UK tax policy
Stuart Adam
© Institute for Fiscal Studies
Aims
• Describe the current UK tax system
• Historical and international context
• Recent policy developments and debates
• Strengths and weaknesses
© Institute for Fiscal Studies
Outline
• Revenues
• Tax policy
– Direct personal taxes
– Corporate income taxes
– Indirect taxes
– Property and local taxes
– Cross-cutting issues
• The tax policy-making process
 Not going to talk (much) about welfare benefits
© Institute for Fiscal Studies
Useful links
• This presentation
– http://www.ifs.org.uk/publications/7378
• HM Revenue and Customs (HMRC) Statistics
– https://www.gov.uk/government/organisations/hm-revenuecustoms/about/statistics
• HM Treasury
– https://www.gov.uk/government/organisations/hm-treasury
• Office for Budget Responsibility: official public finances monitor
– http://budgetresponsibility.org.uk/
• User-friendly facts and figures, Budget analysis, etc
– http://www.ifs.org.uk/tools_and_resources
• The Mirrlees Review of tax policy
– http://www.ifs.org.uk/publications/mirrleesreview
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Some background
• Tax year runs from 6 April to 5 April
• Budgets usually in March (and Autumn Statements in Nov/Dec)
• Coalition government in office from May 2010 to May 2015
• Big government budget deficit following the 2008 crisis
– But mostly being closed by spending cuts, not tax increases
• Scotland’s independence referendum
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UK government revenue
46%
Total receipts
44%
Net taxes and social security contributions
% of GDP
42%
40%
38%
36%
34%
32%
© Institute for Fiscal Studies
Source: Office for Budget Responsibility
2018-19
2016-17
2014-15
2012-13
2010-11
2008-09
2006-07
2004-05
2002-03
2000-01
1998-99
1996-97
1994-95
1992-93
1990-91
1988-89
1986-87
1984-85
1982-83
1980-81
1978-79
30%
Tax revenue as a share of GDP
60%
1978
2011
50%
40%
30%
20%
10%
0%
© Institute for Fiscal Studies
UK OECD USA
Source: OECD.stat
Fra
Ger
Ita
Jap
Can
Swe
Ire
Aus
Composition of revenue, 2014-15 forecast
Other
receipts
14%
Local
(council) tax
4%
Capital taxes
4%
Income tax
26%
Corporation
tax
7%
National
Insurance
17%
Other indirect
taxes
11%
VAT
17%
© Institute for Fiscal Studies
Source: Office for Budget Responsibility
Composition of revenue
100%
Other receipts
90%
Local taxes
80%
Capital taxes
70%
Corporation tax
60%
50%
Other indirect taxes
40%
VAT
30%
National Insurance
20%
Income tax
10%
0%
1978-79 1997-98 2007-08 2010-11 2014-15
© Institute for Fiscal Studies
Source: Office for Budget Responsibility, HM Treasury, author’s calculations
Composition of tax revenue, 2011
100%
Other taxes
90%
Other capital taxes
80%
Recurrent buildings
taxes
Corporation tax
70%
60%
Other indirect taxes
50%
VAT/GST
40%
SSCs + payroll tax
30%
Income tax + CGT
20%
10%
0%
UK OECD USA Fra
© Institute for Fiscal Studies
Source: OECD.stat
Ger
Ita
Jap
Can Swe
Ire
Aus
Income tax schedule
For earned income, April 2014 prices
90%
1978-79
2009-10
2014-15
Marginal income tax rate
80%
70%
60%
50%
40%
30%
20%
10%
0%
£0
£25,000
£50,000
£75,000 £100,000 £125,000 £150,000 £175,000
Income
© Institute for Fiscal Studies
Income tax schedule
For earned income, April 2014 prices
90%
2009-10
Marginal income tax rate
80%
2014-15
70%
60%
50%
40%
30%
20%
10%
0%
£0
£25,000
£50,000
£75,000 £100,000 £125,000 £150,000 £175,000
Income
© Institute for Fiscal Studies
Recent reforms to the income tax schedule
• Personal allowance to reach £10,500 in 2015-16
– £2,855 higher than plans govt inherited – costs over £12 billion per year
– Basic-rate taxpayers gain £571 a year; 2.4 million taken out of income tax
© Institute for Fiscal Studies
Increasing the personal allowance
Distributional impact of an increase from £10,000 to £12,500
Change in net income
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
Poorest
2
3
4
5
6
7
Income Decile Group
© Institute for Fiscal Studies
Assumes higher-rate threshold held constant.
Source: Figure 7.4 of The IFS Green Budget: February 2014
8
9
Richest
All
Income tax schedule
For earned income, April 2014 prices
90%
2009-10
Marginal income tax rate
80%
2014-15
70%
60%
50%
40%
30%
20%
10%
0%
£0
£25,000
£50,000
£75,000 £100,000 £125,000 £150,000 £175,000
Income
© Institute for Fiscal Studies
Recent reforms to the income tax schedule
• Personal allowance to reach £10,500 in 2015-16
– £2,855 higher than plans govt inherited – costs over £12 billion per year
– Basic-rate taxpayers gain £571 a year; 2.4 million taken out of income tax
• Higher-rate threshold will be £5,560 lower than plans inherited
– 1.4m more higher-rate taxpayers
© Institute for Fiscal Studies
Number of higher-rate taxpayers
6
5
Millions
4
3
2
1
© Institute for Fiscal Studies
Note: includes additional rate taxpayers.
