Taxation/Addendum

The development of modern tax systems

Modern tax systems had their origins in the 18th century in the United States and in Britain, and have since evolved piecemeal until they have become so complex that they are fully understood only by highly-trained specialists. Tax revenues in the developed countries now amount, typically, to 30 to 40 per cent of GDP, compared with 10 to 15 per cent at the beginning of the 20th century. The following paragraphs indicate some of the variations that have typically been adopted. A comprehensive classification of taxes is available from the OECD

Components of taxation

Personal income tax

Personal income tax accounts for about 25 per cent of the average tax receipts of the OECD countries. Taxable income is defined in a variety of ways, with many different allowances, exemptions and deductions. Tax rates are generally progressive, usually starting after a tax-free range for the lowest incomes, and followed by a sequence of higher rates as successive "thresholds" are exceeded, to reach maximum (and marginal) rates that are mostly between 40 per cent and 60 per cent . Income from investments and income from employment are sometimes treated differently and there is sometimes special treatment for the elderly. The total "tax wedge" between employees' take-home pay and total labour costs to employers (including employee and employer social security contributions) ranges for most OECD countries to between 25 and 50 per cent of employers labour costs.

Corporate income tax

Corporate income tax accounts for about 11 per cent of the average tax receipts of the OECD countries and tax rates are mainly between 15 per cent and 35 percent . As for personal taxation, many different ways of defining taxable income have been adopted, often with allowances for depreciation or research and development and with "tax breaks" for selected commercial activities, and with special treatment of small busineses. In principle there are also the options of "source-based", "residence-based" or "destination-based" systems (ie related to the location of the parent company, residence of the investor or the location of the final sale).

Taxes on consumption

Taxes on consumption (also known as "indirect taxes") have generally been increasing in recent years , and now account for about 25 per cent of the average tax receipts of the OECD countries. They include

• sales taxes (mainly in the US);
• value added tax - that is immediately paid on purchases at all stages of the supply chain, but subsequently deducted at all stages except purchases by the final consumer (in use in all OECD countries except the US);
• excise taxes - that are paid only on purchases of specified categories of product, such as tobacco and alcohol and petrol;
• tariffs - that are paid on imported goods (mainly agricultural products).

It is common practice to exempt commodities on which poor people spend relatively high proportions of their income, such as food and childrens'clothing.

Social security contributions

Social security contributions account for about 24 per cent of the average tax receipts of the OECD countries. They include employees and employers contributions toward: -

• unemployment insurance benefits;
• accident, injury and sickness benefits;
• old-age, disability and survivors’ pensions;
• family allowances: and,
• reimbursements for medical and hospital expenses or provision of hospital or medical services.

The total of employees' and employers social security contributions amounts for most OECD countries to between 10 and 30 per cent of employers' labour costs.

Taxes on wealth and property

The principal categories of redistributive taxes on property and personal wealth are:

• Taxes on fixed property (real estate)
• Taxes on net wealth and capital gains
• Estate duty, inheritance tax, gift tax
• Taxes on financial and capital transactions

Environmental taxation

Among the taxes that have been adopted in pursuit of environmental objectives are:

• Taxes on energy use.  European Union law requires member states to use "financial instruments" to bring about reductions in the use of energy in pursuit of a target reduction of 9 per cent over a period of 9 years . Implementation is being attempted partly by taxation - for example, the UKs Climate Change Levy
• Carbon taxes. 
• Landfill taxes.  European law sets limits upon the amount of biodegradable municipal waste that member states may send to landfill sites .