Abstract
This chapter describes the data base and provides a detailed survey of the fiscal and social institutions of the countries examined in this book. It is explained how the authors dealt with the LIS microdata and how they rearranged the original data sets to make them suitable for computations. In order to make the relatively complex computations feasible and efficient, while preserving the required level of precision, the data was grouped into 5 percent quantiles. A pre-requisite for embarking on the data analysis is a thorough review of the fiscal and social institutions in the 13 surveyed countries (Australia, Canada, Denmark, Finland, Germany, Israel, the Netherlands, Norway, Sweden, Switzerland, Taiwan, the United Kingdom, and the United States), which is given in the second section of the chapter.
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Notes
- 1.
For more information about the LIS database see Smeeding et al. (1985), Smeeding (2004), and Atkinson (2004). For illustrative examples of applications of the LIS database see, e.g., Allegrezza et al. (2004), Bardasi (2004), Bronchetti and Sullivan (2003), Gornick (2004), Förster and Vleminckx (2004), and Mahler and Jesuit (2006). For our purposes, the LIS data provide the most accurate information. Concerning comparisons with other data sets, the differences, for instance with respect to the calculation of Gini coefficients, are only minor; see OECD, Growing Unequal (2008, pp. 39 and 52). As of 2003, LIS has been complemented by the Luxembourg Wealth Study (LWS); see Sierminska et al. (2006). Note that the LWS contains also income data; for instance, Japanese income data are only found under this heading.
- 2.
Wave VII is currently under construction. Thus, more or less complete data are only available up to Wave VI, but these data are subject to repeated revisions. This explains why we decided to work with the data of Wave V. Moreover, even these data experience revisions from time to time. Hence, we had to settle on a particular deadline for available LIS data, which was September 2010. After this date, there were minor data revisions for Canada Wave V (November 2010) and the United States Wave V (February 2011), which did not affect variables important to us. For Germany, there was a major data revision in December 2010. To take account of this change, we re-computed all results involving Germany using the revised data set, so that they are based on the most recent German data revision.
- 3.
According to the title of this study, we ought to have included only OECD member countries. Israel became a member of OECD in 2010. The member status does not strictly apply to Taiwan; Taiwan gained an OECD observer status in 2002. We included Taiwan because she represents an economy largely different from the other countries considered, and because full data sets are available only for few countries. Moreover, Taiwan is remarkable because she has a low-tax and high-progression direct tax schedule and a low-progression schedule for direct taxes plus payroll taxes.
- 4.
This means that taxes include so-calledclawbacks. i.e., taxes which return to government part of the transfer. Prasad and Deng (2009, p. 439) remark: “This means that where transfers are high, taxes on transfers may be high, but this is not ‘true’ tax, simply a reduction in the amount of transfer given. To achieve a measure of true tax paid, then, the amount of clawbacks should be subtracted from the total tax paid.” (See also Verbist 2005.) However, we opine that clawbacks are an integral part of the tax system. In contrast to Prasad and Deng (2009) we also do not consider indirect taxes in our investigations.
- 5.
- 6.
Some data sets are censored in the way that negative incomes (mainly losses of certain income sources and losses carried forward from past years) are reported as zeros. Hence, we decided to leave out all entries which are nonpositive with respect to either GI or DPI or both. Moreover, inclusion of losses would have diluted the analysis of tax progression.
- 7.
Recall that Israel became an OECD member only in 2010, Taiwan became an OECD observer in 2002. Hence, both countries are not covered by OECD, Growing Unequal (2008).
- 8.
This does not mean that there are no social security subsidies present, but that they are paid as an aggregate to respective institutions rather than directly to individuals. For instance, about one third of the expenses for German old age pensions comes from federal funds, but it is paid to the respective authority rather than directly to individuals.
- 9.
Taking the example of a Belgian income tax reform in 1988, Decoster and van Camp (1998) investigated the differences of taking the administrative definition of the fiscal units on the one hand and the families on the other. Although they found some deviations, the basic results were robust with respect to the unit of observation.
- 10.
Perhaps this might explain why Peichl and Schäfer (2008, p. 16) (using the Suits measure of tax progression) did not find major differences between statutory and effective tax progression for gross incomes.
- 11.
As compared to other empirical work, this is a rather fine grid. Sala-i-Martin (2006, pp. 355 and 357), for instance, had to work with quintiles and had to resort to widespread data interpolations for carrying out his ambitious study. Bishop et al. (1991a, p. 464) worked with deciles for their construction of Lorenz curves, arguing that “increasing the number of quantiles does not necessarily improve the quality of the overall test” (p. 476, Footnote 5). A completely different approach was used by Duncan and Sabirianova Peter (2008) and by Sabirianova Peter et al. (2010). Since they did not find a way to disentangle the influence of the income distribution on tax revenue, they largely relied on the tax schedule alone. To capture the distribution of taxable incomes, they used the interval from zero to the fourfold per-capita GDP of the respective countries, and divided it by 100. Then the tax was calculated for each income corresponding to the resulting percentiles. This approach suffers from the fact that per-capita GDP multiples do not form representative income tax bases.
