CVS Surveyors- For the retail sector, the recently confirmed transitional relief scheme won’t actually provide any net relief, who so desperately need it. Mark Rigby, CEO of business rent and rates specialists CVS Surveyors, said;“The Treasury’s golden goose is getting even fatter following a £1bn windfall from last year’s business rates yield and what’s more, this year the yield is projected to be £0.6bn over budget.

1. Taxation in the UK
CVS SURVEYORS

2. 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 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

3. The tax burden in the UK
30%
32%
34%
36%
38%
40%
42%
44%
46%
79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11
%ofGDP
Public sector total receipts Net taxes and SSCs
Line 3 Line 4
Source: HM Treasury

4. Tax to GDP ratios
Taxes and social security contributions
0%
10%
20%
30%
40%
50%
60%
UK EU15 OECD USA FRA GER JAP SWE IRE AUS CAN ITA
1979
2003
Source: OECD

5. Composition of revenues
Current receipts, 2006-07
Income tax + CGT
National Insurance
VAT
Other indirect taxes
Corporation tax
Recurrent buildings taxes
Other capital taxes
Other receipts
Source: HM Treasury

6. Composition of revenues
Current receipts
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1978-79 2006-07
Other receipts
Other capital taxes
Recurrent buildings taxes
Corporation tax
Other indirect taxes
VAT
National Insurance
Income tax + CGT
Source: HM Treasury

7. Composition of revenues 2003
Taxes and social security contributions
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
UK EU15 OECD USA FRA GER JAP SWE IRE AUS CAN ITA
Other taxes
Other capital taxes
Recurrent buildings taxes
Corporation tax
Other indirect taxes
VAT / retail sales taxes
SSCs + payroll taxes
Income tax + CGT
Source: OECD

8. Income tax schedule
For earned income, 2006 prices
£0
£10,000
£20,000
£30,000
£40,000
£50,000
£60,000
£0 £20,000 £40,000 £60,000 £80,000 £100,000
Gross income
Incometaxliability
1978-79
2006-07

9. 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

10. The income tax burden
For single worker at multiples of average full-time earnings
0%
5%
10%
15%
20%
25%
30%
35%
UK EU15 OECD USA FRA GER JAP SWE IRE AUS CAN ITA
Incometaxas%ofgrossearnings
@ 167% of AW
@ 100% of AW
@ 67% of AW
Source: OECD

11. 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

12. National Insurance schedule
Combined employer and employee NICs, 2006 prices
£0
£20
£40
£60
£80
£100
£120
£140
£160
£180
£200
£0 £200 £400 £600 £800 £1,000
Weekly earnings
WeeklyNICs
1984-85
2006-07

13. 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

14. The burden of income tax + NICs
For single worker at multiples of average full-time earnings
0%
10%
20%
30%
40%
50%
60%
UK EU15 OECD USA FRA GER JAP SWE IRE AUS CAN ITA
PIT+SSCas%ofgrossearnings
@ 167% of AW
@ 100% of AW
@ 67% of AW

15. Main corporation tax rate
0%
10%
20%
30%
40%
50%
60%
1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005

16. 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

17. Taxation of corporations and shareholders 2005
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
UK79 UK05 EU15 OECD USA FRA GER JAP SWE IRE AUS CAN ITA
Top net income tax rate on dividends
Main corporation tax rate
Source: OECD

18. The corporation tax burden
Effective average tax rates and capital allowances 2005
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
UK79 UK05 USA FRA GER JAP SWE IRE AUS CAN ITA
Capital allowances (p.d.v.), plant and machinery
EATR, equity-financed plant and machinery
Source: Klemm (2005)

19. 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

20. VAT rates and bases
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
UK1980UK2003 EU15 OECD FRA GER JAP SWE IRE AUS ITA NZ
main VAT rate
c-efficiency ratio: revenue / (main rate x national accounts consumption)
Source: OECD

21. 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

22. 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

23. 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

24. Environmental tax revenue, 2006-07
Fuel duty (+ VAT on duty)
Vehicle Excise Duty
Other

25. 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

26. Distributional effect of the tax and benefit system
Excluding most ‘business taxes’
-40%
-20%
0%
20%
40%
60%
80%
Poorest 2nd 3rd 4th 5th 6th 7th 8th 9th Richest
Decile group of equivalised household disposable income
Benefits - Taxes as % of original (private) income
Source: Authors’ calculations from ONS (2006)

27. Effect of tax and benefit system on income inequality
1998, personal taxes and benefits only
0.0
0.1
0.2
0.3
0.4
0.5
0.6
UK EU15 Aus Bel Den Fin Fra Ger Gre Ire Ita Lux Neth Por Spa Swe
Ginicoefficient
Private income Disposable income
Source: Immervol, Levy, Lietz, Mantovani, O’Donoghue, Sutherland and Verbist (2005)

28. Effect of tax and benefit system on income
inequality
Excluding most ‘business taxes’
0.0
0.1
0.2
0.3
0.4
0.5
0.6
79 81 83 85 87 89 91 93 95 97 99 01 03 05
Ginicoefficient
Private income
Private + benefits
Private + benefits - direct taxes
Private + benefits - all taxes
Source: ONS (2002, 2006)

29. Effect of tax and benefit changes on income
inequality
Personal direct taxes and benefits only, 1997-98 population
-0.01
0.00
0.01
0.02
0.03
0.04
0.05
0.06
79 81 83 85 87 89 91 93 95 97 99 01
CumulativechangeinGini
relative to RPI uprating
relative to RPI uprating of taxes, GDP uprating of benefits
Source: Clark and Leicester (2004)

30. Work incentives among
workers
Personal taxes and benefits only
40%
45%
50%
55%
60%
65%
70%
79 81 83 85 87 89 91 93 95 97 99 01 03
Mean effective marginal tax rate
Mean participation tax rate
Source: Adam (2005)

31. Work incentives among workers
1998, personal taxes and benefits only
30%
35%
40%
45%
50%
55%
60%
65%
70%
75%
80%
UK EU15 Aus Bel Den Fin Fra Ger Gre Ire Ita Lux Neth Por Spa Swe
Mean effective marginal tax rate Mean participation tax rate
Source: Immervol, Kleven, Kreiner and Saez (2005)

32. 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

33. 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:
1. Tax earnings, ignore savings completely: NICs
2. Tax expenditure, ignore income completely: VAT
3. Tax expenditure, calculated as:
earnings – net contributions into saving accounts

34. 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

35. 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)

36. Company-level EMTRs, 2005
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
UK1979 UK2005 USA FRANCE GERMANY JAPAN
Equity-financed plant and machinery
Debt-financed plant and machinery
Equity-financed industrial buildings
Source: CVS (2005)

37. 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

38. Taxation in the UK
Stuart Adam