Some Aspects of the Progressive Income Tax Structure in the UK

Abstract

The yield of income tax varies automatically with movements in personal income as well as with discretionary changes in tax rates and allowances. In forecasting and for historical appraisal of fiscal policy there is a need to specify the automatic relationship between tax and income movements. In the former case this means specifying an accurate direct tax function in the forecasting model (i.e., identifying endogenous tax movements). From the descriptive, historical, point of view, it is possible to use such a function both to understand the ‘built-in’ properties of the budgetary system and, at the same time, to create a more complete picture of budgetary intervention than is given by the treatment of discretionary changes alone as indicators of fiscal policy. The latter procedure, which arises from the traditional British approach to budget-making (while not necessarily an inaccurate way of formulating policy), does tend to prevent an accurate picture of the complete Government intervention being formed by observers, and may result in expenditure, tax and monetary decisions being taken and analysed in a fragmented framework.