- 12.
Recall from p. 54 that by this procedure we excludere-ranking resulting from the application of equivalence scales.
- 13.
By q-curves [p-curves] we mean the discrete analogues of the curves defined by (4.35)–(4.37) [(4.38)–(4.39)].
- 14.
See Gastwirth and Glauberman (1976) for errors in estimating Lorenz curves when grouped data are used instead of individual data.
- 15.
Anderson et al. (2008, p. 3) report that in 2007, CEOs of S&P 500 firms pocketed on average 344 times the pay of an average American worker. Furthermore, they argue that the gap between CEOs and minimum wage workers runs even wider. In 2007, CEOs averaged 866 times as much as minimum wage employees. See also the extensive list of CEO remuneration by Executive Paywatch, downloadable from http://www.aflcio.org/corporatewatch/paywatch/ceou/database.cfm. label ceo
- 16.
In their comprehensive study of 143 countries from 1981 to 2005, Duncan and Sabirianova Peter (2008) observed decreasing Gini coefficients from 1981 to the mid-nineties, and decreasing Gini coefficients in the last decade to 2005; in their study comprising 189 countries from 1981 to 2005, Sabirianova Peter et al. (2010) observed considerably decreasing income tax progression throughout taking an average over all countries. Note, however, that their analyses did not take into account the income distribution.
- 17.
Israel is not included in Table 5.3 because she became an OECD member only in 2010, and Taiwan has only the status of an OECD observer since 2002.
- 18.
Using OECD data, Tachibanaki (1981) provided also largely implausible results for tax progression for ten OECD countries.
- 19.
This means that married couples pay taxes twice the tax on the half household income, which implies a significant attenuation of tax progression as compared to taxation of individuals.
- 20.
In Australia, there is a Medical Care Levy amounting to 1.5 percent of taxable income, which is, however, collected along with the income tax and is treated as a separate part of the income tax by the LIS data, akin to the German Solidaritätszuschlag of the income tax. In Denmark there is a flat rate contribution for the supplementary pension scheme amounting to DKK 894/year in 1999 [about € 10/month] and a small flat contribution for the unemployment insurance.
- 21.
The conversion of household data into equivalized data occurs through division by \({m}^{\alpha } \geq 1\). Hence, when household data are nondecreasing in \(m\), then the household data for \(m > 1\) are divided by a divisor which is greater than one. This means that household data are relatively more diminished the greater they are. They move closer together, which causes their distributions to become more equal. However, if household data are on average decreasing functions of household size \(m\), then smaller data are divided by divisors greater than one, and the respective distribution of equivalized data becomes more unequal. This may be the case of substantial tax benefits for bigger families (recall that we re-ordered all equivalized data according to equivalized gross incomes), which may in exceptional cases carry over to equivalized data of net incomes. It may also be the case if households with high incomes have substantially less children than households with small incomes, which causes a more unequal distribution of gross equivalized incomes, which may carry over to other equivalized data as well. Note, however, that most commonly household data are nondecreasing functions of \(m\).
- 22.
Tables tec00018 and tec00019.
- 23.
- 24.
Trabandt and Uhlig (2010) showed that additional taxation of labor yields much higher relative increase in tax revenue than additional taxation of capital.
- 25.
Note that international competition enforced this move also from the fiscal policy of countries which did not adopt a DIT. Starting from 1986, Corneo (2005, p. 181) noticed for Germany a gradual shift of the factor incidence of income taxation from capital to labor.
- 26.
This can be accomplished either under the gross-asset method mainly adopted by Norway, or under the net-asset method mainly adopted by Finland and Sweden. For details see Sørensen (2010, pp. 12–16).
- 27.
It may sound strange that, on the one hand, it is argued that there are no mandatory employer social security contributions, whereas, on the other hand, there are mandatory superannuation contributions. According to Australian legislation, superannuation contributions are considered to be “private savings generated through compulsory contributions,” since these contributions accrue as individual claims of employees for retirement rather than as contributions to public funds. Hence, the legal character of superannuation is an additional mandatory part of wages or salaries which has to be put aside for later supplementing old age pensions.
- 28.
Whiteford (2010, p. 531) demonstrated that Australia is leading in income-tested cash transfers among 30 countries.
- 29.
The Medicare Levy had developed originally from an employee’s mandatory social security contribution; later on it was shifted to the central government income tax category.
- 30.
According to LIS Data Information of Wave V for Australia, the data collection period extended from July 2000 to July 2001. This means that the LIS data for Wave V of Australia are based on the New Tax System.
