Help me understand how much of my hard earned £/$/€ ends up as tax

January 19, 2011 9:33 AM

Is there a known term / theory for describing (and maybe even calculating) how much of gross income ends up as tax?

For instance, say I've earned £10 gross, I might then pay £3 income tax and have £7 left to spend. With my £7 cash I buy a CD in a shop, they get my £7. With the shop's gross income, they have to pay their staff wages, pay the power company for electricity, pay the CD distributer etc.

Each of those transactions include the recipient paying some form of tax (the shop employee pays income tax herself and the companies pay corporation tax on their profits), the remainder being their net income/revenue. This is then spent wither their suppliers on further goods and services, again incurring tax. So although the amount of money being spent is diminishing each time, it seems that tax is being recursively deducted.

How much of my original gross £10 earned ends up as tax?

posted by nofunnyname to Work & Money (6 answers total)

It depends on how many things you spend it on. I don't think it's useful to try and gauge an abstract net on a specific amount of money, but to look at it on an exchange basis: it's transactions that are taxed. Reading between the lines of your questions, I'd guess that all money which doesn't wind up in a savings account or someone's mattress is absorbed into the tax structure. IANAE
posted by rhizome at 9:41 AM on January 19, 2011

*question (not questions)
posted by rhizome at 9:42 AM on January 19, 2011

I hear this called overall tax burden or total tax burden, but it is usually calculated on a large scale, e.g., the total income received by people in country X compared to the total tax receipts of all the relevant taxing bodies. I don't know how you'd calculate it for a small, specific sum like your example -- you'd have to know the tax brackets of the store's employees, etc.
posted by enn at 9:44 AM on January 19, 2011

Best answer: What you are asking about is not answerable because you are confusing what economists call stocks and flows. You are treating taxes as a stockpile, something that is used up. But what is really occurring is a flow which includes a time element. The money flows from one individual to the next but is not really used up in the sense that a stockpile can be used up.

The best measurement for what you are interested in is called tax revenues as a percentage of GDP. It is total taxes in a year divided by the total domestic product in one year. In the U.S. you can find various versions of taxes as a percentage of GDP by including taxes at the federal level, the state level, or the local level or a combination of all of these. For example, this from the OECD (PDF) shows taxes as a percentage of GDP for various countries.
posted by JackFlash at 9:50 AM on January 19, 2011 [2 favorites]

I'm no economist, but... I think the problem with your conceptual model of the relationship between taxation and economic activity fails to take into account the fact that tax money doesn't go into a black hole. It's not like Cameron or Obama or whoever is collecting all the receipts for a nice end-of-the-year cash-fueled bonfire. In fact, governments spend pretty much all their money (in a lot of cases, more money than they have, actually) on stuff -- on civil servant salaries which those civil servants then spend on their own lives (almost as if they were normal humans, eh?), on social programmes, on infrastructure.... Even the stuff like weaponry still means that some soldier or contractor or supplier is getting paid to produce stuff.

So in the end, I'd imagine that close to 100% of the total money supply in a given country goes through the government's coffers -- but most if not all of it goes back out again, as well. So I'm not sure this question actually has a helpful answer.
posted by tivalasvegas at 10:21 AM on January 19, 2011

Response by poster: I appreciate the calculation isn't really possible (who can say what tax rates were included or when goods/services in the 'chain' are imported), but I was expecting there to be some kind of example percentage of that £10 that ends up as tax.

Reading up on stocks and flows (thanks @JackFlash) is helping me see that it isn't really that x% of my £10 goes to tax, y% goes elsewhere and that's 'finite'. I'll certainly be reading up more of this, thanks.
posted by nofunnyname at 12:58 AM on January 20, 2011