dr Grzegorz Kula,
[email protected]
Economics of taxation
Lecture 8: Direct taxes:
characteristics and construction.
James & Nobes, ch. 2, 8, 12
OECD (2006), Fundamental Reform of Personal Income Tax, ch. 3 and 4
OECD (2007), Fundamental Reform of Corporate Income Tax
LeBlanc, P., S. Matthews and K. Mellbye (2013), “The Tax Policy Landscape
Five Years after the Crisis”, OECD Taxation Working Papers, No. 17, OECD
Publishing
Direct taxes paid by individuals
dr Grzegorz Kula,
[email protected]
Direct tax is assessed and collected from individuals,
who are intended to bear it (although somebody else
may actually be sending money to the tax
authorities).
Direct taxes paid by individuals:
• income taxes,
• capital gains taxes,
• taxes on revenues of self-employed (?),
• taxes on wealth:
- property taxation,
- inheritance taxation,
• social security contributions (?).
Types of personal income tax systems
dr Grzegorz Kula,
[email protected]
The comprehensive income tax system:
• Taxes all or most (cash) income less deductions (net income)
according to the same rate schedule.
• Wage and capital income are taxed at the same rates, usually
according to a progressive rate schedule.
• The value to the taxpayers of the tax allowances increases
with income.
Facts
• A majority of the OECD countries have tax systems that in
principle are based on this system.
• It is more difficult to avoid taxes through income shifting.
Problems
• Not all types of income are taxed in an equal manner, what
provides possibilities for arbitrage behavior.
• It may discriminate against variable income.
• It neglects the fact that capital is more mobile across borders
than labor.
Types of personal income tax systems
dr Grzegorz Kula,
[email protected]
The dual income tax system:
• A proportional tax rate on all net income (capital, wage and
pension income less deductions) combined with progressive
rates on gross labor and pension income.
• Labor income is taxed at higher rates than capital income.
• The value of tax allowances is independent of the income level.
Facts
• Introduced in Finland, Norway and Sweden, and to a lesser
extent in Denmark, in the early 1990s.
• Fairly neutral and low taxation of capital, which enhances
efficiency, and income redistribution through the progressive
taxation of labor income.
Problems
• The introduction of a lower proportional tax rate on capital
income might undermine the vertical equity, especially because
income from capital tends to be concentrated in the upper
income brackets.
Types of personal income tax systems
dr Grzegorz Kula,
[email protected]
The semi-dual income tax system:
• Different nominal tax rates on different types of
income.
• Typically capital (personal and corporate) income is
taxed at low and often flat rates and remaining
forms of income at higher and progressive rates.
Semi-dual income tax systems tax most types of capital
income at rates that deviate from the progressive tax
rates on labor income.
Semicomprehensive income tax systems tax most types
of capital income at high and often progressive rates
which are levied on labor income as well.
Types of personal income tax systems
dr Grzegorz Kula,
[email protected]
The flat tax system:
• A proportional (flat) tax rate on all net income (capital
income, labor income, other income minus all deductions).
• Wage and capital income are taxed equally, and the value of
the tax allowances is independent of the income level.
Facts
• About 25 countries around the world are using this system.
• Usually the introduction of a single rate, combined with the
abolition of all or most tax allowances and tax credits.
• If the same flat rate is introduced for PIT and CIT this reduces
the tax incentives for income shifting.
• Progressivity in flat tax systems is achieved by means of a
basic allowance/basic income provision.
Problems
• The improvement of the efficiency of the tax system depends
on what happens to the tax rates and special tax provisions,
since they are responsible for distortions.
Types of personal income tax systems
dr Grzegorz Kula,
[email protected]
The expenditure tax system:
• Taxes only consumption and not savings.
Arguments for:
• Present and future consumption are taxed at the same rate,
• It is easier to measure its tax base.
Arguments against:
• A progressive income tax system is more efficient at
redistributing income than an expenditure tax system.
• All sources of income that finance consumption will
eventually be taxed, including capital.
• If some countries have expenditures taxation, while others do
not, taxpayers may consume part of their income abroad.
