The latest OECD figures show that the tax burden in 2016 on UK families with an average wage was 20% higher than average in all OECD countries. In contrast the tax burden on single taxpayers without family responsibilities was less -18% less than in European countries. The income tax system places a heavy burden on one-income families. A one income UK family earning £36000 pays 70% more than a comparable French family, more than twice as much as a US family and 15 times as much as a German family.
The tax and the family team have been monitoring for eleven years the way other countries tax families and comparing this with the way families are taxed in the UK. Their reports have been published by CARE. Recent reports are to be found on the Reports page of this website.
Each year the highly respected Paris based Organisation for Economic Cooperation and Development (OECD) publishes details of the taxes on wages in each of the 35 member countries. The latest report published in 2017 gives provisional figures for 2016 and final figures for 2015. OCED uses a broad definition of tax.
This review of the taxation of families uses statistics published by the OECD in Taxing Wages to make comparisons between the UK and other developed countries. It examines direct tax burdens on households at various income points. Following established OECD practice, international comparisons for 2016, the latest year for which there is OECD data, reveal that the tax burden on one-earner families on the average wage is significantly greater than the averages for the OECD as a whole and for the group of EU countries that are OECD members.
‘Tax’ for this purpose is defined as income tax, tax plus employee social security contributions less cash benefits. The UK tax figures therefore take account of tax credits and child benefit but not housing benefit or council tax support. The UK has by international standards a generous system of support for families, but even taking this into account, on a wage of £36,571 the UK tax burden is 20% greater than the OECD average both on single parents with two children and on one-earner married couples with two children. The unfavourable position of these one-earner families results mainly from the fact that UK income tax does not take account of marriage or family responsibilities.
By contrast the UK tax burden on single people without family responsibilities is less than international averages. At around £36,000, it is 9% less than the OECD average and 18% less than the average for the 22 EU countries that are OECD members.
Although the UK tax system is not more burdensome in general than the tax systems of other developed countries, its treatment of one-earner families on the average wage is clearly unfavourable by international standards.
The UK income tax system places a particularly heavy burden on one-earner families. At the OECD average wage, the UK income tax burden is 25% greater than the OECD average for a one-earner married couple with two children, and 13% greater for a single person with two children. The UK one-earner married couple with two children pays 70% more income tax than the French family, more than twice as much as the US family, and 15 times as much as the German family.
By contrast, the UK income tax burden on a single person without children is 14% less than the OECD average at the OECD average wage. Income tax burdens on single people without children in the UK are similar to those in France, but less than those in Germany and the US.
UK tax credits compensate low income families for the heavy income tax burden, such that their overall tax rate is low by international standards. However, the withdrawal of UK tax credits as incomes rise is largely responsible for high effective marginal tax rates (EMTRs) across a wide income range. The effective marginal rate shows the amount the Government takes back from an extra pound earned. This will change a little, but not much, with the advent of universal credit as it is rolled out across the country.
The chart below shows the effective marginal rate of tax a one earner married couples earning £28,758 faced in the UK and comparable families faced in other OECD countries in 2016
Effective Marginal Tax Rate Comparison
In 2016 a one earner couple with two children earning £27,424 (just below median gross earnings for full time employees in 2016) would have been entitled to tax credits. This means that their EMTR would have been 73%. Income tax accounts for 20%, national insurance contributions 12% and loss of tax credits 41%. Increasing number of families are now in rented accommodation and where this is the case the family are likely to claiming Housing Benefit their EMTR rises to [91%]. This means that a family of four living on £350 needs an extra £50 a week to be out of poverty would need to earn and £550! Even if their marginal rate was 73% the family would need an extra £185. No other country has effective tax rates at as high as these on ordinary worker. The average across all 35 OECD countries on comparable families is 35.7%. Under Universal Credit the marginal rate for a family entitled to Housing benefit will be 80%.
The reason why EMTRs for one-earner families on modest incomes are much higher in the UK than in other OECD countries is that family responsibility is recognised not within the income tax system, but by means of tax credits that are tapered sharply. When independent taxation was introduced in the UK (in 1990), recognition of family responsibility was retained within the income tax system through provision of the Married Couples Allowance and the Additional Persons Allowance, and the EMTR for a one-earner family on 75% average wage was only 34%, close to the OECD 2016. In 1999-2000 these provisions were removed and tax credits introduced. It is the withdrawal of these benefits as incomes rise that has caused the UK EMTR for families entitled to tax credits but not Housing Benefit to rise to 73% in 2016.
The introduction of Universal Credit will for most families result in an EMTR of 75% (a reduction for renters but an increase or others. A 75% rate will be much higher than families face in most other countries. Council Tax Support is also means tested on the basis of income and where this applies, depending on the local authority area, the EMTR may be 80%. For a useful commentary on marginal rates under Universal Credit follow the link below:
US tax changes
On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act. Most comment in this country has been about the cut in the corporate ta rate from 35 per cent to 21 per cent. However income tax rates have also been cut. The top individual tax rate will drop to 37 per cent. But as well as cutting the income tax rate then Act has also abolished the personal exemptions and to compensate for this the Act doubles the standard deduction. It would see that the loss of personal exemptions will mean that some families will not benefit some the rate cuts. the changes do not appear to effect the above analysis.