In his Budget speech, the Chancellor said that the UK had a higher rate of tax on high incomes than Norway. Is that true? How does the UK compare to others; and how was that changed by the Budget?
How does the UK tax on high incomes compare with other countries? It’s a simple question – but not straightforward to answer.
One way is to look at the highest marginal rate of tax on high incomes. That looks something like this:
But the rates alone are misleading. The biggest missing element is: when do the rates apply? The 37% top rate of Federal income tax in the US kicks in at $523,600. The top UK rate – now 40% – applies from £50k. So saying the UK rate is just a bit higher than the US rate misses the most important question: how much tax do people actually pay? What is the effective tax rate on any given income?
We can answer this given data for rates (taken from the wonderful OECD tax database), updated for the Budget changes, and calculate the overall effective rate of tax.1 on an employee – or the “tax wedge” for different multiples of average income in each country2. See my previous post introducing this approach for more detail and a complete list of caveats and limitations. The updated code is here.
Here’s the chart comparing UK tax (before and after the mini budget) with the rest of the OECD, looking at incomes going up to 20 x average income. You can click on it for an interactive version that lets you select/deselect different countries:
It turns out the Chancellor was correct – the UK did have a higher rate of effective tax on someone earning 20x the average income (£500k), but (from April 2023) no longer will.
All in all, the UK has a rather average level of tax on high earners, compared with the rest of the OECD. By contrast, the UK taxes average income significantly less than the average. That’s something almost nobody believes – but it is nevertheless true. If you don’t believe my chart, here’s the OECD comparison for the average income:
It shouldn’t be a surprise that the countries with more extensive welfare states than the UK have higher rates of tax on the average worker. By contrast, some of them tax higher earners more; some don’t. The thing is, whilst the level of tax on the rich is of huge political significance, it is not very significant to the public finances. The 45p rate which the Tories just abolished raised £2bn. Income tax as a whole raises £228bn. NHS spending is £136bn.
If we want a Scandinavian level of public services, then most people have to pay similar levels of tax to most people in Scandinavia. Sorry about that.
Footnotes
The calculation realistically has to include employer national insurance and social security. Yes, it’s paid by the employer, and isn’t visible on our wage slip, but evidence suggests it is mostly borne by workers (i.e. because the employer has an amount they’re willing/able to pay as wages, and employer NICs come out of that). ↩︎
i.e. because realistically you don’t compare taxes on £100k in the UK with £100k in Costa Rica; you should compare taxes on three times the average income in the UK with three times the average income in Costa Rica ↩︎
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