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News - 12 October 2006

OECD Report - the UK is very taxing

British people suffered the biggest rise in taxes last year, according to a study by the Organisation for Economic Cooperation and Development (OECD) released on Wednesday. But the trend for increasing taxes is not peculiar to the UK.

Governments in three-quarters of the world's leading economies are now increasing their revenues from taxes on the population. Rises were mainly coming through strong economic growth boosting income tax and corporation tax revenues, rather than higher tax rates - in many countries the rates of tax had been cut. Many had also expanded their tax base, by closing loopholes, bringing more taxpayers into the net and cracking down on evasion.

Britain's tax revenues as a share of national income last year rose to 37.2%, just above the average for all OECD countries. The rise, from 36% in 2004, was the third biggest of any OECD member.

In first place was Iceland, where taxes rose by 3.7 percentage points to 42.4% of GDP, followed by the United States, where taxes rose by 1.3 percentage points. The US has one of the lowest overall tax takes of any OECD member, at 26.8% of GDP.

This reverses a trend towards lower tax burdens, which was evident from 2000 to 2003.

"Tax revenues are rising in many OECD countries despite deep cuts in tax rates, reflecting both the effects of stronger economic growth, which has led to higher corporate profits, and moves in some countries to offset the effects of cuts in tax rates by broadening the tax base and improving tax compliance."

The OECD report comes at a time when British companies are complaining about higher taxes. The CBI warned this week that more businesses could leave the UK unless tax rates were cut. HSBC said last week it may consider moving its headquarters from Britain because of higher taxes.

The Treasury has benefited greatly from a phenomenon known as "fiscal drag" whereby tax thresholds are only raised in line with inflation. Traditionally, average earnings increase about twice as fast as inflation, meaning people get dragged into higher tax brackets and pay more without tax rates being raised. Gordon Brown's latest budget documents pencilled in a large increase in the overall tax burden resulting from fiscal drag.

Britain's tax burden remains well below its peak of 39.1%, hit during the 1980s, and was below the average of countries in the European Union's 15 original members, before the 2004 enlargement, which is 39.7%.

The OECD report showed that the tax take in France is a hefty 44.3% of GDP, up 0.9 percentage points from 2004. Germany's was 34.7% last year, unchanged from 2004. Highest was Sweden, where the government takes 51.1% of GDP in taxes, up from 50.4% in 2004. Next is Denmark on 49.7%, then Belgium on 45.4%, just ahead of Norway on 45%. Mexico was the lowest, on just 19.8%.


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