1. Stuart Adam (IFS) James Browne (IFS) Chris Heady (OECD)
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 revenues Current 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 system Excluding most ‘business taxes’
Source: Authors’ calculations from ONS (2006)

8. 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)

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

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

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

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

13. Implicit tax rates on capital, 2001 Capital 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. Stuart Adam (IFS) James Browne (IFS) Chris Heady (OECD)
Taxation in the UK
Stuart Adam (IFS)
James Browne (IFS)
Chris Heady (OECD)