Source: HMRC Statistics and IFS projections
2014-15
2012-13
2010-11
2008-09
2006-07
2004-05
2002-03
2000-01
1998-99
1996-97
1994-95
1992-93
1990-91
1988-89
1986-87
1984-85
1982-83
1980-81
1978-79
0
Income tax schedule
For earned income, April 2014 prices
90%
2009-10
Marginal income tax rate
80%
2014-15
70%
60%
50%
40%
30%
20%
10%
0%
£0
£25,000
£50,000
£75,000 £100,000 £125,000 £150,000 £175,000
Income
© Institute for Fiscal Studies
Recent reforms to the income tax schedule
• Personal allowance to reach £10,500 in 2015-16
– £2,855 higher than plans govt inherited – costs over £12 billion per year
– Basic-rate taxpayers gain £571 a year; 2.4 million taken out of income tax
• Higher-rate threshold will be £5,560 lower than plans inherited
– 1.4m more higher-rate taxpayers
• 50% rate introduced above £150,000, then reduced to 45%
– The 1% of taxpayers affected provide 30% of income tax revenue
– Best guess is little revenue effect, but no-one really knows
© Institute for Fiscal Studies
Top tax rate and revenue: the government’s view
Source: HMRC (2012), The Exchequer effect of the 50 per cent additional rate of income tax
© Institute for Fiscal Studies
Income tax schedule
For earned income, April 2014 prices
90%
2009-10
Marginal income tax rate
80%
2014-15
70%
60%
50%
40%
30%
20%
10%
0%
£0
£25,000
£50,000
£75,000 £100,000 £125,000 £150,000 £175,000
Income
© Institute for Fiscal Studies
Recent reforms to the income tax schedule
• Personal allowance to reach £10,500 in 2015-16
– £2,855 higher than plans govt inherited – costs over £12 billion per year
– Basic-rate taxpayers gain £571 a year; 2.4 million taken out of income tax
• Higher-rate threshold will be £5,560 lower than plans inherited
– 1.4m more higher-rate taxpayers
• 50% rate introduced above £150,000, then reduced to 45%
– The 1% of taxpayers affected provide 30% of income tax revenue
– Best guess is little revenue effect, but no-one really knows
• Personal allowance gradually withdrawn once income exceeds £100k
– Equivalent to a 60% tax band – why not call it that?
– Bizarre shape for the rate schedule!
© Institute for Fiscal Studies
Income tax treatment of the family
• Shift from (largely) joint to individual taxation in 1990
– Part of an international trend
• Abolition of additional allowances for marriage and children
• Shift towards providing support for low-income families via tax credits
– 2003 tax credit reforms created big practical problems
• Tax credits now starting to be merged with several means-tested
working-age benefits into a single ‘universal credit’
– But implementation problems  running far behind schedule
• Income tax now starting to depend on family circumstances again
– Used to withdraw child benefit from those with high incomes
– 10% of tax allowance transferable to basic-rate spouse from April 2015
© Institute for Fiscal Studies
Collecting income tax
• 90% collected via Pay-As-You-Earn (PAYE)
– Exact cumulative deduction of tax by employers
– So two-thirds of taxpayers don’t fill in a tax return
– Unusual internationally
– Works well for most, but goes badly wrong for a sizeable minority
– Similar system withholds basic-rate tax from bank interest
• Self-assessment (tax returns) for those with more complex affairs
• Real-Time Information (RTI) reporting introduced in April 2013
– Employers must report salaries when paid, not at end of year
– Partly so government can use information to adjust benefit awards
– ‘Temporary’ easing of requirements for many small firms
© Institute for Fiscal Studies
National Insurance contributions (NICs)
• Simple rate schedule, applied to earnings only:
– Employers: 13.8% of earnings above £153 per week
– Employees: 12% between £153 and £805 per week; 2% above that
– Self-employed pay much less
• Since April 2014, each employer gets £2,000 deduction
• Just another income tax – not really social insurance
– Link between ‘contributions’ and benefits small and shrinking
– Could be transformed into a true social insurance scheme. Otherwise...
• Should be merged with income tax: a major simplification
• Not perceived as just another income tax – leads to bad policymaking
– Why increase income tax allowance but not NICs threshold?
– 2001 election: promised not to increase income tax, then increased NICs
© Institute for Fiscal Studies
Income tax and NICs treatment of saving
• By default, savings income subject to normal income tax, but not NICs
– Lower income tax on dividends, reflecting corporation tax already paid
• However...
