Taxes and benefits

Private pension saving is a key component of retirement saving in the UK. The most recent data available shows that four-tenths of private household wealth is held in private pensions. Among those aged 55 to 64 nearly 73 percent had accumulated some private pension rights, with the median holding among those with some pension rights being £149,300 (Office for National Statistics 2015). This is partly explained by the fact that holding savings in pensions is, on average, tax favoured relative to other saving vehicles. The fact that large amounts are placed in private pensions also makes it important that the tax treatment of such savings is well-designed.

Between 2007–08 and 2009–10, total government receipts collapsed – they fell by over 9% in real terms and were 2% lower as a proportion of national income – largely as a result of the financial crisis and resulting recession. By the end of this decade, government receipts are forecast to be 37.2% of national income,2 a little lower than in 2007–08 (37.5%) but higher than in 2009–10 (35.8%) and 2015–16 (36.3%) and a little higher than the average level over the two decades before the recession (36.4%). On the face of it, these aggregate numbers imply that, by 2020–21, we will be more or less back where we started, raising around the same proportion of national income in revenue as just before the crisis. However, this masks considerable changes in the composition of receipts.

The taxation of high-income earners is of importance to every country and is the subject of a considerable amount of recent academic research. Such high-income earners contribute substantial amounts of tax and generate significant positive spillovers, but are also highly mobile: a 1% increase in the top marginal income tax rate increases out-migrations by around 1.5 to 3%. We review research into taxation of high-income earners to provide a synthesis of existing theoretical and empirical understanding. We offer various avenues for potential future theoretical and empirical research.

A substantial share of the wealth of Americans is held in tax-deferred form such as in retirement accounts or as unrealised capital gains. Most data and statistics on assets and wealth are reported on a pre-tax basis, but pre-tax values include an implicit tax liability and may not provide as accurate a measure of the financial position or material well-being of families. In this paper, we describe the distribution of tax-deferred assets in the Survey of Consumer Finances (SCF) from 1989 to 2013, provide new estimates of the income tax liabilities implicit in those assets, and present new statistics on the level and distribution of after-tax net worth. The results of our analysis suggest that, relative to published statistics on pre-tax net worth, the distribution of after-tax wealth is slightly less concentrated in the early years of our sample period, but the effectiveness of the income tax system in reducing wealth inequality has decreased during the last decade. We find the reduction in the long-term capital gains rate is the primary reason for the muted effectiveness of the current income tax system in reducing wealth inequality.

This paper is a response to the House of Commons Treasury Committee's call for evidence for their inquiry into UK tax policy and the tax base.