Britain’s tax system combines the worst of the US and Scandinavia
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
If I asked you which country has the most progressive tax system in the developed world — where high earners hand over an especially large share of their income relative to the average worker — what would your answer be? Perhaps Sweden? Denmark?
The answer is in fact Britain. According to the latest figures from the OECD, 45 per cent of top earners’ salaries goes on taxes and social contributions, compared with 29 per cent for the average worker, for a top-to-middle gap of 16 percentage points. Scandinavian gaps come in at about 12 points. Northern Europe’s social democracies tax everyone from bottom to top at a moderately high rate. In Britain, taxes at the top are comparable to Denmark and Norway but the average Briton is taxed less than the average American.
This is a relatively recent development. Up until 15 years ago, taxes on the average Briton were in the middle of the pack internationally, while the top 10 per cent was relatively under-squeezed. Since then the middle and bottom have enjoyed tax cuts, while the top earners have seen a steep increase and are contributing an ever-growing share of total income tax receipts despite their share of income flatlining.
If this is the first time you’re hearing about this, it might be because it’s a deeply inconvenient fact for everyone involved. The centre-right Conservative party is not especially keen to broadcast the fact that it significantly increased taxes on high earners during its tenure from 2010 to 2024. And the left has nothing to gain from informing its base that Britain’s top 10 per cent has had a rough 15 years of being squeezed ever more tightly and might be due a break.
As such, the prevailing narrative about the UK’s tough austerity in the 2010s misses a crucial detail: there were indeed steeply regressive and damaging cuts to benefits and public services, but this was not a classic move for a government of the right, cutting spending to finance tax cuts for the rich. So deep was the fiscal crisis that public spending was cut and taxes on the rich went up. The result is that Britain’s top 10 per cent is the only segment paying more in taxes today than in 2010. Even after including the impact of benefit cuts on the bottom of the income distribution, the top has seen bigger income losses than anyone other than the poorest fifth.
But much more important than the political inconvenience and violation of the accepted narrative, these changes are having deeply negative consequences for the economy and society.
Successful social democracies spread both taxation and spending across the population. Everyone pays their way and everyone reaps the benefits in the form of high-quality and well-funded public services, fostering socio-economic solidarity with buy-in from the top and bottom alike.
At the other end of the spectrum, the US has lower taxes and public spending, but a far more dynamic economy and strong incentives for work and innovation. Its robust growth means high living standards are no longer confined to the top but increasingly shared across much of the population.
The UK has the worst of both worlds: it collects much less tax revenue from the middle of the income distribution than its European neighbours with better-quality public services, while at the top the combination of high and rising taxes with the abrupt withdrawal of public goods creates bad incentives and resentment all round. The UK’s curious experiment in eating the rich while shrinking the state has left Britons less satisfied with their public services than not only Scandinavians but most Americans, and poorer than not only Americans but most Scandinavians.
Troublingly, next week’s UK Budget looks set to deliver more of the same muddled thinking. Broad-based tax increases were floated but have since been retreated from. The latest proposals include a raft of smaller tweaks that seem likely to land disproportionately on higher earners while raising much less money for overhauling strained public services.
Neither successive British governments nor the wider public are prepared to confront mathematical realities. Whether Britain wants to be more like Scandinavia or America, getting there will mean less reliance on the rich to pay the bills.
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