• Individual Savings Accounts (ISAs) are tax-free
– Can put up to £15,000 per year into these, in cash or shares
• No tax on imputed income from owner-occupied housing
• Pensions:
– Income tax relief on contributions, up to a limit which has been reduced in
recent years (NICs relief on employer contributions only)
– No tax on income within the fund
– Income tax (but not NICs) on money withdrawn except a 25% lump sum
• So in practice most savings are tax-free
– And pensions are subsidised in ill-designed ways
© Institute for Fiscal Studies
Capital gains tax
• Levied on gains above £11,000 realised in a particular year
• 18% for basic-rate taxpayers, 28% for higher-rate taxpayers
– Only 10% for first £10m of lifetime gains on owner-managed businesses
• Policy has gone round in circles
– Tension between encouraging investment and preventing avoidance
• Exemptions:
– Main homes, pensions, ISAs
– Any gains unrealised at death
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Inheritance tax
• Levied at 40% on estates above £325,000
– Since 2007, any unused allowance passed to surviving spouse£650,000
• Threshold frozen from 2009-10 to 2017-18: 22% real-terms reduction
– Despite Prime Minister’s stated desire to increase the threshold
© Institute for Fiscal Studies
Inheritance tax
12
0.25
10
0.20
8
0.15
6
0.10
4
0.05
2
0.00
0
© Institute for Fiscal Studies
Note: estates subject to inheritance tax, or capital transfer tax before 1986-87
Source: authors’ calculations based on data from HMRC, OBR and ONS
% of deaths
Receipts as a share of national income (left axis)
Taxpayers as a share of deaths (right axis)
1978-79
1980-81
1982-83
1984-85
1986-87
1988-89
1990-91
1992-93
1994-95
1996-97
1998-99
2000-01
2002-03
2004-05
2006-07
2008-09
2010-11
2012-13
2014-15
2016-17
2018-19
% of GDP
0.30
Inheritance tax
• Levied at 40% on estates above £325,000
– Since 2007, any unused allowance passed to surviving spouse£650,000
• Threshold frozen from 2009-10 to 2017-18: 22% real-terms reduction
– Despite Prime Minister’s stated desire to increase the threshold
• Gifts made in the seven years before death taxed on a sliding scale
– Gifts made earlier than that escape tax altogether
• Exemptions: spouse, charities; agricultural land, some business assets
• Easier to avoid for the very wealthy than the moderately wealthy
• Unpopular
• Should either abolish or transform into tax on lifetime receipts
– At the very least, remove some of most obvious avoidance opportunities
© Institute for Fiscal Studies
Corporation tax
• Revenue heavily reliant on a few big companies
– 390 companies (<0.1% of taxpayers) accounted for 45% of revenue in
2012-13
• Unusually, current government published a ‘corporate tax roadmap’
soon after taking office and has largely stuck to it
• Recently moved to exempting foreign-source income from tax
– Except some ‘passive’ income from low-taxed subsidiaries
• Concern over debt-equity bias, but little done about it
© Institute for Fiscal Studies
Corporation tax rates
60%
Main rate
50%
Small profits rate
40%
30%
£8bn
per year
20%
10%
© Institute for Fiscal Studies
2016
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
0%
Corporate income tax rates, 2014
Ireland
Slovenia
Czech Republic
Hungary
Poland
Chile
Finland
Iceland
Turkey
Estonia
UK
Switzerland
Slovak Republic
Sweden
Korea
Denmark
Austria
Netherlands
OECD average
Greece
Canada
Israel
Norway
Italy
New Zealand
Luxembourg
Australia
Mexico
Spain
Germany
G7 average
Portugal
Belgium
France
Japan
USA
0%
© Institute for Fiscal Studies
5%
10%
Source: OECD Tax Database
15%
20%
25%
30%
35%
40%
Corporation tax revenue, % of GDP
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
© Institute for Fiscal Studies
Sources: HM Treasury; Office for Budget Responsibility
2018-19
2016-17
2014-15
2012-13
2010-11
2008-09
2006-07
2004-05
2002-03
2000-01
1998-99
1996-97
1994-95
1992-93
1990-91
1988-89
1986-87
1984-85
1982-83
1980-81
1978-79
0.0%
Capital allowances for depreciation
• Allowances vary between asset classes
– Set down in law, not based on accounting depreciation
• Gradually made less generous
– In line with international trend towards broadening corporate tax base
– But UK’s allowances look stringent by international standards
© Institute for Fiscal Studies
Present value of capital allowances, 2012
Greece
Slovak Republic
Belgium
Switzerland
South Korea
Czech Republic
Spain
France
Portugal
Israel
Luxembourg
Sweden
Iceland
Finland
Denmark
Turkey
Italy
OECD average
Mexico
Australia
Slovenia
Ireland
Canada
Austria
USA
G7 average
Germany
Hungary
Norway
Poland
Netherlands
Japan
New Zealand
UK
Chile
0%
© Institute for Fiscal Studies
10%
20%
30%
40%
50%
60%
Note: weighted average of selected investments. See Bilicka and Devereux (2012),
CBT corporate tax ranking 2012 for details and other assumptions.
