Riding the curve – tax burdens, tax credits and withdrawal rates

Following my last blog, where I commented that the UK government should think about tax credit withdrawal rates if it wants to tackle child poverty, I thought it would be a good idea to look more into the withdrawal rates and tax burdens faced by one earner families. In other words, I decided to look at the tax burdens faced by these families as income progresses, from 50% average[1] wage right up to 200%. I wanted to find out not so much about absolute tax burdens at different income points for one earner families (CARE’s taxation of families publication deals with this excellently[2]), but the gradient (or rate of tax credit withdrawal, and income tax and national insurance increases) as income progresses. In past articles, I have undertaken analysis of all 34 OECD nations, however, for the purposes of this exercise I have selected just six nations; Denmark, Finland, France, Germany, UK and Austria. I have attempted to be broadly representative in selecting countries; 2 (Denmark and Finland) are broadly defined by Gosta Esping Andersen  as Social Democratic social regimes, 3 (France, Germany and Austria) are defined as Corporatist-Statist regimes, and 1 (UK) doesn’t really fit anywhere![3]

The results here are striking. First and foremost, the UK system, despite having the lowest tax burden at 50% average earnings, has a gradient (particularly between 50% and 75% earnings) that is much steeper than any of the other countries between these wage levels.[4] This demonstrates in stark visual form what we have known for a while, that the rate at which tax credits are withdrawn in the UK system is quite extreme, especially between 50% and 75% average wage.[5] In practice, what this means is that as one progresses between these two wage levels, benefits and tax credits are withdrawn more sharply than other European nations so as to make paid employment proportionately less rewarding. Indeed, many families in the UK face Marginal Effective tax rates of 76%, meaning that for every extra £1 earned, a one earner household would only see 24 pence.[6]

Moreover, all the other nations in this analysis do have a system that accommodate tax benefits in some form or another[7] and Austria in particular structures its tax credits and benefits in a similar way to the UK, and although (as you would expect) under it’s system the tax burdens for one earner households are negative they are not quite as negative as the UK’s. What is more, Austria despite having a somewhat similar system to the UK, manages to achieve a more gradual gradient, as do the other nations in this analysis.

On a final note, and linking back to the previous family fiscal policy blogs on child poverty, it is interesting to note that Denmark, which has the lowest child poverty rate in the OECD[8] has positive tax burdens for those on 50% average income. As I said in my previous blog, it could perhaps be argued that child poverty is not just about income, and as an expansion to that, poverty and the incomes of working people in general need to be looked at in the context of how tax credits and benefits are withdrawn as a household progresses up the income scale. In other words, policy makers need to look at ways in which the UK ‘curve’ can become less steep and more gentle, meaning that households keep more of their income as they progress up the income scale.

[1] Average wage is defined as the average full time male and female adult earnings, OECD, Taxing Wages 2010-11, May 2010, p.555.

[2] See Draper et al, Taxation of Families 2010/11, CARE, http://www.care.org.uk/wp-content/uploads/2012/03/CARE_Tax-families-10-11.pdf

[3] Emanuele Ferragina and Martin Seeleib-Kaiser, Welfare regime debate: past, present, futures. Policy & Politics, 2011 p. 597.

[4] Based on calculations made from Taxing Wages, 2011, OECD, p.109-142 (see more here:http://www.oecd.org/document/34/0,3746,en_2649_34533_44993442_1_1_1_1,00.html)

[5] Draper et al, The Taxation of Families, 2012, p.18’

[6] Draper et al, The Taxation of Families, 2012, p.18

[7] Taxing Wages 2010-11, OECD, 2011, p.193-553

[8] See Binder, ‘Is income just about poverty?, CARE Family Fiscal Policy blog, May 2012.

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