Facts:
• No country has yet moved to an expenditure tax system.
• The tax system of all OECD countries is in practice
characterized by some elements of expenditure taxation.
Differences in personal income taxes
dr Grzegorz Kula,
[email protected]
Income is the revenue gained as a result of hired work, offering
services, creating goods and also revenues from transfers,
wealth, capital, etc., reduced by the costs of gaining this
revenue, depending on its source.
1. Sources of revenue: in different countries there are different
catalogues of sources of revenue. Revenue from a given
source can be calculated in many ways and depending on
sources we can also have different taxes.
2. Costs: the actual costs without any limits, the actual costs
but within some limits, costs as a lump-sum, or costs as a
percentage of revenue.
3. Tax allowances and exemptions: personal exemptions, family
allowances, standard deductions, which could depend on the
characteristics of the taxpayer, and/or itemized deductions.
Differences in personal income taxes
dr Grzegorz Kula,
[email protected]
Main differences between countries (examples):
• Which individual characteristics and in what way are
considered by the tax system?
• What is the general level of taxes in economy (in
relation to GDP or to the average wage)?
• What is the allocation of tax burden in the
population?
• What is the degree of progressivity (the number and
the level of rates)?
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Differences in personal income taxes
Share of GDP
Source: OECD
Share of total taxes
dr Grzegorz Kula,
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PIT, OECD average
35
30
25
20
15
10
5
0
Differences in personal income taxes
Source: LeBlanc et al. (2013)
dr Grzegorz Kula,
[email protected]
Central government PIT marginal rates, 2013
Country
Australia
Austria
Belgium
Canada
Chile
Czech Republic
Denmark
Estonia
Finland
France
Germany
Greece
Hungary
Iceland
Ireland
Israel
Italy
Japan
Korea
Luxembourg
Mexico
Netherlands
New Zealand
Norway
Poland
Portugal
Slovak Republic
Slovenia
Spain
Sweden
Switzerland
Turkey
United Kingdom
United States
Basic relief
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
dr Grzegorz Kula,
[email protected]
Marital status Relief for
Marginal rates (%)
relief
children
+
+
+
+
joint taxation
joint taxation
joint family
joint taxation
joint taxation
+
joint taxation
+
+
+
joint taxation
+
joint taxation
joint taxation
joint taxation
+
+
joint taxation
joint taxation
+
joint taxation
Source: OECD (2014) Taxing Wages 2012-2013
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
+
0 19 32,5 37 45
0 36,5 43,21 50
25 30 40 45 50
15 22 26 29
4 8 13,5 23 30,4 35,5 40
15*
5,83 8 15
21
6,5 17,5 21,5 29,75 31,75
0 5,5 14 30 41 45
formula based
22 32 42
16
22,9 25,8 31,8
20 41
10 14 21 31 34 48 50
23 27 38 41 43
5 10 20 23 33 40
6 15 24 35 38
0 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 39 40
1,92 6,4 10,88 16 17,92 21,36 23,52 30
5,85 10,85 42 52
10,5 17,5 30 33
0 9 12
18 32
14,5 28,5 37 45 48
19 25
16 27 41 50
12,75 16 21,5 25,5 27,5 29,5 30,5
0 20 25
1 2 3 4 5 6 7 8 9 10 11 12 13 [11,5]
15 20 27 35
20 40 45
10 15 25 28 33 35 39,6
dr Grzegorz Kula,
[email protected]
Source: OECD (2016), Taxing
Wages 2014-2015.
dr Grzegorz Kula,
[email protected]
Source: OECD (2016),
Taxing Wages 20142015.
dr Grzegorz Kula,
[email protected]
Source: OECD (2016),
Taxing Wages 20142015.
Differences in personal income taxes
dr Grzegorz Kula,
[email protected]
Other differences (examples)
1. The extent of tax coverage: is the whole population covered
by income taxes?
• In many countries it is not the case.
• Two main groups with special rights:
- farmers, who do not pay income tax in many countries,
- elderly, who enjoy special tax privileges.
