Taxation (Hansard, 19 May 1988)

§ Mr. Norman Lamont

[holding answer 29 April 1988]In summary the methodology is:

(i) Average earnings for each financial year are derived from the New Earnings Survey series for "full time males on adult rates, whose pay for the survey pay-period was not affected by absence". The series for years before 1983 has to be adjusted to take account of a change in definition in that year. The series is projected from 1986–87 to 1988–89 using the assumptions provided to the Government Actuary and reported in chapter 3 of the Autumn Statement 1987.

For each multiple of average earnings:

(ii) Income tax liability is calculated using the personal allowances, income tax rates and thresholds for the appropriate year. The man is assumed to claim no allowances or reliefs other than the relevant basic personal allowance and, where appropriate, child tax allowances.
(iii) National insurance contributions (NIC) are calculated using the lower earnings limit, the upper 578 earnings limit and, in relevant years, the limits on reduced rate NIC bands for the financial year. The NIC rates used are those for a man not contracted-out of SERPs.
(iv) Child benefit is calculated using the rate in force for the financial year. Where the rate changes during the financial year, a financial year average s calculated, taking account of the number of weeks of the financial year for which each rate applied.
(v) Disposable income is calculated as the sum of gross earnings and child benefit, less income tax and NIC.
(vi) Ten per cent. of disposable income is assumed to be saved. This simplifying assumption is needed as indirect taxes are calculated by reference to expenditure, rather than disposable income (see vii). The same assumption is used for all years so that changes in indirect taxes reflect changes in the tax regime, rather than changes in savings behaviour.
(vii) Payments of VAT, each of the Customs and Excise duties, vehicle excise duty, domestic rates and other indirect taxes including intermediate taxes such as employers' NIC are estimated using regression equations derived from the 1985 Family Expenditure Survey (FES). These relate indirect taxes paid to expenditure; they are simple linear equations with a constant term and expenditure as the independent variable.

There are separate equations for different family types to reflect their varying expenditure patterns. Separate VAT equations are developed to reflect changes in VAT coverage since 1978–79 (two rates of VAT in 1978–79 and the extension of the VAT base from 1984–85 onwards).

The equations are developed from the middle 80 per cent. of observations in the FES to avoid possible distortion caused by inclusion of extreme values. The equations cannot be used outside the range of expenditure from which they are developed and this restriction is implemented by only estimating indirect tax payments within the range of three quarters to one and a half times average earnings.

The equations developed from the FES are at the prices and levels of consumption of that FES (currently 1985). They are therefore scaled backwards and forwards from 1985 to financial years between 1978–79 and 1988–89 taking account of changes in total consumption and changes in revenue from the individual tax.

Payments of individual indirect taxes, or groups of indirect taxes, by a particular family type at a given level of earnings are calculated by putting their spending level derived from (v) and (vi) into the appropriate equations.

A more detailed explanation could be provided only at disproportionate cost.