70%
80%
Effective average tax rates, 2012
Ireland
Slovenia
Slovak Republic
Czech Republic
Greece
Poland
Turkey
Switzerland
Iceland
South Korea
Hungary
Netherlands
Chile
Israel
Austria
Finland
Denmark
OECD average
Italy
Sweden
Luxembourg
Canada
UK
Portugal
New Zealand
Norway
Mexico
Australia
Germany
Belgium
G7 average
France
Spain
USA
Japan
0%
© Institute for Fiscal Studies
5%
10%
15%
20%
25%
30%
Note: weighted average of selected investments. See Bilicka and Devereux (2012),
CBT corporate tax ranking 2012 for details and other assumptions.
35%
40%
Effective marginal tax rates, 2012
Italy
Greece
Switzerland
South Korea
Ireland
Slovak Republic
Netherlands
Czech Republic
Turkey
Slovenia
Poland
Luxembourg
Iceland
Israel
Hungary
Austria
Belgium
OECD average
Portugal
Canada
Sweden
Finland
Denmark
G7 average
Mexico
France
Germany
Spain
Australia
Chile
New Zealand
Norway
UK
USA
Japan
-10%
© Institute for Fiscal Studies
-5%
0%
5%
10%
15%
20%
Note: weighted average of selected investments. See Bilicka and Devereux (2012),
CBT corporate tax ranking 2012 for details and other assumptions.
25%
30%
Capital allowances for depreciation
• Allowances vary between asset classes
– Set down in law, not based on accounting depreciation
• Gradually made less generous
– In line with international trend towards broadening corporate tax base
– But UK’s allowances look stringent by international standards
• Since 2008, Annual Investment Allowance writes off some plant and
machinery investment immediately
– Generally covers all plant and machinery investment for small firms
– Size of allowance has been very unstable
© Institute for Fiscal Studies
Annual investment allowance
£500,000
£450,000
£400,000
£350,000
£300,000
£250,000
£200,000
£150,000
£100,000
£50,000
£0
2007
© Institute for Fiscal Studies
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Tax treatment of intellectual property
• R&D relief
– Introduced in April 2000 and expanded since
– Additional relief over and above deducting 100% of R&D expenditure
– More generous for small and medium-sized enterprises
• Patent Box
– 10% tax rate on income from (products incorporating) patents
– Being phased in from April 2013
– One of 14 European countries to introduce such a ‘box’ for IP
– May be well targeted at attracting mobile profits
– Not well targeted at stimulating innovation
– Big cost of apply to lots of income not generated by patent itself
– Scope to avoid tax by including patented items in products
© Institute for Fiscal Studies
North Sea tax revenue, % of GDP
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
© Institute for Fiscal Studies
Sources: HM Treasury; Office for Budget Responsibility
2018-19
2016-17
2014-15
2012-13
2010-11
2008-09
2006-07
2004-05
2002-03
2000-01
1998-99
1996-97
1994-95
1992-93
1990-91
1988-89
1986-87
1984-85
1982-83
1980-81
1978-79
0.0%
Tax treatment of North Sea oil & gas production
• Much higher rate of corporation tax, 62%
– Plus petroleum revenue tax  81% on profits from fields predating 1993
– More generous capital allowances, generally 100%
• Both high rate and 100% allowances make sense
– 100% allowances minimise discouragement to investment
– Oil and gas are in fixed location  no need for rate to be competitive
• Policy in this area has been subject to frequent change
– Instability here especially undesirable given long planning horizons
• Review of policy currently under way
© Institute for Fiscal Studies
Base erosion and profit shifting (BEPS)
• A big political issue
– Public anger that some firms sell a lot in the UK but pay little CT
• No-one knows how much revenue is being lost
• UK is enthusiastic participant in OECD project to counter BEPS
– Tension with measures designed to attract profits to UK
• Likely to make some progress but not solve fundamental problem
– How much of a multinational’s profit derives from UK production?
– ‘Arm’s-length’ prices often not measurable
© Institute for Fiscal Studies
VAT
• The EU is a major player in VAT policy
– All member states must have a VAT
– Minimum 15% main rate
– Use of reduced rates restricted
– Scope of zero rates cannot be extended
– Various exemptions mandatory
– Standardised definitions, rules and procedures
• Still lots of scope for national variation within these boundaries
© Institute for Fiscal Studies
The main rate of VAT
20%
£13bn
per year
18%
16%
14%
12%
10%
8%
6%
4%
2%
© Institute for Fiscal Studies
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
0%
VAT/GST rates, 2014
Hungary
Iceland
Denmark
Norway
Sweden
Finland
Greece
Ireland
Poland
Portugal
Italy
Slovenia
Belgium
Czech Republic
Netherlands
Spain
Austria
Estonia
France
Slovak Republic
UK
OECD average
Chile
Germany
Israel
Turkey
Mexico
Luxembourg
New Zealand
Australia
Korea
Switzerland
Canada
Japan
0%
© Institute for Fiscal Studies
5%
10%
Note: USA excluded as it has no VAT.
Source: OECD Tax Database
15%
20%
25%
30%
The VAT base
• UK applies a zero rate to more items than almost any other country
– Most food, water, books, children’s clothes, transport, new housing…
– Cost £40bn in 2013-14 (vs. total VAT revenue of £107bn)
– A complex and distortionary way to achieve redistribution – can do better!