- 31.
In Australia, the term Commonwealth refers to the Federal Government.
- 32.
- 33.
Note that OECD, Taxing Wages (2001, p. 258) correctly considers this impost as a social security contribution, although the Danish Revenue Statistics classifies it as part of the income tax. LIS, however, follows the Danish Revenue Statistics and counts it as part of the income tax.
- 34.
The OECD, Tax Policy Reform (2010, pp. 111–3), report is enthusiastic about the ongoing Danish tax reform launched in 2010. It aims at a substantial reduction of the top marginal tax rates and a moderate reduction of the marginal tax rates of the bottom income strata. This reform is to be financed by broadening the tax base, in particular by substantially reducing tax deductability of interest for the personal income tax exceeding DKK 50,000 (DKK 100,000 for married couples).
- 35.
This means that this allowance does not apply to pensions and social security benefits.
- 36.
Until 2004 Statistics Finland used the ‘old’ OECDequivalence scales, viz. the weight 1 for the first adult in a household, 0.7 for further adults, and 0.5 for children aged between 0 and 17 years.
- 37.
The German income tax schedules for the period 1958–2005 are downloadable as “Tarifgeschichte” from the website of the German Bundesministerium der Finanzen.
- 38.
For the sake of comparability the figures are given in terms of euros.
- 39.
For a comprehensive survey of the German income tax based on the statutory tax schedules for the time from 1958 to 2005 see Corneo (2005).
- 40.
Bach et al. (2009, p. 311, Table 2) report that, out of 45.16 million of potential tax units in 2001, only 29.1 million filed tax returns. This means that only 64.4 percent of potential tax units actually filed tax returns, leaving an estimated 35.6 percent of non-filers. Social security old age pensions enjoyed preferential tax treatment. This preferential tax treatment of old age pensions was changed as of 2005. Since 2005 old age pensions are subject to taxation, however, with long transitional provisions allowing for lower taxation for old age pensioners in accordance with the starting year of their old age pension. The pensions of civil servants were ever fully taxable.
- 41.
This status was later changed effective from 2005.
- 42.
The term “new countries” refers to the area of the former German Democratic Republic and the term “old countries” refers to the area of the former Federal Republic of Germany.
- 43.
As we did not find a clear-cut report of the Israeli tax and social security system prevailing in 2001, we had to compile it from various sources. Moreover, note that the Israeli tax system was thoroughly reformed as of January \({1}^{\mathrm{st}}\), 2003.
- 44.
The regular rate of employees (4.9 percent) is split among the different branches of National Insurance in the following way: 2.7 percent for old-age and survivors, 1.3 percent for disability, 0.1 percent for long-term care, 0.6 percent for maternity, 0.15 percent for unemployment, and 0.05 percent for accident injury; similar breakdowns apply to all other rates.
- 45.
Note that the Dutch government had launched a major tax reform effective of 2001. See the OECD Report on Netherlands for 2000, pp. 44–51, and the OECD Report on Netherlands for 2002, pp. 45–8.
- 46.
The OECD Report on Netherlands for 2000, p. 49, specifies: “In the Dutch tax system the owner-occupier is fully taxed on the imputed rents (huurwaardeforfait) after deduction of expenses, such as mortgage interest. However, in practice, imputed rents—in most cases 1.25 percent of the property’s value—are well below market rents, whereas interest deductions are allowed at the actual rates, thus providing homeowners with a substantial benefit. As a result, in 1998, homeowners deducted around € 13 billion from their taxable income for mortgage interest, reducing their tax liabilities by about € 6.5 billion, whereas they paid only around € 2 billion in taxes on their imputed rent.”
- 47.
According to the OECD Report on Netherlands for 2000, pp. 82–3, only about 60 percent of the population is covered by this insurance; 30 percent of the population has private health insurance, and civil servants are statutory insured.
- 48.
- 49.
For an excellent survey of the Norwegian tax system see Kleinbard (2010, pp. 53–83); for a survey of the contemporary Norwegian tax system see http://www.kpmg.no/arch/_img/9484126.pdf.
- 50.
On housing only 50 percent of the capital gains are taxable, and this can be deferred in case of purchase of an equivalent property within 12 months. Sale of other private real estate is taxable only if the profit is more than SEK 50,000.
- 51.
For the self-employed the rate is so high because they have also to pay the majority of employer social security contributions which cover basically the same items but are a bit higher, viz. 32.52 percent, in addition to the payroll tax of 24.25 percent (16.16 percent for persons older than 65 years).
- 52.
In their analysis for Australia, Canada, Sweden, and the United States, Bishop et al. (1990, Appendix, Fig. 3) showed that Sweden had the least progressive tax and transfer system assuming the conditional postfisc progressivity orderings of all four countries under investigation. For their approach see Footnote 2 in Chap.1.
