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The most famous opinion about taxes comes from Benjamin Franklin “In this world nothing is certain but death and taxes”. I suppose he meant that everything else is optional.
On the other hand, if you look at what British politicians say about them, you might think we have a lot of choice about taxes as well. Until recently, who should pay ... and how much, was the biggest cause of arguments in British politics. This period is probably finished now, since no party seems interested in making radical changes to the system. In the past, it was easy to win an election by making people frightened about the tax plans of the other side. Strangely, although politicians argued a lot about tax, you cannot see much difference between different governments when you look at the overall results. There was a short period between 1965 and 1970 when tax, as a proportion of the whole economy, went up from about 35% to over 40%. Since then it has remained about the same. Britain, if you compare it with other rich European countries, has fairly low taxes.
The tax that produces the largest amount of government revenue is income tax. It accounts for about 29% of all the money raised by taxes. Most people don’t actually pay it, instead their employer takes it directly from their salary before they receive it. It’s called the “pay as you earn” system or PAYE.
If we take a person who receives the average salary of about £24,600. A single person has an allowance of £4,745 which they can receive tax free. The rest of their income is “taxable” but at different rates according to the band that it falls in. The first £2, 020 pounds fall in the 10% band so that makes £202. That leaves £17,835 in the basic rate tax band of 22%, making £3,923.70 to pay. In total, this single average wage-earner pays £4,125.70 in income tax. There is also a higher rate of 40% - to pay at this rate a single person has to earn more than £36,145. About a quarter of the population live in families where no one is rich enough to pay income tax.
British people at the age of 16 are all sent a card with an ID number on which tells them they have entered the National Insurance system, and, as an Englishman living outside the country, this is the only tax that I pay regularly to my government. It’s the system that produces the second big chunk of government funds, about 17%. It’s harder to explain than income tax because most people pay out of their salary, but, at the same time, their employer also pays on their behalf. As with income tax, there is a threshold of about £4,700 below which you pay nothing. The difference is that rich people start to pay less once they pass the top amount of £610 per week. In between, each employee pays 11% and their employer pays 12.8%.
In theory, National Insurance is not really a tax because people who pay can also receive special rights in return - like pensions and unemployment benefit. That’s why I pay it. However, in practice, the government has to add money from other taxes to keep the system functioning, especially at times when there are a lot of unemployed people - as in the early 1980’s and 1990’s. One of the big questions for the future is what will happen when the number of pensioners increases dramatically as it is expected to do.
The third main tax is usually known by its initials which stand for Value Added Tax. It produces nearly 16% percent of government revenues. This is a tax you pay in shops every time you buy something; usually at a rate of 17.5%. This money is just included in the price and businesses do all the work of calculating, collecting and paying this tax to the government. There is a very small category of things that can have a special low VAT rate of 5%:
Fuel and power used at home
Children’s car seats
Women’s sanitary products
Making big or empty houses into small flats
There are quite a lot of things sold that are exempt from VAT or carry a 0% rate which results in the same thing. The most important of these are: food, newly-built houses, rent and financial services, public transport, books, newspapers and magazines.
Taken all together, the other taxes account for about 39% of government revenues. The biggest of these are corporation tax – paid by companies on their profits (7%), fuel duties (5%) and local taxes on businesses and homes (both about 4%). There are some taxes which raise very little money such as landfill tax about (£700 million) and air passenger duty – the tax for using UK airports (£800M). These add £15 a tonne to the cost of burying rubbish in Britain and at least £5 to international air fares.
I’ll finish with one piece of advice. The tax system in Britain is big and complicated, and even the most insignificant parts of it move huge amounts of money. The profession of tax adviser – helping people to pay less – is likely to remain a well-paid one.
Is the tax system of your country the same as in the UK? If not, how is it different? Do you think that you have to pay too much tax? Why/why not?.
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Wikipedia: tax
HowStuffWorks: how income taxes work
BBC: in depth – tax & inheritance
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