2. List of allowances.
3. Method of calculating the costs of obtaining the revenues:
• Cumulative tax assessment, i.e. while calculating withheld
taxes at each payment of salary we check the previously paid
withheld taxes.
• Non-cumulative assessment, i.e. withheld taxes are collected
without taking into account amounts withhold previously.
Differences in personal income taxes
dr Grzegorz Kula,
[email protected]
4. The ways in which particular incomes are taxed:
E.g. taxes on income from savings
• Subtracting the tax automatically from each interests added
to the account.
• Collecting the tax at the moment savings are withdrawn from
the account.
• Collecting the tax if the level of savings exceeds some
threshold.
• Using the normal income tax rules.
E.g. taxes on income from assets traded on the stock exchange
• Assessing the change of the value of the portfolio in a year.
• Calculating profits gained at the moment of selling stocks
(taking into account the time of ownership and the size of
investment).
Differences in personal income taxes
5. Degree of uniformity - are all the incomes taxed
together with the same rules, or separately,
depending on the source of revenue?
• Traditionally two approaches: uniform taxation in
Prussia and tax schedules in United Kingdom.
• In the case of tax schedules different tax rules for
each schedule.
• In most countries there are some elements of
schedule system, even in Germany.
• The differences in schedules may concern the tax
rates, rules for calculating costs or tax base.
dr Grzegorz Kula,
[email protected]
Direct taxes paid by legal entities
dr Grzegorz Kula,
[email protected]
Direct taxes paid by legal entities:
• corporate income tax / tax on profits,
• tax on revenue,
First introduced in US in 1909.
• capital gains taxes,
• taxes on wealth (net assets of a firm),
• taxes on property,
• royalties, license fees or ecological charges.
In OECD countries usually for small firms, as
a lump-sum or some percentage of revenue.
Why do we have a corporate income tax?
dr Grzegorz Kula,
[email protected]
Why cannot we have one income tax?
• Tax authorities prevent shareholders from sheltering
their equity income from taxation (problem of retained
incomes).
• It is difficult to say what an income of a firm is (many
forms of legal status).
• Taxing firms demands different techniques than taxing
individuals.
• Government can earn location specific rents,
• Companies should pay for public goods they consume.
“The popular view is that corporations should pay their
fair share of the tax burden” (OECD, 2007)
dr Grzegorz Kula,
[email protected]
The basic trend in CIT
The CIT rates were falling. According to OECD (2007):
• In 1982, 11 out of 17 countries had CIT rates not lower
than 50%; in 2006 there were none.
• In 1982, there was no country with a CIT rate lower than
30%. In 2006, there were 10 countries that had a rate not
higher than 30%.
Reasons for this trend:
• The high mobility of capital between countries and
international competition for capital.
• Governments need also to offer something to the local
firms.
• If the access to capital is difficult, lowering taxes allows
firms to use more of their own resources for investment.
dr Grzegorz Kula,
[email protected]
Statutory corporate income tax rates, 2000 and 2011
Source: Brys, B., S. Matthews and J. Owens (2011), “Tax Reform Trends in OECD Countries”,
OECD Taxation Working Papers, No. 1, OECD Publishing.
http://dx.doi.org/10.1787/5kg3h0xxmz8t-en
dr Grzegorz Kula,
[email protected]
Statutory corporate income tax rates, 2007 and 2013
Source: LeBlanc et al. (2013)
dr Grzegorz Kula,
[email protected]
Source: OECD (2007), Fundamental Reform of Corporate Income Tax
Differences in corporate income taxes
Source: OECD (2007), Fundamental Reform of Corporate Income Tax
dr Grzegorz Kula,
[email protected]
dr Grzegorz Kula,
[email protected]
Why do CIT revenues grow despite falling rates?
•
•
•
•
Expansion of the corporate tax base,
Higher profits due to prosperity and globalization,
Increased investment and inflow of foreign capital,
More capital in companies as PIT becomes higher
than CIT,
• Tax compliance costs fall and companies can act in a
more efficient way,
• Stricter corporate tax enforcement policies, reducing
corporate tax-avoidance and evasion behavior.
