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 moneys spent Equity and efficiency objectives
Tax share vs GDP growth, , OECD countries Source: OECD
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
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 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? Overall tax (and spending) pressures Drive for simplicity Flat tax? Corporate tax race to the bottom? The political dimension
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)
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