Compare living standards, not tax

THE GREAT 17th-century stylist Sir Thomas Browne wrote a treatise called Pseudodoxia Epidemica. The title means "epidemic false beliefs", which are particularly rife these days on the subject of taxation. Everyone claims they pay too much tax and that someone else should pay more, except those who keep quiet about how little they pay.

Oskar Lafontaine, who resigned as German finance minister, was the notorious exponent of the false belief that taxes had to be harmonised within the European Union. He combined this with the other false belief that British business paid too little tax and should pay as much as German business.

On the British side, we have compounded the error by boasting about how low our social security charges are, and how we shall achieve faster economic growth by having a lower total tax burden than our competitors.

Tony Blair, the Prime Minister, got the Germans to tone down their demands from harmonisation to co-ordination. This means a narrowing of the band between different national rates of indirect taxation to even out prices in the single market for goods and services, and similar treatment of withholding tax on interest, to create a level playing field in the single financial market.

Fiscal policy as a whole also needs to be co-ordinated, so that countries do not breach the Maastricht deficit ceiling of 3 per cent, and so that their combined fiscal stance fits in with the European Central Bank's monetary policy. Apart from that, governments have freedom to tax and spend as they wish, and will need to use it more actively as they have lost control of monetary policy.

It is a myth, fostered by successive Chancellors of the Exchequer, that British business is lightly taxed. Corporate taxes on income are 3.9 per cent of GDP in the UK, above the EU average, but only 1.5 per cent of GDP in Germany. The UK pays the highest tax on corporate property, with business rates and capital gains tax at 2.1 per cent of GDP. Business rates are a regressive tax, unrelated to profits, whose main merit is to guarantee that all businesses pay some tax. If they are included, UK business pays 6 per cent of GDP in tax, the highest rate among industrial countries.

It is an illusion that low employers' national insurance contributions redeem British business. These amount to only 3.4 per cent of GDP, or half the EU average, and just over a quarter of the high French and Swedish figures. With employers' social security, British and German business look lightly taxed, both paying just under 10 per cent of GDP.

The big error is to omit the burden of private social security, or employers' contributions to pension schemes. The UK claims to be in a much better position on pensions that most other EU countries, because it relies more heavily on funded schemes and does not have such big unfunded future pension liabilities. Another way of looking at it is that a low public social security burden gives the UK the meanest state pensions in Europe, and that private pension schemes impose a burden on the economy so as to supplement meagre state payments with more generous private provision.

Employers' contributions to private pension schemes are 3.6 per cent of GDP in the UK, above the average of 2.5 per cent for other countries. The British corporate tax burden, including these, comes to 13 per cent of GDP, slightly higher than the German burden, although well below that of other countries, notably the US, where employers' private health and pension contributions are 7 per cent of GDP.

Corporation tax rates are a poor guide to the size of tax burdens. The UK has a lower rate than most countries of 31 per cent of corporate profits. Sweden, with one of the heaviest corporate tax burdens, has an even lower rate of 28 per cent. The EU average is 36 per cent, and Germany has a high rate of 50 per cent (the average of the two separate rates for undistributed and distributed profits). The British tax rate is lower, but the UK has fewer tax-free allowances than Germany and other countries, and thus a wider tax base and a bigger tax burden.

When Nigel Lawson, then Chancellor of the Exchequer, changed the corporate tax system in his 1984 Budget, he slashed both capital allowances and tax rates. He may have made the system more efficient, but the UK has not had the same incentive as other countries to modernise its capital stock. Gordon Brown, the present Chancellor, has taken away much of the advantage of lower corporation tax rates by accelerating payments.

The effective tax rate on the income on business capital (including property but excluding social security taxes) corresponds more closely to the corporate tax burden. It is 45 per cent in the UK, far higher than the 31 per cent EU average, or the low 24 per cent rates in France and Germany, but not that much higher than the 40 per cent rate in Sweden and the US.

Government policy in the UK falls back on the false Thatcherite doctrine that a low total tax burden is good for enterprise and economic growth. If we exclude social security, Britain's tax burden is almost exactly the EU average of 30 per cent, and well above that of France, Germany and the US. If social security taxes are included, then Britain looks like the lowest taxed country in Europe, apart from Ireland and Spain, with a burden of 36 per cent. Yet private social security provision must be added in, otherwise differences in tax burden become due mainly to differences in the public-private mix of social provision.

The UK's total burden rises because employee and self-employed contributions to life insurance and pension funds are a high 8.4 per cent of GDP, well ahead of France, where they are 5.7 per cent of GDP, and Germany, where they are only 2 per cent. Not all such contributions are used to finance retirement, but it is an advantage to be able to use long-term savings before normal retirement age. Nor do all savings go into long-term forms, and the boundaries between different kinds of personal saving vary widely across countries.

Arguments about the tax burden are in any case beside the point. There is a clear positive correlation in the EU between the total tax burden (including public but not private social security) and the standard of living as measured by GDP per head. The UK, with a low tax burden, has a relatively low standard of living. Denmark, with the highest tax burden, has the highest standard of living. Is it any wonder that so few Danes leave Denmark because of high taxes?

High taxes do not cause a low standard of living. A high standard of living enables a country to levy high taxes, and to finance high public expenditure. Taxation is progressive, rising with income, across countries as well as within them.