Differences in corporate income taxes
dr Grzegorz Kula,
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• The most visible difference is in the level and
structure of the tax rates.
• Most countries have only one CIT rate, although
many still use more than one rate.
• Usually rates depend on the size of the enterprise
(often it is a joint criterion of revenues and size of
workforce) → progressivity.
• Some countries have different taxes depending on
the sector in which a firm is operating (e.g. Ireland).
• Rates may differ depending on the legal status of
enterprises, market share or even location.
Central government CIT marginal rates, 2015
Country
General rate
Special rates
Australia
30%
Austria
25%
Belgium
33% 3% surtax, reduced rates
Canada
15% local CIT
Chile
22,50%
Czech Republic
19% 0%, 5%
Denmark
23,50%
Estonia
20% 0% for reinvested profits
Finland
20%
France
33,33% 10,7% surtax
Germany
15% local CIT
Greece
29%
Hungary
10%, 19% local CIT
Iceland
20%
Ireland
12,50% 25%
Israel
26,50%
Italy
27,50% local CIT
Japan
23,90% local CIT
Korea
10%, 20%, 22% local CIT
Luxembourg
20%, 21% local CIT
Mexico
30%
Netherlands
20%, 25%
New Zealand
28%
Norway
27% oil production and transport
Poland
19%
Portugal
21% 3%, 5%, 7% surtax, local CIT
Slovak Republic
22%
Slovenia
17%
0%
Spain
25%, 28% local CIT
Sweden
22%
Switzerland
8,50% local CIT
Turkey
20%
United Kingdom
20%
United States
15%-35% local CIT
Source: Deloitte, Corporate Tax Rates 2015
dr Grzegorz Kula,
[email protected]
Differences in corporate income taxes
dr Grzegorz Kula,
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Other differences in CIT (examples)
1. Definition of the tax:
• In many countries this is a tax on corporations only, while for
firms which are not corporations the tax is collected from
their owners’ incomes .
• In other countries CIT is paid by all the firms.
• There are cases in which there is CIT for corporations and
profit tax on other types of business activities.
2. Accounting rules used to calculate the tax:
• Accrual accounting - income is included in the tax base when
it is earned, not when cash is received.
• Realization accounting - tax can be deferred until capital gains
(or losses) are realized.
• Cash-flow accounting - tax base consists of income when cash
is received, net of expenses purchased.
Differences in corporate income taxes
dr Grzegorz Kula,
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Other differences in CIT (examples)
3. Size of the tax base:
• The definition of CIT base is extremely complex.
• In some countries the tax base is closely connected with
accounting profits (Germany or Italy).
• In other countries the differences between the two are
important (USA and UK).
4. Depreciation allowance :
• Governments are granting different depreciation allowances
not only for tax reasons, but also to create incentives for firms
to do something.
5. Other allowances and exemptions.
In general, the bigger the firm, the more complicated is CIT.
Types of corporate income tax
dr Grzegorz Kula,
[email protected]
• Classical system:
– Taxes the total income of corporations,
– Double taxation – the distributed income is subject to
both corporate and personal income taxes.
• Imputation system:
– Part of, or the whole CIT is imputed to the recipients of
dividends,
– In a full integration/imputation system all corporate
earnings are taxed at the personal level at the same PIT
rate.
• Advance corporation tax
– Provides a deductible allowance for corporate equity in
computing taxable profits.
Double taxation
dr Grzegorz Kula,
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The avoidance of double taxation: we do not want a
situation in which taxes overlap.
• Synchronization of PIT and CIT, as well as CIT between
different types of companies and sources of income.
• Most countries apply many detailed rules for particular
cases.
• The basic problem is the one of dividends – they can be
taxed twice: once as firm’s income with CIT, and second
time as income of the owners with PIT.
• Dividends are usually taxed at source, often at the
moment of paying out the dividend.
• Those who receive these dividends are not paying the
same tax again, because they can use tax credit.