chris Heady (OECD)

  2. Outline • The level and composition of revenues • Where is the UK in line with international trends? • Where is the UK unusual? • 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

  3. The tax burden in the UK Source: HM Treasury

  4. Composition of revenuesCurrent receipts, 2006-07 Source: HM Treasury

  5. UK developments are typical Income tax: • Reduction in number of rates • Cuts in basic and higher rates • Move from family to individual unit of taxation • Introduction of in-work support through the tax system Corporation tax: • Cuts in rates • Broadening of base • Reduced use of imputation Indirect taxes: • Increased revenue from VAT • Reduced revenue from other indirect taxes • Introduction of new environmental taxes

  6. Where the UK is unusual • Extremely centralised • More reliant on property taxes, less on NICs • NICs are an awkward half-way house • PAYE • Abolished tax relief on mortgage interest • Narrow VAT base

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

  8. Effect of tax and benefit system on income inequality1998, personal taxes and benefits only Source: Immervol, Levy, Lietz, Mantovani, O’Donoghue, Sutherland and Verbist (2005)

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

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

  11. Work incentives among workersPersonal taxes and benefits only Source: Adam (2005)

  12. Work incentives among workers1998, personal taxes and benefits only Source: Immervol, Kleven, Kreiner and Saez (2005)

  13. Implicit tax rates on capital, 2001Capital tax revenues / national accounts capital income Source: David Carey and Josette Rabesona, OECD

  14. How might we not tax saving? • One common baseline: zero taxation of the normal return to saving Three mechanisms: • Tax earnings, ignore when spent: NICs • Tax expenditure, ignore when earned: VAT • Tax expenditure, calculated as: earnings – net contributions into saving accounts

  15. Income tax treatment of saving Default is to tax returns to saving (interest, dividends, capital gains) as well as earnings • though at different rates: dividend tax credit and CGT taper 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

  16. Other taxes on capital (1) • Stamp duties • Council tax • Inheritance tax • Withdrawal of means-tested benefits

  17. Other taxes on capital (2) • Corporation tax • effective tax rates depend on how far investments and returns can be deducted from taxable profits • this varies: • plant & machinery treated more favourably than buildings • debt finance treated more favourably than equity • differentials have narrowed since 1979 • Interaction between corporate and personal tax is complicated: • retention and distribution of profits have income tax implications, whereas share issues and buybacks do not • no personal tax implications for tax-exempt institutions (since dividend tax credit no longer payable) • companies and their lenders/shareholders may be taxed in different jurisdictions

  18. Tax smoothing • Pensions are taxed as deferred earnings • But the tax rate faced in retirement may be different • 40% tax in work, 22% tax in retirement • 59% tax + tax credit taper in work, 22% tax in retirement • 22% tax in work, 40% (or higher) benefit withdrawal in retirement • This can make pensions extremely attractive or unattractive • and favour strategic timing of pension contributions • Has this become more or less important? • Income tax rates are now less dispersed • But more people pay higher-rate tax • And more people face means tests

  19. Conclusions • UK mostly in line with international trends • Whether reforms have increased inequality depends on what you mean by a “reform”! • Labour’s reforms (relative to price-indexation) have been progressive but weakened work incentives on average • Distortions between different savings vehicles and forms of investment have been reduced • Still plenty in need of attention!

  20. Taxation in the UK Stuart Adam (IFS) James Browne (IFS) Chris Heady (OECD)

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