It occurred to me recently that in the midst of the current hyperbole and debate around the Coalition Government’s latest welfare proposals and reforms, a lot of confusing terms have been bandied around without much consideration as to what they mean or what they refer to.
Take the latest OECD press release on their new ‘Taxing Wages 2012’ publication as a case in point. As interesting and insightful as the press release was, and as crucial as their Taxing Wages publications are to many researchers and writers around the World such as myself, the mainstream and specialist press (quite understandably might I add) published what in my mind was inaccurate information regarding how UK families ‘pay the highest tax in the OECD.’
What the OECD actually said was that UK one-earner families with two children have the highest tax wedges (or tax burdens on labour income) in the OECD at average earnings, although admittedly this isn’t made especially clear in the press release. A ‘tax wedge’ as I will set out below is quite a wide term and actually includes far more than just Income Tax and National Insurance, as some the press articles on the issue might have implied.
Please don’t misunderstand me; I am not having a go at the press (mainstream or specialist). I know as well as anyone through working in this area how complex and confusing the parallel universes of tax and benefits can be, but we (and I include myself here) must be careful when writing about these matters to make sure we mean what we say when we write about these sorts of things.
With this in mind, I decided to have a go at explaining in as plain English as possible some key terms and concepts around tax and welfare. Whilst the list below isn’t exhaustive, I hope to have covered all the key terms. If you feel that I have missed out a key term, or have defined something incorrectly, please feel free to leave a comment in the box below and I’ll do my best to rectify!
Tax Burden: This term comes up a lot in the family tax and benefits arena and is widely used by both the OECD and CARE in its ‘Taxation of Families’ publications, and when applied to the individual or household in the UK context, it refers to Income Tax plus National Insurance minus cash benefits (for example, tax credits) as a proportion of gross wages (explained below.) Hence, this term in my view, rather than ‘Tax Wedge’ better defines how much tax someone pays.
Tax Wedge: This term is far wider encompassing than Tax Burden and takes into account Income tax, employer and employee social security contributions and pay roll tax as a percentage of labour costs; hence this concept takes into account employer and labour considerations rather than just personal earnings.
Gross earnings: This term refers to the wages of an individual before Income Tax, National Insurance or any other deductions and Child Benefit, Tax Credit or any other additions.
Labour Costs: Labour costs is defined as the total expenditure borne by employers in order to employ workers, they include factors such as direct remuneration, bonuses, severance pay and benefits in kind. They also include indirect costs linked to employees, independently of the remuneration paid by the employer, such as collectively agreed, contractual and voluntary social security contributions, direct social benefits, vocational training costs, other social expenditure (cultural and medical services, transport costs, etc.), and taxes relating to employment regarded as labour costs, less any subsidies received.
Payroll Taxes: Payroll taxes consist of taxes payable by enterprises assessed either as a proportion of the wages and salaries paid or as a fixed amount per person employed.
Tax Credits: In the UK context, Tax Credits lie exclusively within the benefits system and are cash transfers from the Government to households and the amount given is based on a number of factors such as the amount of hours worked, gross earnings and the number of children in the household (for child tax credit.) Extra Credits are also available for childcare costs.
Child Benefit: Up until very recently, Child Benefit was a universal cash transfer given to families proportional to the number of children in the family, and disregarded the income of the household. However, the Coalition government have recently changed the eligibility rules so any household with an individual earning more than £50,000 per year will start to have their child benefit tapered away to the point where earnings exceed £60,000 per year, where child benefit will no longer be available. Nonetheless, for eligible families the amount given to the first child is £20.30 per week for the first child and £13.40 for each subsequent child.
Universal Credit: Universal Credit is a new means tested welfare credit in the benefits due to be introduced this year which combines many of the existing benefits and tax credits into one single payment.
Marginal Effective Tax Rates: The Marginal Effective Tax Rate, or METR, when applied to the world of tax and benefits, is the amount an earner keeps from extra earnings earned. To take a current real life example, if an earner working 30 hours per week on the minimum wage earns £100 in overtime, and is a lone parent with two children, then that earner will see £27 of that £100 come into the household due to Income Tax and National Insurance increases and Benefit withdrawal.
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