Christopher Johnson is UK Adviser to the Association for the Monetary Union of Europe.

Suggested Topics
PROMOTED VIDEO
News
Jamie and Emily Pharro discovering their friend's prank
video
News
i100
News
Tim Vine has won the funniest joke award at the Edinburgh Festival 2014
peopleTim Vine, winner of the Funniest Joke of the Fringe award, has nigh-on 200 in his act. So how are they conceived?
News
people
Life and Style
techApp to start sending headlines, TV clips and ads to your phone
Arts and Entertainment
Taylor Swift crawls through the legs of twerking dancers in her 'Shake It Off' music video
musicEarl Sweatshirt thinks so
Life and Style
tech
News
ebooksAn evocation of the conflict through the eyes of those who lived through it
Arts and Entertainment
Daniel Radcliffe and Zoe Kazan in What If
filmReview: Actor swaps Harry Potter for Cary Grant in What If
News
Our resilience to stress is to a large extent determined by our genes
science
Travel
travel
Sport
sportBesiktas 0 Arsenal 0: Champions League qualifying first-leg match ends in stalemate in Istanbul
News
Pornography is more accessible - and harder to avoid - than ever
news... but they still admit watching it
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Techincal Accountant-Insurance-Bank-£550/day

£475 - £550 per day + competitive: Orgtel: Senior Technical Accountant-Insuran...

Sales Performance Manager, Gloucester - £290 p/day

£200 - £290 per annum + competitive: Orgtel: Sales Performance Manager, Key Ba...

Junior Database developer (SQL, T-SQL, Excel, SSRS, Crystal rep

£25000 - £30000 per annum + bonus+benefits+package: Harrington Starr: Junior D...

Java/Calypso Developer

£600 - £800 per day: Harrington Starr: Java/Calypso Developer Java, Calypso, ...

Day In a Page

Ferguson: In the heartlands of America, a descent into madness

A descent into madness in America's heartlands

David Usborne arrived in Ferguson, Missouri to be greeted by a scene more redolent of Gaza and Afghanistan
BBC’s filming of raid at Sir Cliff’s home ‘may be result of corruption’

BBC faces corruption allegation over its Sir Cliff police raid coverage

Reporter’s relationship with police under scrutiny as DG is summoned by MPs to explain extensive live broadcast of swoop on singer’s home
Lauded therapist Harley Mille still in limbo as battle to stay in Britain drags on

Lauded therapist still in limbo as battle to stay in Britain drags on

Australian Harley Miller is as frustrated by court delays as she is with the idiosyncrasies of immigration law
Lewis Fry Richardson's weather forecasts changed the world. But could his predictions of war do the same?

Lewis Fry Richardson's weather forecasts changed the world...

But could his predictions of war do the same?
Kate Bush asks fans not to take photos at her London gigs: 'I want to have contact with the audience, not iPhones'

'I want to have contact with the audience, not iPhones'

Kate Bush asks fans not to take photos at her London gigs
Under-35s have rated gardening in their top five favourite leisure activities, but why?

Young at hort

Under-35s have rated gardening in their top five favourite leisure activities. But why are so many people are swapping sweaty clubs for leafy shrubs?
Tim Vine, winner of the Funniest Joke of the Fringe award: 'making a quip as funny as possible is an art'

Beyond a joke

Tim Vine, winner of the Funniest Joke of the Fringe award, has nigh-on 200 in his act. So how are they conceived?
The late Peter O'Toole shines in 'Katherine of Alexandria' despite illness

The late Peter O'Toole shines in 'Katherine of Alexandria' despite illness

Sadly though, the Lawrence of Arabia star is not around to lend his own critique
Wicken Fen in Cambridgeshire: The joy of camping in a wetland nature reserve and sleeping under the stars

A wild night out

Wicken Fen in Cambridgeshire offers a rare chance to camp in a wetland nature reserve
Comic Sans for Cancer exhibition: It’s the font that’s openly ridiculed for its jaunty style, but figures of fun have their fans

Comic Sans for Cancer exhibition

It’s the font that’s openly ridiculed for its jaunty style, but figures of fun have their fans
Besiktas vs Arsenal: Five things we learnt from the Champions League first-leg tie

Besiktas vs Arsenal

Five things we learnt from the Champions League first-leg tie
Rory McIlroy a smash hit on the US talk show circuit

Rory McIlroy a smash hit on the US talk show circuit

As the Northern Irishman prepares for the Barclays, he finds time to appear on TV in the States, where he’s now such a global superstar that he needs no introduction
Boy racer Max Verstappen stays relaxed over step up to Formula One

Boy racer Max Verstappen stays relaxed over step up to F1

The 16-year-old will become the sport’s youngest-ever driver when he makes his debut for Toro Rosso next season
Fear brings the enemies of Isis together at last

Fear brings the enemies of Isis together at last

But belated attempts to unite will be to no avail if the Sunni caliphate remains strong in Syria, says Patrick Cockburn
Charlie Gilmour: 'I wondered if I would end up killing myself in jail'

Charlie Gilmour: 'I wondered if I'd end up killing myself in jail'

Following last week's report on prison suicides, the former inmate asks how much progress we have made in the 50 years since the abolition of capital punishment