• Reduced rate of 5% applies principally to domestic fuel
– Looks particularly bad given environmental concerns
• Exemptions are the most damaging aspect of VAT
– VAT paid on inputs cannot be recovered  distorts production patterns
– Principally financial services, public services and the public sector
– Mostly mandated by EU for practical reasons, but there are alternatives
– Effective exemption via high registration threshold (£81,000) more
defensible
© Institute for Fiscal Studies
Estimated VAT ‘gaps’ across the EU, 2011
% of theoretical liabilities
Romania
Latvia
Greece
Slovakia
Lithuania
Hungary
Czech Republic
Italy
Spain
EU average
France
Estonia
Luxembourg
Belgium
Portugal
Bulgaria
Poland
Finland
Austria
UK
Germany
Denmark
Ireland
Slovenia
Netherlands
Malta
Sweden
0%
5%
10%
15%
20%
25%
30%
35%
Source: CASE & CPB (2013), Study to quantify and analyse the VAT Gap in the EU-27 Member States
© Institute for Fiscal Studies
40%
45%
50%
VAT revenue ratios, 2009
VAT revenue as % of (main rate x total consumption expenditure)
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Mex Spa
Ita
Fra
Ire
UK
Aus OECD Ger
Swe EU*
* 2008 figures
© Institute for Fiscal Studies
Sources: OECD Consumption Tax Trends 2012; Adam et al. (2011)
Jap
Lux
NZ Cyp*
Other indirect taxes
• Alcohol and tobacco - £20.3bn
– Among the highest rates in the EU
© Institute for Fiscal Studies
Real-terms alcohol and tobacco duties (1978=100)
300
250
Cigarettes
200
Beer
150
100
Wine
50
Spirits
© Institute for Fiscal Studies
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
0
Other indirect taxes
• Alcohol and tobacco - £20.3bn
– Among the highest rates in the EU
• Betting - £2.3bn
• Road fuel - £26.8bn
© Institute for Fiscal Studies
Apr 1978
Apr 1979
Apr 1980
Apr 1981
Apr 1982
Apr 1983
Apr 1984
Apr 1985
Apr 1986
Apr 1987
Apr 1988
Apr 1989
Apr 1990
Apr 1991
Apr 1992
Apr 1993
Apr 1994
Apr 1995
Apr 1996
Apr 1997
Apr 1998
Apr 1999
Apr 2000
Apr 2001
Apr 2002
Apr 2003
Apr 2004
Apr 2005
Apr 2006
Apr 2007
Apr 2008
Apr 2009
Apr 2010
Apr 2011
Apr 2012
Apr 2013
Apr 2014
Apr 2015
Real duty on a litre of petrol
Pence, April 2013 prices
72
67
Current policy
62
Policy inherited
57
52
47
42
37
32
27
© Institute for Fiscal Studies
£6bn
per year
Fuel duty: to uprate or not to uprate?
Dates uprating
due before
Budget 2011
Apr 2011
Apr 2012
Apr 2013
Apr 2014
Apr 2015
Apr 2016
© Institute for Fiscal Studies
Budget
2011
Autumn
Statement
2011
June 2012
Autumn
Statement
2012
Budget
2013
Autumn
Statement
2013
Fuel duty: to uprate or not to uprate?
Dates uprating
due before
Budget 2011
Budget
2011
Apr 2011
Jan 2012
Apr 2012
Aug 2012
Apr 2013
Apr 2013
Apr 2014
Apr 2014
Apr 2015
Apr 2015
Apr 2016
Apr 2016
© Institute for Fiscal Studies
Autumn
Statement
2011
June 2012
Autumn
Statement
2012
Budget
2013
Autumn
Statement
2013
Fuel duty: to uprate or not to uprate?
Dates uprating
due before
Budget 2011
Budget
2011
Autumn
Statement
2011
Apr 2011
Jan 2012
Aug 2012
Apr 2012
Aug 2012
Cancelled
Apr 2013
Apr 2013
Apr 2013
Apr 2014
Apr 2014
Apr 2014
Apr 2015
Apr 2015
Apr 2015
Apr 2016
Apr 2016
Apr 2016
© Institute for Fiscal Studies
June 2012
Autumn
Statement
2012
Budget
2013
Autumn
Statement
2013
Fuel duty: to uprate or not to uprate?
Dates uprating
due before
Budget 2011
Budget
2011
Autumn
Statement
2011
June 2012
Apr 2011
Jan 2012
Aug 2012
Jan 2013
Apr 2012
Aug 2012
Cancelled
Cancelled
Apr 2013
Apr 2013
Apr 2013
Apr 2013
Apr 2014
Apr 2014
Apr 2014
Apr 2014
Apr 2015
Apr 2015
Apr 2015
Apr 2015
Apr 2016
Apr 2016
Apr 2016
Apr 2016
© Institute for Fiscal Studies
Autumn
Statement
2012
Budget
2013
Autumn
Statement
2013
Fuel duty: to uprate or not to uprate?
