Financial Risk Manager

Ways of Financial and Risk Management

The Rich Will Pay - Taxation Policy
Tuesday, March 29, 2011

NO CUTS. That was the slogan of one British protester who walked through my neighbourhood on Saturday. It seemed an extraordinary hope for a country with a £150 billion deficit. My colleague Bagehot found that most protesters accept that some cuts are necessary; they just disagree on the pace and scale. But there is a school of thought that cuts can be avoided entirely by closing tax loopholes for the corporate sector or by taxing the rich.

We hope to run a chart on corporate tax revenues later in the week but here are the OECD data for personal tax rates as a proportion of GDP. As you can see, Britain's tax take from income is well above the OECD average, although not at Scandinavian levels. It is higher, however, than France or Germany.

Now, of course, it is possible that the tax take might be high as a result of punishing poor working stiffs, while the rich get off scot-free. Scott Hodge of the Tax Foundation used an OECD study to calculate the relative shares of income tax paid by the top 10%, with their share of national income. On average income tax systems in the OECD are progressive in the sense that the richest pay proportionately more; the ratio is 1.11. The UK weighs in at 1.2.

Now, of course, income tax is only part of the story; money is also raised via sales taxes which are more regressive. The US rich, for example, pay proportionately more of the income tax but the US's income tax burden is below the OECD average. Britain, however, has an above average income tax burden and is more progressive than average. These geese are already well plucked.

Leaving Denmark aside, what if Britain aimed to be, say, Sweden? It could try to get another 3% of GDP that way (although the budget deficit is in double digits). However, who are the British rich? Many of them are based in the City, and are not necessarily British at all, but American, French etc. They are not in London for the weather or the transport system and could move elsewhere. For those who doubt that there is a trade-off between tax rates and tax take, note that the Swedish system has high marginal tax rates but in terms of tax take, is less progressive than Britain.

Source: The Economist

posted @ 2:35 PM,