New Internationalist

The Facts

Issue 220

new internationalist
issue 220 - June 1991

TAXATION - The FACTS

The GREAT REVENUE ROBBERY
We all feel the weight of tax on our shoulders. Still
government never seems to have enough to run things properly.
Tax reform has meant light taxes on wealth and profit
and a financial squeeze for everyone else.

THE CONSERVATIVE OFFENSIVE

Changing the rules to favour the rich.

Income tax

• By 1990 some 86 countries worldwide had substantially reduced their top income-tax rates. llIn the UK the income-tax rate paid by top earners has been slashed from 83% to 40% since 1979.1

• Over the past two decades the top rate charged to high-income earners in Canada has dropped from 57.6% to 29%.2

• With adjustments for inflation the top one per cent of income earners in the US paid $84.4 billion less in taxes in 1990 than they did in 1977.3

• In Sweden the top marginal tax rate dropped from 72% in 1989 to 51% in 1991.4

• In Bolivia it is estimated that 75% of the income tax from labour is collected while only 20% of the income from capital is collected.5

• In Aotearoa/New Zealand the top income-tax rate dropped from 66% in 1985 to 33% by 1989.

Capital gains

• In the UK you can make £5,500 ($10,000) in capital gains every year before you have to pay a cent of tax.6

• The net effect of the liberalizing of US capital gains taxes proposed by the Bush administration in the fall of 1990 was an average annual gain of $68 for those earning incomes of $10,000 or less and $15,454 for those with incomes over $200,000.7

• Estate taxes in the US made up 2.3% of revenue in 1965 and by 1991 they are projected to drop to 0.5% of revenue.8

Corporate taxes

• Business and investment breaks will cost the US Treasury $212 billion in corporate taxes and $205 billion in personal income taxes between 1989 and 1993.9

• In Canada the Federal Government gives $9 billion in annual tax subsidies to business, the same amount that it collects in taxes. In the 1970s the tax ran at about 50%; by 1988 it had been dropped to 28%.10

• Until 1982-83 UK company profits were taxed at 52%. The current rate is between 25% and 35% depending on income.9

 

THIRD WORLD TAXES

Cash-starved Third World governments lack the capacity to tax income of the rich (who hide it) or the poor (who don't have it). They must seek revenue elsewhere.

• Third World low-income countries rely for three-fourths of their tax income on commodity taxes, particularly import and export duties as well as sales and excise taxes. Middle-income Third World countries get half their revenue from these sources.12

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THE MONEY CHASE

Who pays most?14

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Tax evasion

• Thirty per cent of all international trade takes place within transnational corporations allowing financial manipulations so that corporate income can show up in those countries where the tax advantage is greatest.15

• The average medical deduction by Americans earning over a million dollars is $44,000 a year.17

• Audits of suspected tax evaders in Turkey in the early 1980s found that 50% of income was undeclared.

Taxing wealth

• Every 1 per cent levy on the incomes of the best-off 10 per cent of US citizens would raise $15 billion taxes.18

• In French-speaking West Africa 84% of taxpayers pay based on a presumptive tax - whereby tax owed is estimated from business volume and living standards (amount of property, number of servants, foreign travel etc.) This system increases revenue.

• An annual 8% tax on net assets of over $300,000 in the US would raise enough revenue (about $155 billion) to pay off the national budget deficit while affecting just 2% of the population.19

 


TAX TALK - A GLOSSARY

Progressivity
The phrase used to describe the steepness of the tax rate as you move up the income scale. A rate of 19% on the lowest taxable incomes and a rate of 28% on the highest is not very progressive while a low rate of 15% and a high rate of 65% is.

Bracket creep
The effect of inflation on unindexed (for inflation) income-tax rates. For example if you are at the low rate but your income increases although just keeping pace with inflation you may end up paying a higher rate of tax although your purchasing power stays the same.

Tax incidence
Who ends up actually paying a tax. If landlords or businesses have the ability to pass on taxes in the form of price and rent hikes the tax incidence falls on someone else.

Tax expenditures
Indirect government spending - the result of not collecting taxes. For example tax breaks on mortgages and other interest costs are available to taxpayers in many countries although companies and large investors profit most from this loophole. This type of government spending by not collecting tends to escape public scrutiny.

Direct and indirect taxes
Direct taxes are geared to the individual's income, profit or wealth and are to some extent based on ability to pay. Indirect taxes are levied on particular goods (as with taxes like the VAT or GST), imports or exports (a favourite Third World form of taxation) or sin taxes on alcohol, gasoline and tobacco - regardless of the individual's ability to pay.

Tax havens
Low-tax jurisdictions like Switzerland, Panama and Hong Kong where companies and some wealthy individuals arrange to maintain their investments or maintain branches so their profits can surface in a low-tax environment.

Base and rate
The tax base is the income or economic activity that is subject to tax and the rate indicates how much tax is due from each source. Some tax systems have high rates but have a narrow base, allowing for example, generous deduction of business expenses. Other tax systems have a wide base with few exemptions and lower rates.

Tax handles
The possibilities a government has for getting at economic activity from which they can extract tax. This is a real problem in Third World countries where income is either too low to be taxable or in the underground economy beyond the reach of badly-stretched revenue departments. Many Third World governments must rely on indirect import and export taxes that they can collect when goods leave or enter the country.

Tax shelters
A way in which the taxpayer can park their income in a particular kind of investment such as retirement savings used by many or tax-exempt foundations for the wealthy few. The theory is that this parked income will be taxable at some later date that is more advantageous to the taxpayer.

1 Changing Tax, John Hills, (Child Poverty Action Group, 1988.)
2 Behind Closed Doors, Linda McQuaig, (Penguin 1987).
3 Growth and Equity, Bruce Fisher and Robert MacIntyre, (Citizens for Tax Justice, 1990)
4 Financial Times, Friday Feb. 24th, 1991.
5 World Development Report, World Bank, 1988.
6 Budget Notes, Critchleys Chartered Accountants, March 19th, 1991.
7 Fisher and McIntyre, op. cit.
8 Tax Policy in the Twenty-First Century, Herbert Stein ed., (Wiley 1988).
9 Fisher and MacIntyre, op. cit.
10 Is it Fair?, Leon Muszynski, Centre for Policy Alternatives, 1988.
11 Hills, op.cit.
12 World Development Report op. cit.
13 World Development Report op. cit.
14 Hills, op. cit.
15 Hills, op.cit.
16 Mirages and Miracles, Alan Lipietz, (Verso 1987).
17 Harpers Magazine, March 1991.
18 Fisher et al.,op.cit.
19 William Dugger, The Wealth Tax: A Policy Proposal, (Journal of Economic Issues, March 1990).

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