Dates uprating
due before
Budget 2011
Budget
2011
Autumn
Statement
2011
June 2012
Autumn
Statement
2012
Apr 2011
Jan 2012
Aug 2012
Jan 2013
Cancelled
Apr 2012
Aug 2012
Cancelled
Cancelled
Cancelled
Apr 2013
Apr 2013
Apr 2013
Apr 2013
Sep 2013
Apr 2014
Apr 2014
Apr 2014
Apr 2014
Sep 2014
Apr 2015
Apr 2015
Apr 2015
Apr 2015
Sep 2015
Apr 2016
Apr 2016
Apr 2016
Apr 2016
Apr 2016
© Institute for Fiscal Studies
Budget
2013
Autumn
Statement
2013
Fuel duty: to uprate or not to uprate?
Dates uprating
due before
Budget 2011
Budget
2011
Autumn
Statement
2011
June 2012
Autumn
Statement
2012
Budget
2013
Apr 2011
Jan 2012
Aug 2012
Jan 2013
Cancelled
Cancelled
Apr 2012
Aug 2012
Cancelled
Cancelled
Cancelled
Cancelled
Apr 2013
Apr 2013
Apr 2013
Apr 2013
Sep 2013
Cancelled
Apr 2014
Apr 2014
Apr 2014
Apr 2014
Sep 2014
Sep 2014
Apr 2015
Apr 2015
Apr 2015
Apr 2015
Sep 2015
Sep 2015
Apr 2016
Apr 2016
Apr 2016
Apr 2016
Apr 2016
Apr 2016
© Institute for Fiscal Studies
Autumn
Statement
2013
Fuel duty: to uprate or not to uprate?
Dates uprating
due before
Budget 2011
Budget
2011
Autumn
Statement
2011
June 2012
Autumn
Statement
2012
Budget
2013
Autumn
Statement
2013
Apr 2011
Jan 2012
Aug 2012
Jan 2013
Cancelled
Cancelled
Cancelled
Apr 2012
Aug 2012
Cancelled
Cancelled
Cancelled
Cancelled
Cancelled
Apr 2013
Apr 2013
Apr 2013
Apr 2013
Sep 2013
Cancelled
Cancelled
Apr 2014
Apr 2014
Apr 2014
Apr 2014
Sep 2014
Sep 2014
Cancelled
Apr 2015
Apr 2015
Apr 2015
Apr 2015
Sep 2015
Sep 2015
Sep 2015
Apr 2016
Apr 2016
Apr 2016
Apr 2016
Apr 2016
Apr 2016
Apr 2016
© Institute for Fiscal Studies
Other indirect taxes
• Alcohol and tobacco - £20.3bn
– Among the highest rates in the EU
• Betting - £2.3bn
• Road fuel - £26.8bn
– Big swings of direction; no clear policy
– Too high to reflect emissions; not well targeted at congestion
• Vehicle ownership - £5.9bn
• Small environmental taxes introduced more recently:
– Air passenger duty (1994) - £3.2bn
– Landfill tax (1996) - £1.3bn
– Climate change levy (2001) - £2.0bn
– Aggregates levy (2002) - £0.3bn
– London congestion charge (2003) - £0.2bn
© Institute for Fiscal Studies
Implicit carbon tax, 2013
£ per tonne CO2
£80
Electricity
Gas
£70
£60
£50
£40
£30
£20
£10
£0
-£10
-£20
© Institute for Fiscal Studies
Household
Small business
Medium business
Large energyintensive business
Source: Advani et al. (2013), Energy use policies and carbon pricing in the UK
Property and local taxes
Recap:
• No VAT on housing
• Income tax and CGT on rental housing but not owner-occupied
– Though no tax relief on mortgage interest for owner-occupiers
3 taxes specifically on property:
• Council tax - £27.6bn
• Business rates - £26.9bn
• Stamp duty land tax - £12.7bn
 The UK’s three worst-designed taxes?
© Institute for Fiscal Studies
Council tax
• Replaced the short-lived and massively unpopular ‘poll tax’ in 1993
• Central government sets structure; local authorities choose rate
– Though rises deemed ‘excessive’ by central govt now require referendum
© Institute for Fiscal Studies
Council tax, 2014-15
In English local authority setting England & Wales average Band D rate
£3,000
Tax payable
£2,500
£2,000
£1,500
£1,000
£500
£0
£0
£50,000 £100,000 £150,000 £200,000 £250,000 £300,000 £350,000 £400,000
1991 property value
© Institute for Fiscal Studies
Council tax
• Replaced the short-lived and massively unpopular ‘poll tax’ in 1993
• Central government sets structure; local authorities choose rate
– Though rises deemed ‘excessive’ by central govt now require referendum
• Design has obvious weaknesses
– Still based on 1991 property values in England and Scotland
– Wide bands
– Regressive
– 25% discount for single occupancy
 2 of 3 main parties now propose a ‘mansion tax’ – but better to fix CT
• Discounts for low-income families
– Working-age discounts localised in April 2013
• Unpopular
– Central govts incentivised cash freezes since 2010 (2007 in Scotland)
• Northern Ireland has different (more sensible) tax
© Institute for Fiscal Studies
Receipts from recurrent taxes on non-domestic
immovable property, 2011
Israel
United Kingdom
Australia*
Poland*
Netherlands*
France
OECD average*
Sweden
Belgium
Slovenia
Finland
Slovakia
Germany
Mexico*
Austria
Czech Republic
Norway
South Korea
0
0.5
1
% of GDP
* Data for 2010
© Institute for Fiscal Studies
Source: Figure 11.3, The IFS Green Budget 2014.
