Ask a random person on the street how much tax they pay and they’ll usually guess around 20 per cent of their income. That’s the basic rate of income tax, and it’s easy to forget taxes like VAT, council tax, beer and wine duties, air passenger duty, motoring taxes and stamp duty.
Even if you remind them of those, it takes a short course in economics to explain that things like corporation tax eventually hit ordinary people too if they’re saving for their retirement. In fact, there are more than 30 different taxes levied by the government to pay its bills.
There’s a reason for that. The stealthier taxes are, the less people realise just how much they’re paying. The art of taxation, a French taxman once said, is in plucking the goose with as little hissing as possible. And guess what: we’re the geese.
That’s why we at the Adam Smith Institute calculate Tax Freedom Day, which this year falls today. We add up all the taxes Her Majesty’s government levies every year and compare that against the total amount Britons earn.
This year, we’ve had to work for 154 days to pay our taxes – four days longer than last year. This is the latest Tax Freedom Day since 2001, and only the fourth time it’s been this late since 1986.
What’s going on? Even though there haven’t been major headline tax rises, and the chancellor has actually cut a few taxes like corporation tax, the tax take as a fraction of national income has risen.
Because the tax code is so complex, normal shifts in people’s behaviour can mean they’re paying more tax than before: people drinking ale instead of (less taxed) cider, or eating hobnobs instead of (zero VAT) Jaffa Cakes, or buying shares instead of (stamp duty-free) bonds. Things like this are why Tax Freedom Day is later this year.
You might not mind 42 per cent of net national income going on tax. It isn’t all wasted, after all.
But it does feel a little galling to spend nearly half the year working for the taxman. Suppose we wanted to pluck his feathers for once. Where might we start?
We think there are two big priorities for cutting taxes: one, stop taking so much money from the working poor; and two, stop taxing investment so much.
The government did well to raise the tax-free personal allowance to the full-time National Minimum Wage (NMW) rate, but it ignored National Insurance Contributions (NICs), which are in practice just another form of income tax.
The NICs threshold kicks in at a much lower level, around £8,000 a year, which means that even minimum wage workers still pay a decent wodge of their income to HMRC. We want the government to raise that threshold. It would put more money in people’s pockets, make work pay more, and finish the job of taking the poorest workers out of tax.
Next, take the axe to capital taxes. These seem like easy money, because they tax “the rich”. But investment is what drives economic growth, and the consensus among economists is that taxing investment makes us poorer in the long run – a lot poorer, in fact. Cuts to corporation tax and capital gains tax would boost economic growth, living standards and, eventually, tax receipts. They should be a no-brainer for a reformist government.
The one silver lining to Tax Freedom Day being later this year is that it falls on a Friday. So today, if you can stomach the taxes, raise a glass to tax freedom – and let’s resolve to make it fall a week earlier next year.