UK vs US taxes

George Bush is a stronger believer in income equality than Gordon Brown.
These figures (pdf) from the CBO (via Greg Mankiw and the Kruse Kronicle) show that the poorest fifth of Americans paid an average of 4.3% of their income in federal taxes whilst the richest fifth paid 25.5%.
How do these figures  compare to the UK? Table 16A here gives the answer. The poorest quintile in the UK paid 36.5% of their income in tax, whilst the richest fifth actually paid less - 35.5%.
Britain's tax system, then, is  regressive whilst the US's is progressive.
You might object that I'm not comparing like with like. I'm including indirect taxes, whilst the US figures exclude local sales taxes (though they include excise duties).
However, if we look only at income tax and national insurance, the UK system is still less progressive than the US's, at the federal level. The bottom fifth pay 6.2% in direct tax (net of credits) whilst the  top fifth pay 23.7%. The ratio of these tax rates is 3.8, compared to 5.9 for the US federal tax takes.
If you don't believe these figures, check out Willem Buiter's calculations that top marginal taxes are higher in New York than London.
Sure, you can quibble with these numbers. The US figures exclude local income taxes. And perhaps the UK taxes the poor more because they have more income thanks to more generous welfare benefits.
But however you slice it, the message seems to be that the UK's tax system after eight years of "Labour" government (my figures refer to 2005-06) is less progressive than the US's federal tax system after years of pro-rich Bush presidency.

Comments

[dearieme]

Proposition: if you have as expensive a welfare state as Britain you will find it necessary to tax the poor quite heavily. The alternative is to tax the rich so heavily that the consequences will be worse. If that proposition has any merit, then the answer is to shrink the state massively and exploit that by reducing taxes, starting with the taxes that the poor pay. A good place to start might be a tax that the working poor pay whether they know it or not - the Employers' National Insurance contribution.

[Scratch]

Alternatively they could remove the staggeringly regressive NI contributions limit and exploit the extra income by reducing income taxes on the low paid and, who knows? perhaps even the median earner.

I doubt an extra 11% tax on high incomes would see the wealthy crawling through the streets clutching a begging bowl and a cardboard sign detailing the terrifying extent of their destitution.

[jameshigham]

Coming Libertarian Party government rate is flat 0%.

[Matthew]

Table 3 says in the UK it's 4.3% for the lowest fifth and 23% for the top, what are your figures?

[James]

I doubt an extra 11% tax on high incomes would see the wealthy crawling through the streets clutching a begging bowl and a cardboard sign detailing the terrifying extent of their destitution.

I doubt they would, but a high proportion would just tell the government to sod off and leave the country - hence collected tax from them becomes £0.

If you squeeze those that can leave too hard, you end up with less money for the coffers - simple economics.

[chris]

Matthew - my figures are for non-retired households; tax allowances are bigger for pensioners.

[Freshly Squeezed Cynic]

"Coming Libertarian Party government rate is flat 0%."

Eh, not unless you're planning on having no police or military, pal.

[Matthew]

The US figures are for all households though, aren't they?

It's also worth noting that under a Citizens Basic Income the poorest 20% would pay a higher proportion of income tax. You can't look at these things without looking at the spending side of the equation.

[rwendland]

I'm not convinced this is a fair comparison for at least two reasons:

1) I observe that the US Effective Individual Income Tax Rate is sometimes negative, so appears to factor in "tax credits" of a kind. Should not therefore UK Tax Credits be factored in on the UK side as well?

2) If we factored in equal quality Medical Insurance on top of the US taxs (to balance for the NHS), this fixed cost would be heavily regressive, a higher % for lower earners. Perhaps completely nullifying the progressive effect in the US.

[Blissex]

These comparisons are indeed meaningless because they don't compare like for like and they are by quintile which is a bit too coarse, especially at the high and bottom ends.

The most credible estimates that I have seen are that usians pay around 30% of their incomes in taxes irrespective of income level; the mix varies considerably. The top quintile pay around 25% of their income in federal taxes (mostly income tax) and 5% in state taxes (mostly sales tax), and the bottom 80% pay around 14% in federal taxes and 16% in state taxes.

Probably total tax take, including VAT, council and property taxes, is slightly more progressive in the UK.

[Cassandra]

Adding to Blissex and rewendland's comments about the bogus-ness of the comparisons and Chris's bending of Truth to apthetically prove a point, one needs to: add in USA state income, local property, state sales taxes, notional cost of medical coverage, a notional charge for absence of public transport and lame-o social safety-net and for completeness subtract the helicopter-out-of-Mogadishu component (though Brits are admittedly just as quick and generous with evacuating nationals from peril). For futher fairness, one should make national adjustments to educational costs, include much higher energy & utilitiy taxes in UK bills. Then, one might be getting close to comparison that is not quite-so-easily lampooned by even the most lightweight of critics

[rwendland]

I've studied this a bit more. The US income included notional income for "all in-kind benefits (Medicare, Medicaid, employer-paid health insurance premiums, food stamps, school lunches and breakfasts, housing assistance, and energy assistance)". But the UK income used does not include the notional income for NHS etc benefits. So unfair comparison.

The fact that the US figures are federal only is a killer, as I think that leaves out eg state taxes for education, and their notional benefits. But the UK figures include taxes for eduction. This is a pretty hopeless comparison.