1.5
2
Business rates
• A percentage of estimated market rental value of properties
– 48.2% for high-rent properties in most of England & Scotland in 2014-15
– Reduced for low-rent properties
– Rise in average bills linked to RPI inflation – bills didn’t fall in recession
• Removed from local government control in 1990
– Though recent reform lets local govt keep some revenue from base growth
• Had been admirably stable until recently...
– 5-yearly revaluation delayed for the first time
– Rate failed to keep pace with inflation for the first time
– ‘Temporary’ doubling of small business rate relief, extended 4 times
– Temporary relief for retail properties introduced
• Discourages development and use of business property
– Taxing value of land (excluding buildings) would not do this
© Institute for Fiscal Studies
Stamp duty land tax
£180,000
May 1997
£160,000
May 2014
Tax payable
£140,000
£40,000
£120,000
£100,000
£80,000
£60,000
£40,000
£20,000
£0
£0
£500,000
£1,000,000
£1,500,000
£2,000,000
Sale price
© Institute for Fiscal Studies
Note: residential property. Exemption threshold higher for non-residential property
£2,500,000
Stamp duty land tax
• ‘Slab’ structure absurd
– £1 higher price can mean £40,000 higher tax bill
• More fundamentally, transactions should not be taxed at all
– Why impose heavier tax on properties that change hands more often?
– Assets should be held by the people who value them most
– Reduced labour mobility one symptom of this more fundamental problem
• Stamp duties should not be part of the tax system
– But don’t want to give up revenue / give windfall gains to current owners
– So look to replace with better taxes rather than simply abolish
© Institute for Fiscal Studies
Some issues that cut across taxes
• Avoidance and evasion
– ‘Tax gap’ is a concern
© Institute for Fiscal Studies
Estimated ‘tax gaps’, 2011-12
% of total (£35bn)
Tobacco duties
Alcohol
duties
2%
VAT
Tobacco
duties
4%
Corporation tax
Overall
Corporation
tax
13%
Alcohol duties
Income tax, NICs, CGT
Other
Fuel duties
0%
VAT
33%
4%
8%
12%
Tax gap (%)
© Institute for Fiscal Studies
Source: HMRC, Measuring Tax Gaps 2013
Fuel duties
1%
Other
3%
Income tax,
NICs, CGT
44%
Composition of tax gap by behaviour, 2011-12
Failure to
take
reasonable
care
12%
Error
8%
Criminal
attacks
13%
Evasion
15%
Non-payment
13%
Legal
interpretation
12%
© Institute for Fiscal Studies
Hidden
economy
15%
Avoidance
12%
Source: HMRC, Measuring Tax Gaps 2013
Some issues that cut across taxes
• Avoidance and evasion
– ‘Tax gap’ is a concern
– A raft of measures in every Budget and Autumn Statement
– And a new General Anti-Abuse Rule (GAAR) since July 2013
• Distributional effects of the system as a whole
© Institute for Fiscal Studies
Distributional effect of the tax and benefit system
2012-13, excluding most ‘business taxes’
60%
% of disposable income
40%
20%
0%
-20%
-40%
-60%
-80%
Poorest
2
3
4
5
6
7
8
Income Decile Group
© Institute for Fiscal Studies
Source: Author’s calculations from ONS (2014), The effects of taxes and
benefits on household income, 2012/2013
9
Richest
All
Impact of tax and benefit reforms
Implemented June 2010 - April 2015 inclusive
£500
Change in net income
£0
-£500
-£1,000
-£1,500
-£2,000
-£2,500
-£3,000
-£3,500
-£4,000
Poorest
2
3
4
5
6
7
8
Income Decile Group
© Institute for Fiscal Studies
For details see Adam and Browne (2013), Do the UK government’s
welfare reforms make work pay?
9
Richest
All
Cumulative shares of tax liability, 2013-14
Cumulative percentage paid
120%
100%
80%
60%
40%
% of tax-minus-benefits paid by highest-income households
20%
% of tax paid by highest-income households
0%
Top 10%
20%
30%
40%
50%
60%
70%
80%
Percentage of households
© Institute for Fiscal Studies
Note: excludes corporation tax, business rates, stamp duties, CGT and IHT.