- 53.
The Institutional Information for 2000 on Taiwan’s income tax régime as given by the LIS Database is wrong. There it is assured that the tax schedule presented in the Institutional Information should apply to 2003. However, the tax schedule given there did not even hold in 2000. We are indebted to Wei Yu-lun of the Taxation Agency, Ministry of Finance, Taiwan, for information on the correct tax schedule. We are also indebted to Mrs. Julia Scherpp of Baker & McKenzie who allowed us access to a copy of Investitionsführer Taiwan (2000).
- 54.
In 1999, private pensions from two schemes were concerned. First, the so-called Retirement Annuity Contracts (RAC). These contracts could be taken only before July 1\({}^{\mathrm{st}}\), 1988, when the current form of the Personal Pension Plan (PPP) was introduced. After July 1\({}^{\mathrm{st}}\), 1988, no new RACs could be taken out, but those with such contracts were able to continue contributing to them. From April 6\({}^{\mathrm{th}}\), 2006, under the new rules introduced by HM Revenue & Customs, RACs were put on the same basis as PPPs and almost all of their special features no longer apply. Before April 5\({}^{\mathrm{th}}\), 2006, retirement annuities were taxed at basic rate of 22 percent by the annuity providers paying them. Since April 6\({}^{\mathrm{th}}\), 2006, they are taxed under the personal income tax schedule.
- 55.
The married couple’s allowance was abolished as of April 6\({}^{\mathrm{th}}\), 2000. Since this date it is only effective for couples or partnerships where one spouse was born before April 6\({}^{\mathrm{th}}\), 1935.
- 56.
The Tax Foundation provides a comprehensive list of the U.S. Federal Individual Income Tax History, 1913–2011, which gives a detailed list of all federal income tax schedules that held in the time periods from 1913 to 2011. See www.taxfoundation.org/taxdata/show/151.html.
- 57.
The income of children with sufficient income who are also claimed as dependents by their parents are taxed at their parents’ top marginal tax rate for incomes exceeding their itemized deductions plus the standard allowance of USD 700 (850) to prevent transfers of income-producing property from parents to children.
- 58.
Allowable itemized deductions are reduced by 3 percent of the amount by which income exceeds USD 128,950. However, the reduction is limited to 80 percent of the total of otherwise allowable itemized deductions other than the allowable itemized deductions for medical expenses, investment interest, theft and casualty losses, and gambling losses.
- 59.
For a detailed account of the history of EITC parameters see Tax Policy Center, Urban Institute and Brookings Institution, Tax Facts, Historical EITC Parameters, downloadable under http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?DocID=36&Topic2id=40&Topic3id=42
- 60.
The website of The Tax Foundation explains: “The original role of the Alternative Minimum Tax, introduced in 1969, was to prevent a small group of high-income taxpayers from combining so many deductions and exemptions that they owed little or no income tax. The AMT identifies taxpayers who have taken ‘excessive’ advantage of legal tax breaks and forces them to re-calculate their income tax. They must add back in some of the previously untaxed income, take a special AMT exemption and pay tax on this new definition of taxable income at different rates. In theory, the AMT serves as a tax backstop, taxing income that would have escaped taxation.” This website also informs that in 2000 there were 1,304,198 returns subject to AMT with an additional AMT liability of USD 9.6 billion. For further details on the AMT see Chamberlin and Fleenor, www.taxfoundation.org/publications/show/498.html.
- 61.
The Tax Foundation provides a comprehensive list of the U.S. State Income Tax History, 2000–2010, which gives a detailed list of all state income tax schedules which had held in the years from 2000 to 2010. See www.taxfoundation.org/taxdata/show/228.html.
- 62.
Elder (1992) studied the influence of limitation laws of expenditure and/or taxes on state fiscal policy. He found limitation laws in 19 states. Elder (1992, p. 60) observed that “growth of tax burdens has been significantly reduced in those states that have used expenditure limitations. In contrast, in states that have sought to constrain revenue growth directly the limitation laws have been ineffective.” Such legislation may explain the differences in the states’ fiscal policy. With respect to business impost (corporate income tax rate, investment tax credit rate, capital apportionment weight, and average corporate tax rate), Chirinko and Wilson (2010) observed widespread business campaign contributions aiming at tax reductions in the respective states. Conversely, campaign contributions affect tax competition among states. They found that contributions have a significant direct effect on tax policy, the economic value of a USD 1 business campaign contribution is nearly USD 4. This explains differences in the states’ business taxation, which is not of concern in this book, although it deserves to be mentioned.
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Seidl, C., Pogorelskiy, K., Traub, S. (2013). Data and Fiscal Institutions of the Surveyed Countries. In: Tax Progression in OECD Countries. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-28317-8_5
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