But anyway, if you take UK table 16A and add in the notional income from NHS/education/etc ("Benefits in kind" in 16A), I make the poorest quintile in the UK paid 23.1% of their actual+notional income in tax, steping up progressively to the top fifth at 33.96%; average 31.46% for all incomes. But you can't compare this with US federal only numbers.

[ajay]

You might object that I'm not comparing like with like. I'm including indirect taxes, whilst the US figures exclude local sales taxes (though they include excise duties).

Do you know, I think I just might? Sales taxes are more regressive than income taxes (because the poor tend to spend a higher percentage of their income on taxable products than the rich) so naturally if you exclude them the system will look more progressive than it actually is.

Buiter's cherrypicking, of course - New York has a uniquely high income tax burden, as residents pay federal, state and city income taxes, while the income tax rate for Londoners is, naturally, the same as for any other Brits.

And some states in the US have no state income tax - but they do have a sales tax. Might omitting state taxes make the US system look more progressive? I think it might.

The points about omitting NHS benefits (and, for that matter, the regressive cost of health insurance) have already been made above.

But here's another more fundamental point you've also missed: greater income inequality in the US - partly a consequence of government action - means that the poorer quintile may be paying a little less tax simply because they have, proportionately speaking, less money.

[Tim Worstall]

Not sure I buy it. The UK figures include council tax: the US ones don't include property taxation. As that's what funds the education system there that leaves something of a gap, no?
Property tax there is county (or urban unit) based.

[Mark Wadsworth]

Council Tax does not fund education system, they completely changed this a couple of years ago.

[rwendland]

ajay, very good point about greater income inequality in the US creating poorer lowest quintile, hence lower tax % there. Reflects lower US minimum wage: federal $5.85/hour v. UK £5.52/hour, and better US pay at the top.

This is very easy to see in the per-quintile average gross incomes. Below I compare US "Comprehensive household income" (includes Medicare/aid & employer-paid health insurance etc) and UK Gross income
+ NHS notional income, at $1.95=£1 exchange rate across the quintiles:

US $ : 15,900 37,400 58,500 85,200 231,300

UK £ : 15,684 26,881 36,432 47,061 80,840 41,380
UK in $: 25,040 46,706 65,465 86,832 152,939

US/UK: 63.5% 80.1% 89.4% 98.1% 151.2%

It seems only the topmost quintile of US households does better than the UK in gross pre-tax incomes, and the lowest quintile is much worse off.

[Sam]

Tim Worstall:

But in the US, property tax is paid by owners, rather than residents. Poor people don't own property, so don't pay property tax.

(Well, they do in the sense that property tax is a business expense of their landlord, which will tend to drive rents up, but we'll get even more hopelessly confused if we go down that route.)

So actually, including property tax (which is proportional to the value of the property that you own, and not capped like UK council tax) would make the US look even more progressive...

[Sam]

rwendland:

Interesting figures. Housing is very much more expensive in the UK - I wonder what effect that has on your figures (is housing benefit included in income at the low end?) and on their meaning (the exchange rate $2=£1 is somewhat sensible for transportable goods, but not even slightly appropriate for comparing property.)

[rwendland]

Sam, housing benefit is £1292 for lowest quintile, so significant but it won't turn around the conclusion. It would be better to do this analysis just for workers (leaving out pensioners & incapacity benefit etc), as I think there are too many confusing elements in these numbers. But the data isn't there to do that easily. To see the benefits included you need to look at Table 15A - I'm using "Gross Income + NHS" on the UK side; tax credits and child benefit are significant (£1700 in low quintile).

I am pretty amazed by the result, I really did not expect UK comprehensive incomes to be so high at middle quintiles compared to US - and if dollar falls more this effect will become larger. You're right that we need to dig down in the numbers to see if there is a comparison flaw somewhere.

[Igor]

I am from States. I do not mind tax paying percentage as it's stands at the moment.
The problem I have is double taxation and missing benefits for taxpayer. The middle class tax payers are core any country's economy. Do not worry about rich one's leaving for being taxed extra, need to protect the middle class the driving force of healthy economy.
Look at States at the moment, results of neglecting the middle class.
My problem is, if I have payed council tax, road tax, council parking tax, benefits tax then why is that not deducted from my total earned income? That is the money I have already given to the government (local or federal) as taxation and now I have to pay tax on that amount again.
Why is there no relief from mortgage interest, against my total earned income? If I had payed tax on it and bank has to pay tax, since it is a profit, isn't that money double taxed? Then UK tax percentages on the tables shown are not showing right figures. If the same sum of money changes hands in the same taxed year, the one that ends up with it at the end of the year pay tax on it, not everyone who was in the chain (if you were a business). Then your total tax take could be higher then amount that you are taxing on. Good for a tax man I reckon. By the time you done paying everybody you have not much left yourself.
Being foreign national it is hard paying for some of the benefits that this country gives out freely. But that may be the price of buying social peace?? One would need more police to battle the uprise in crime, so it maybe works itself out to some degree.

[bob ama]

Health insurance? You seem to have forgotten to factor this in. Health care in Britain is free.

[coach purses]

There is no exact definition of the word happiness. Happy people are happy for all sorts of reasons. The key is not wealth or physical well-being, since we find beggars, invalids and so-called failures, who are extremely happy.

[Nick]

interesting comments..

[Geo]

The US is far more expensive when it comes to home ownership.

A £1million home in London costs about 3,000 per year in council tax

In California , that would cost you £30,000 per year in property tax which is charged 3% of the homes value!

So just by that calculation, you would £27,000 better off per year living in the UK.