In Defence of Liberty

Driven by data; ridden with liberty.

The OECD’s Tax Wedge

In modern economies, governments raise tax revenue from a large variety of activities, such as the purchase of ‘luxury’ items, the sale of shares and the earning of income. On the Left Foot Forward article For those who argue people are overtaxed in the UK, Richard Murphy of the Tax Justice Network argues that taxes in the United Kingdom are too low, especially on higher earners.

This table shows the difference between total labour costs and take-home pay on average wage levels, for an unmarried worker without children. (Photo: Left Foot Forward)

This table shows the difference between total labour costs and take-home pay on average wage levels, for an unmarried worker without children. (Photo: Left Foot Forward)

Mr Murphy highlights the OECD’s ‘tax wedge’, which is defined as:

Table 0.1 shows that the tax wedge between total labour costs to the employer and the corresponding net take-home pay for single worker without children, at average earnings levels, varied widely across OCED countries in 2012 (see column 1). While in Belgium, France, Germany and Hungary, the tax wedge is around 50 per cent or higher, it is under 20 per cent in Chile, Israel, Mexico and New Zealand. The highest tax wedge is observed in Belgium (56.0 per cent) and the lowest in Chile (7.0 per cent).

The UK has a low rank, with a tax wedge of 32.3%. From this evidence, Mr Murphy concludes “that may also be why we have such a high deficit: we are undertaxing high earnings in particular” and “there’s no case for saying we’re overtaxed, most especially at high rates”.

The author conflates multiple issues. The tax wedge is defined as the combined income tax and National Insurance (NI) payments, both paid by the employee and the employer, on average wages, assuming the worker is single and without children. These specifications mean the tax wedge ignores pro-marriage and pro-natal policies.

Erroneous Claims

Firstly, it is erroneous to make claims about taxes on higher earners, since the OECD’s tax wedge concerns average wage levels. Secondly, it is also incorrect to draw conclusions about the overall tax burden from these figures, such as “there’s no case for saying we’re overtaxed”, since the tax wedge represents only the direct taxation on average incomes. According to the Guardian, in 2012-13, the British government collected £154bn from income tax, £104.1bn from NI, £101.1bn from Value-Added Tax (VAT), £39.8bn from corporation tax, £26.2bn from fuel duty and £19.9bn from duties on tobacco, spirit, beer, cider and wine. Direct income taxation on individuals represents £258.1bn of the £593.8bn total tax take, or 43.5%.

A low tax wedge does not necessarily signify a low-tax country – it can be that income taxation forms only a small part of the government’s tax revenue or the income taxation is reasonably progressive, in terms of confiscating more from those on larger incomes. Alternate forms of taxation are not ineludibly regressive; the Institute for Fiscal Studies describes VAT as “mildly progressive”, but the labyrinthine system of different rates “distorts people’s spending decisions and firms’ production decisions”. High tax wedges may be ameliorated with substantial redistribution towards married families with children.

Despite Mr Murphy’s fascination with the taxation on large wage packets, the provided evidence cannot support insinuations that the national deficit is being caused by low taxes on high earners.

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This entry was posted on May 18, 2013 by in Economics and tagged , , .
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