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
Arts & Entertainment
Madonna in her music video for 'Like A Virgin'
music... and other misheard song lyrics
Sport
Steven Gerrard had to be talked into adopting a deeper role by his manager, Brendan Rodgers
sportThe city’s fight for justice after Hillsborough is embodied in Steven Gerrard, who's poised to lead his club to a remarkable triumph
News
Waitrose will be bringing in more manned tills
newsOverheard in Waitrose: documenting the chatter in 'Britain's poshest supermarket'
News
The energy drink MosKa was banned for containing a heavy dose of the popular erectile dysfunction Levitra
news
VIDEO
News
Much of the colleges’ land is off-limits to locals in Cambridge, with tight security
educationAnd has the Cambridge I knew turned its back on me?
Environment
People are buying increasing numbers of plants such as lavender to aid the insects
environmentGardeners rally round the endangered bumblebee
Sport
Australia's Dylan Tombides competes for the ball with Adal Matar of Kuwait during the AFC U-22 Championship Group C match in January
sportDylan Tombides was diagnosed with testicular cancer in 2011
Arts & Entertainment
Customers browse through Vinyl Junkies record shop in Berwick Street, Soho, London
musicBest exclusives coming to an independent record shop near you this Record Store Day
News
Ida Beate Loken has been living at the foot of a mountain since May
newsNorwegian gives up home comforts for a cave
Extras
indybest10 best gardening gloves
Arts & Entertainment
tvIt might all be getting a bit much, but this is still the some of the finest TV ever made, says Grace Dent
Arts & Entertainment
Comedian Lenny Henry is calling for more regulation to support ethnic actors on TV
tvActor and comedian leads campaign against 'lack of diversity' in British television
News
Posted at the end of March, this tweeted photo was a week off the end of their Broadway shows
people
News
peopleStar to remain in hospital for up to 27 days to get over allergic reaction
Arts & Entertainment
The Honesty Policy is a group of anonymous Muslims who believe that the community needs a space to express itself without shame or judgement
music
News
Who makes you happy?
happy listSend your nominations now for the Independent on Sunday Happy List
Have you tried new the Independent Digital Edition iPad app?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

1st Line Helpdesk Engineer Apprentice

£150.00 per week: QA Apprenticeships: This company has been providing on site ...

Telesales & Sales Support Apprentice

£221.25 per week: QA Apprenticeships: This company is a well established Inter...

Client Relationship Manager - SQL, Python

£40000 - £50000 per annum: Harrington Starr: Client Relationship Manager - SQL...

**Financial Services Tax**

£35000 - £50000 per annum: Pro-Recruitment Group: Take your chance to join the...

Day In a Page

How I brokered a peace deal with Robert Mugabe: Roy Agyemang reveals the delicate diplomacy needed to get Zimbabwe’s President to sit down with the BBC

How I brokered a peace deal with Robert Mugabe

Roy Agyemang reveals the delicate diplomacy needed to get Zimbabwe’s President to sit down with the BBC
Video of British Muslims dancing to Pharrell Williams's hit Happy attacked as 'sinful'

British Muslims's Happy video attacked as 'sinful'

The four-minute clip by Honesty Policy has had more than 300,000 hits on YouTube
Church of England-raised Michael Williams describes the unexpected joys in learning about his family's Jewish faith

Michael Williams: Do as I do, not as I pray

Church of England-raised Williams describes the unexpected joys in learning about his family's Jewish faith
A History of the First World War in 100 moments: A visit to the Front Line by the Prime Minister's wife

A History of the First World War in 100 moments

A visit to the Front Line by the Prime Minister's wife
Comedian Jenny Collier: 'Sexism I experienced on stand-up circuit should be extinct'

Jenny Collier: 'Sexism on stand-up circuit should be extinct'

The comedian's appearance at a show on the eve of International Women's Day was cancelled because they had "too many women" on the bill
Cannes Film Festival: Ken Loach and Mike Leigh to fight it out for the Palme d'Or

Cannes Film Festival

Ken Loach and Mike Leigh to fight it out for the Palme d'Or
The concept album makes surprise top ten return with neolithic opus from Jethro Tull's Ian Anderson

The concept album makes surprise top ten return

Neolithic opus from Jethro Tull's Ian Anderson is unexpected success
Lichen is the surprise new ingredient on fine-dining menus, thanks to our love of Scandinavian and Indian cuisines

Lichen is surprise new ingredient on fine-dining menus

Emily Jupp discovers how it can give a unique, smoky flavour to our cooking
10 best baking books

10 best baking books

Planning a spot of baking this bank holiday weekend? From old favourites to new releases, here’s ten cookbooks for you
Jury still out on Manchester City boss Manuel Pellegrini

Jury still out on Pellegrini

Draw with Sunderland raises questions over Manchester City manager's ability to motivate and unify his players
Ben Stokes: 'Punching lockers isn't way forward'

Ben Stokes: 'Punching lockers isn't way forward'

The all-rounder has been hailed as future star after Ashes debut but incident in Caribbean added to doubts about discipline. Jon Culley meets a man looking to control his emotions
Mark Johnston: First £1 million jackpot spurs him on

Mark Johnston: First £1 million jackpot spurs him on

The most prize money ever at an All-Weather race day is up for grabs at Lingfield on Friday, and the record-breaking trainer tells Jon Freeman how times have changed
Ricky Gervais: 'People are waiting for me to fail. If you think it's awful, then just don't watch it'

Ricky Gervais: 'People are waiting for me to fail'

As the second series of his divisive sitcom 'Derek' hits screens, the comedian tells James Rampton why he'll never bow to the critics who habitually circle his work
Mad Men series 7, TV review: The suits are still sharp, but Don Draper has lost his edge

Mad Men returns for a final fling

The suits are still sharp, but Don Draper has lost his edge
Google finds a lift into space will never get off the ground as there is no material strong enough for a cable from Earth into orbit

Google finds a lift into space will never get off the ground

Technology giant’s scientists say there is no material strong enough for a cable from Earth into orbit