Economics and Business Exchange Supported by Deloitte.

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2. Trends in the structure and impact of the UK tax system Howard Reed Economics & Business Exchange 13 June 2006

3. Outline • The overall tax burden • Distributional impacts • Structural trends • Future trends?

4. The extent of taxation Source: OECD

5. 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 money’s spent • Equity and efficiency objectives

6. Tax share vs GDP growth, 1995-2005, OECD countries Source: OECD

7. 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

8. 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

9. Issues with distributional analysis • ‘snapshot’ vs. life cycle • Incidence (who really pays a tax?) • When transfers (benefits/ tax credits) are included, overall redistribution

10. 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 1984-1999

11. 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’?

12. Recent UK trends: revenue shares Source: OECD

13. Recent international trends Personal taxes: • Decreasing number of marginal rates & bands • Decreasing top rates Corporate taxes: • Trend towards reductions in rates

14. Future developments? • Overall tax (and spending) pressures • Drive for ‘simplicity’ • Flat tax? • Corporate tax ‘race to the bottom’? • The political dimension

15. Overall tax pressures Source: HM Treasury,Budget 2006

16. 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?

17. 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)

18. 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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