Introduction
UK annual GDP is running at about £Bn 1400. This represents the total goods and services produced within the UK economy in a year. A significant part of this involves the government through various forms of taxation, public goods and services and social benefits. The effects of such an intensive government involvement in the economy are some redistribution of income and wealth, and some distortions to the normal price mechanisms of a market economy. Where does all this tax appear in the national flow of income? What is its effect? Are there realistic alternatives to the means of levying taxation? Through examination of the data provided by the Office of National Statistics, an attempt is being made here to explore these questions.
Data is taken from the Blue Book for 2009 http://www.statistics.gov.uk/downloads/theme_economy/BB09.pdf. This provides an extensive presentation of the UK economy. To simplify analysis, all numerical data is presented and analysed as a percentatege of GDP, Gross Domestic Product. This should give a feel for the general flow of monies in the economy.
Definitions and methodology for the UK statistics are all comprehensively described in “United Kingdom National Accounts: concepts, sources and methods”. This is based on a common standard for all European nations (ESA 95), which in turn is based on the common standard for all UN nations (SNA 2008). This results in a broad commonality in methods and definitions around the world. In the following analysis, the ESA 95 designations for data will be indicated where available; an example is D.12 for “Employers Social Contributions”.
Gross domestic product is measured in 3 main ways; income, expenditure and product (or output). When the total goods and services produced in a year are sold, an “income” is generated; this same income is then available to be spent (“expediture”). Income The sum total of a nation’s goods and services produced in a year can be measured in terms of money, ie. ascribed a monetary value. This same monetary value represents both the “expenditure” needed to procure those goods and services, and the amount of “income” generated by their sale. It is also possible to sum all the actual products and services produced (the “output”) and assign them a monetary value. All 3 ways can produce an estimation of GDP, and will yield the same answer within the limits of statistical error. In this analysis, income and expenditure methods are investigated.
Income – GDP
The total market price for all goods and services for 2008 was £1,446,113 million [B.1*g], which is 100% of GDP. This will now be analysed to explore what constitutes the 100%.
First analysis is of taxes levied directly on products and production; percentage of GDP and the ESA 95 code is shown for each component:
- GDP at factor incomes (88.5%; B.1g)
- Taxes on products and production less subsidies (11.3%; D.2 – D.3)
- Total: GDP at market prices (100%; B.1*g)
As a slight distraction, details of the taxes on products and production are as follows:
- VAT (6.4%; D.21)
- Import tax (0.18%; D.212)
- Other taxes on products (4.2%; D.214)
- Other taxes on production (1.6%; D.29)
- Total: taxes on products and production (12.3%; D.2)
- Subsidies on production (0.24%; D.39) and products (0.38%; D.31). Total (0.8%; D.3)
- Total: Taxes less subsidies (11.5%; )
Notes: Of the VAT, 0.16% is paid directly to EU and effectively does not reach the UK government. In a similar way, import duties are paid directly to the EU. The subsidies are effectively a negative tax on production and products and hence deducted from the taxes to yield the net tax.
Returning to analyse the GDP at factor incomes, the share received by corporations, the employed and the self-employed are considered:
- Gross operating surplus of corporations (29.7%; B.2g)
- Mixed income (5.8%; B.3g)
- Compensation of employees (53.2%; D.1)
- Total: GDP at factor incomes (88.5%; D.1g)
Gross operating surplus of corporations is basically gross profit. There are various types of corporations analysed:
- Non-financial corporations (18.9%; B.2g/S.11)
- Financial corporations (4.6%; B.2g/S.12)
- General government (1.0%; B.2g/S.13)
- Households and non-profit institutions serving households (NPISH) (5.2%; B.2g/S.14+S.15)
- Total: Gross operating surplus of corporations (29.7%; B.2g)
Non-financial corporations (private, 18.3% and public, 0.6%) are those directly involved in the production of goods and services. Financial corporations are those engaged primarily in financial activities such as banking and insurance. General government includes both central and local government. Non-profit institutions serving households (NPISH) include productive units such as charities and universities. These include taxes.
Mixed income is basically income from self-employment and includes social contributions and income taxes. Compensation of employees covers all employees and includes social contributions (both employers and employees parts) and income taxes.
- Wages and salaries (45.1%)
- Employers social contributions (7.2%)
- Imputed employers social contribution payments in kind etc. (0.9%)
- Total: Compensation of employees (53.2%)
The share of GDP said to be directly received by households is total GDP at factor incomes less employers social contributions:
- GDP at factor incomes (88.5%; D.1g)
- Less Employers social contributions (7.2%)
- Households receipt (direct) of GDP (81.3%)
This share of GDP includes taxes on incomes, wealth and profits, as well as employee + self-employed social contributions. We now move into a tricky area of tax, social contributions and benefits.
- Employees social contributions as NIC etc. (6.3%)
- Tax on income and capital gains (14.3%)
Expenditure- GDP
GDP can be analysed in terms of expenditure; the 100% of GDP is analysed in terms of final consumption by households, NPISH and government, as well as gross capital formation (investment) and exports:
- Total household final consumption (61.6%)
- NPISH (2.6%)
- Government (21.7%)
- Total gross capital formation (17.0%)
- Net exports (-2.7%)
Government expenditure on final consumption can be analysed as:
- Public goods and services (8.3%)
- Individual goods and services (13.4%)
Public goods and services are termed “collective government final consumption expenditure” and include defence, law and order, legislation, public health, protection of the environment, and research and development.
Individual goods and services are consumed by a few and therefore not available to many others; decisions on allocation are necessary. Examples are medical treatment or education.
Gross capital formation can be analysed:
- Gross capital formation (16.9%)
- Changes in inventories (0.1%)
- Aquisitions less disposals of valuable (0.04%)
Net Exports:
- Exports (29.1%)
- Less Imports (31.8%)
Social Contributions and Benefits
Hidden in the general flows presented above are several redistributive flows from some households and government, and govenrment to other households.
- Employers compulsary social contributions (7.2%)
- Employers imputed social contributions (0.9%)
- Employees social contributions (6.3%)
- Self employed + unemployed social contributions (0.2%)
- Social benefits other than social transfers in kind (17.1%)
- Social transfers in kind (15.9%)
Tagged: macroeconomics, taxation