The Revenue Responsiveness of Income and Consumption Taxes in the UK

Abstract

This paper provides new estimates of the revenue elasticities of income and consumption taxes in the UK over the period 1989–2000. Using new analytical expressions for consumption taxes, these elasticities are estimated from information on relatively few parameters, almost all of which are readily available from published sources. Changes in consumption patterns over time, and income tax parameters, are found to be important for the magnitude of consumption tax elasticities.

The income elasticity of tax revenue: estimates for income and consumption taxes in the United Kingdom

“…This appendix provides details of the elasticity formulae (see Creedy and Gemmell (2002) for further details), along with the tax structure and income distribution data used to calculate the tax revenue elasticities in the text. Creedy and Gemmell (2002) for details of derivations.)…”

“…Creedy and Gemmell (2001) show how differentiation of (A10) can be used to obtain expenditure elasticity values. Creedy and Gemmell (2001) show how differentiation of (A10) can be used to obtain expenditure elasticity values.…”

“…Expenditure elasticities were obtained by first fitting a regression of the form (A10) ln , where w ki (i = 1,...,n) is the average expenditure weight, or budget share, for the ith commodity group and kth total expenditure group, and m k (k = 1,...,K) is the arithmetic mean expenditure of the kth total expenditure group. Creedy and Gemmell (2001) show how differentiation of (A10) can be used to obtain expenditure elasticity values. Table A4 shows parameter estimates (for 1999), 26 budget shares, w, and expenditure elasticities, e, for the 10 commodity groups, using illustrative values of weekly expenditure, m, of £200 and £400.…”

“…2 Estimates of revenue elasticities are an important input into the debate on changes in the burden of taxation in the UK. See Creedy and Gemmell (2002) for a review and extension to consumption taxation. Clark et al (2002), for example, draw attention to the fact that, since 1996-97, real alcohol and tobacco duties have risen substantially, yet the share of these taxes in GDP has remained constant or declined.…”

“…For example,Clark et al (2002) give summary information about differences in the average growth of incomes within different deciles of the income distribution. A specification allowing for regression towards, or away from, the mean combined with a random component of proportionate income changes is discussed inCreedy and Gemmell (2002). Systematic equalising changes have the effect of reducing aggregate revenue elasticities.8 The introduction of working families' tax credit (WFTC) in 1999 established a transfer payment system administered by the Inland Revenue via the income tax system.…”