Source: Figure 9.4 of The IFS Green Budget: February 2013
90%
100%
(all)
Some issues that cut across taxes
• Avoidance and evasion
– ‘Tax gap’ is a concern
– A raft of measures in every Budget and Autumn Statement
– And a new General Anti-Abuse Rule (GAAR) since July 2013
• Distributional effects of the system as a whole
• Work incentive effects of the system as a whole
© Institute for Fiscal Studies
Two kinds of financial work incentives
• Incentive to be in paid work at all
– Replacement rate (RR): out-of-work income / in-work income
– Participation tax rate (PTR): proportion of total earnings taken in tax
and withdrawn benefits
• Incentive for those in work to increase their earnings
– Effective marginal tax rate (EMTR): proportion of an extra £1 of
earnings taken in tax and withdrawn benefits
 In all cases, higher numbers = weaker incentives
© Institute for Fiscal Studies
Average RR by earnings, 2015
With and without coalition government reforms
80%
No tax and benefit reforms
75%
Tax reforms only
Replacement rate
70%
Tax and benefit reforms
65%
60%
55%
50%
45%
40%
35%
30%
£0
£10,000
£20,000
£30,000
£40,000
£50,000
Gross employer cost
Source: Adam and Browne (2013), Do the UK government’s welfare reforms make work pay?
© Institute for Fiscal Studies
£60,000
Average PTR by earnings, 2015
With and without coalition government reforms
60%
Participation tax rate
55%
50%
45%
No tax and benefit reforms
40%
Tax reforms only
35%
Tax and benefit reforms
30%
£0
£10,000
£20,000
£30,000
£40,000
£50,000
Gross employer cost
Source: Adam and Browne (2013), Do the UK government’s welfare reforms make work pay?
© Institute for Fiscal Studies
£60,000
Average EMTR of workers by earnings, 2015
With and without coalition government reforms
Effective marginal tax rate
70%
65%
60%
55%
50%
45%
No tax and benefit reforms
40%
Tax reforms only
35%
Tax and benefit reforms
30%
£0
£10,000
£20,000
£30,000
£40,000
£50,000
Gross employer cost
Source: Adam and Browne (2013), Do the UK government’s welfare reforms make work pay?
© Institute for Fiscal Studies
£60,000
Some issues that cut across taxes
• Avoidance and evasion
– ‘Tax gap’ is a concern
– A raft of measures in every Budget and Autumn Statement
– And a new General Anti-Abuse Rule (GAAR) since July 2013
• Distributional effects of the system as a whole
• Work incentive effects of the system as a whole
• Choice of legal form
– Employment is penalised relative to self-employment and incorporation
© Institute for Fiscal Studies
Marginal tax rates by legal form, 2014-15
Employed
Self-employed
Small company
Basic rate
40%
29%
20%
Higher rate
49%
42%
40%
© Institute for Fiscal Studies
Part of an international trend?
YES:
• Cuts in top and basic rates of income tax
• SSC rates up even as income tax rates down
• Shift from family to individual taxation
• Shift from taxes on specific goods towards VAT
• Corporate tax rates cut, base broadened
• Introduction of environmental taxes
NO:
• Unusual in removing mortgage interest relief
• Centralisation
The coalition government’s priorities for tax
• Current government has increased tax overall
– Biggest contributors: VAT increase and anti-avoidance measures
• Yet still found money for tax cuts in its three priority areas
– £12bn - personal allowance
– £8bn - headline rate of corporation tax
– £6bn - fuel duty
• Two of these three were ambitions clearly stated in advance
– Fuel duty more piecemeal
• Little sign of a coherent strategy for the tax system as a whole
© Institute for Fiscal Studies
Room for improvement
Ideas from the Mirrlees Review
• Merge income tax and National Insurance
• Broaden the VAT base (with appropriate compensation package)
• Major overhaul of property taxation
• More consistent carbon price; target motoring taxes on congestion
• Reform the taxation of savings and profits
– Full allowance for amounts saved/invested
– Apply same overall statutory rate to income from all sources
© Institute for Fiscal Studies
Tax policy-making
• Hyperactive
– Perceived need to pull rabbits out of the hat in Budgets, Autumn
Statements and party conferences (as well as elections)
– Exacerbated by rise of 24-hour news coverage
• Taxes tend to rise in post-election Budgets
• Some recent improvements in institutional arrangements
– Independent Office for Budget Responsibility
– More transparency re policy costings
– Somewhat better consultation
• Very centralised
– Tax policy-making very concentrated in the Treasury
– Council tax is the only (mostly) local tax: only 4% of revenues
– Some devolution of powers to Wales and Northern Ireland
– As for Scotland...
© Institute for Fiscal Studies
Scotland has just voted against independence
• But radical change still likely
– Main political parties all promising much more devolution, quickly
• Scotland has had some tax-setting powers for years
– Full control over council tax and business rates  but done little
– Vary basic rate of income tax by up to 3 percentage points  not done
• Already due to get more
– Stamp duty land tax  replacing with (slightly) more sensible tax
– Landfill tax  little change planned
– Vary all rates of income tax (together, on unchanged tax base)  given
haven’t used existing powers, how valuable is this?
• What else will be devolved?
– Each party’s proposals so far slightly different
– Recent rhetoric has sounded radical, but not specific
– More devolution to the rest of the UK too?
© Institute for Fiscal Studies
UK tax policy
Stuart Adam
© Institute for Fiscal Studies