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Taxation in the UK. Stuart Adam (IFS) James Browne (IFS) Chris Heady (OECD). The chapter. Overview of the UK tax system in historical, international and theoretical contexts: Level and composition of revenues Structure of the major taxes

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Taxation in the uk l.jpg

Taxation in the UK

Stuart Adam (IFS)

James Browne (IFS)

Chris Heady (OECD)


The chapter l.jpg
The chapter

  • 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 work incentives

      • How close to an expenditure tax?

  • Watch for overlap with other chapters!

  • See also IFS’s Survey of the UK tax system

    • www.ifs.org.uk/bns/bn09.pdf



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Tax to GDP ratiosTaxes and social security contributions


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Composition of revenuesCurrent receipts


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Composition of revenues 2003Taxes and social security contributions


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Income tax scheduleFor earned income, 2006 prices


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Changes to PIT 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


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The income tax burdenFor single worker at multiples of average full-time earnings


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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

    • major delivery problems with latest (2003) reforms


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National Insurance scheduleCombined employer and employee NICs, 2006 prices


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Changes to NICs

More like income tax:

  • Abolition of ‘entry fee’

  • End of cap on contributions

  • Alignment of entry point with PIT allowance

  • Extension to benefits in kind

  • Erosion of the contributory principle


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The burden of PIT + SSCFor single worker at multiples of average full-time earnings



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Changes to corporation tax

  • Main rate cut (52%30%), part of a continuing international trend

  • Small companies’ rate cut (40%19%)

    • ill-fated experiment with 0% starting rate

  • Reduced capital allowances, part of an international trend of base-broadening to finance rate cuts

    • for plant and machinery, immediate 100% write-down replaced by 25% annual declining-balance

  • R&D tax credit introduced 2000

  • Payments system reformed 1999 (abolition of ACT)

    Taxation of dividends at the shareholder level:

  • Tax credit cuts effective basic rate to 0%, higher rate to 25%

  • Not payable to tax-exempt shareholders since 1997 (2004 for ISAs)

  • Other EU countries have also reduced use of imputation, to finance rate cuts and comply with EU rules



The corporate tax burden effective average tax rates and capital allowances 2005 l.jpg
The corporate tax burdenEffective average tax rates and capital allowances 2005

Source: Klemm (2005)


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VAT

  • Main rate 8%15% in 1979 and 17.5% in 1991

    • part of international move from excise duties towards VAT

  • Some base broadening overall

    • domestic fuel brought in at a reduced rate in 1994

    • slight narrowing since 1997: reduced rate cut to 5% and extended to a few previously full-rate items

    • still very narrow by international standards

  • EU commitments

  • Serious concerns about ‘carousel fraud’



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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


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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 raises more than £1bn

    • compared with £24bn (+ VAT) from fuel duty


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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

  • Local government finance currently under review

    • Reformed council tax, relocalised business rates, local income tax main options being considered


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Part of an international trend?

YES:

  • Cuts in top and basic rates of income tax

  • Shift from duties on specific goods towards VAT

  • Corporate tax rates cut, base broadened

  • Shift from family to individual taxation

  • In-work support through the tax system

  • SSC rates up even as PIT rates down

    • But for different reasons: UK seems largely political, while elsewhere caused by rises in commitments (health, pensions etc) for which SSCs earmarked

  • Introduction of environmental taxes

    NO:

  • (Re-)introduction of starting rate of income tax

    • International trend (and UK in the 80s) to reduce number of bands

  • Unusual in removing mortgage interest relief

  • Increasing centralisation not matched elsewhere


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Distributional effect of the tax and benefit systemExcluding most ‘business taxes’

Source: Authors’ calculations from ONS (2006)


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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)


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Effect of tax and benefit system on income inequalityExcluding most ‘business taxes’

Source: ONS (2002, 2006)


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

Source: Clark and Leicester (2004)


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Work incentives among workersPersonal taxes and benefits only

Source: Adam (2005)


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Work incentives among workers1998, personal taxes and benefits only

Source: Immervol, Kleven, Kreiner and Saez (2005)


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Towards an expenditure taxHow close is the UK?

Different approaches:

1. Treatment of individual asset types

  • Uniformity of treatment may be as important as level of taxation

  • Hard to capture capital allowances etc

  • Little feel for the overall level of capital taxation


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Tax treatment of savings

Income tax and NICs on contributions (saved income):

- All taxed except pension contributions (exempt from PIT; employer contributions exempt from NICs too)

Stamp duty on transactions:

- 0.5% on securities, 0-4% on property depending on value

Tax on returns:

- Interest and rental income: income tax (0, 10, 20/22, 40%) except ISAs, pensions, and imputed rent from owner-occupied housing and other durables

- Dividends: corporation tax (0, 19, 30%) on UK-resident companies; income tax (0, 25%) on dividend income except ISAs and pensions

- Capital gains: corporation tax (0, 19, 30%) on UK-resident companies; CGT (0-40%) except ISAs, pensions, and owner-occupied housing

Income tax and NICs on withdrawals:

- All exempt except pensions (taxed, but 25% tax-free lump sum and no NICs)

Other taxes:

- Council tax (about £1,000 per year on average) on most housing

- Inheritance tax (0-40%) on assets transferred at or within 7 years of death


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Changes to treatment of savings

Closer to uniform tax-free treatment at personal level:

  • Introduction of capped tax-free vehicles (PEPs, TESSAs and ISAs)

  • Removal of tax relief on life assurance and mortgage interest (previously more generous than expenditure tax treatment)

    • The removal of mortgage interest relief is an achievement that few countries have been able to emulate

      Further away at corporate level:

  • 100% capital allowances for plant & machinery ended


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Towards an expenditure taxHow close is the UK?

Different approaches:

1. Treatment of individual asset types

  • Uniformity of treatment may be as important as level of taxation

  • Hard to capture capital allowances etc

  • Little feel for the overall level of capital taxation

    2. Effective tax rates on different investments (King & Fullerton)

  • Accurate measure for a particular investment

  • Endless possible permutations:

    different forms of investment, tax-exempt shareholders, foreign investors/companies, finance via debt vs equity vs retained profits, different assumptions (inflation, true depreciation, profits, etc),…


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Tax rates on investments

Source: Klemm (2005)


Towards an expenditure tax how close is the uk35 l.jpg
Towards an expenditure taxHow close is the UK?

Different approaches:

1. Treatment of individual asset types

  • Uniformity of treatment may be as important as level of taxation

  • Hard to capture capital allowances etc

  • Little feel for the overall level of capital taxation

    2. Effective tax rates on different investments (King & Fullerton)

  • Accurate measure for a particular investment

  • Endless possible permutations:

    different forms of investment, tax-exempt shareholders, foreign investors/companies, finance via debt vs equity vs retained profits, different assumptions (inflation, true depreciation, profits, etc),…

    3. Aggregate revenue-based measures

  • How much more revenue is raised than under expenditure tax treatment?

  • Compared with TEE (wage) expenditure tax (EC / Carey & Rabesona) or compared with EET (cash-flow) expenditure tax (Gordon & Slemrod)?

  • Ignores distortion from non-uniformity

     None so far deals well with treatment of savings in means tests, or changing tax rates faced over time


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Tax rates on investments

Source: EMTRs from Klemm (2005), implicit tax rates from Carey and Rabesona (2002)


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Questions

  • Have we missed anything important?

    • Bear in mind space limitations!

  • What are the best measures for the economic characteristics?

    • In particular: how best to approach the expenditure tax question?


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