Today is tax freedom day – and time to think the unthinkable

 
Allister Heath

TODAY is tax freedom day in the UK – the day that you start to work for yourself, rather than for the government. For an average UK resident, the entirety of January, February, March and April, and virtually all of May, went on part-financing the state – the first 150 days of the year. It is only money earned from today that is retained by families to spend as they see fit.

The budget deficit is primarily a form of deferred taxation – and if the government were running a balanced budget, tax freedom day would actually fall on 13 July. As the economist Gabriel Stein argues, the government will spend the equivalent of all of the income generated by the economy for the first 196 days of the year. So much for the supposedly savage cuts to public spending from the coalition – and tragically, even though expenditure remains so high, parts of the public sector, including the NHS, are nearing crisis again. The system is bust, and needs radical structural change.

The research, for the Adam Smith Institute, takes all taxes as a share of net national income – currently 41.5 per cent – and applies that to average annual incomes. This makes sense: all taxes are paid by people, even those supposedly levied on companies; and there is a myriad of ways the taxman double, triple or even quadruple taxes income that is generated in this country, despite all of the loopholes that also exist in our broken tax system.

There are many reasons why all of this matters. A high tax burden reduces the incentive to work, save and invest. Elevated levels of public spending are inefficient: government expenditure is less productive, on average, than private spending, and is often allocated to political, rather than economic, priorities. The second point is equally true of capital projects, which are usually deemed to be much better for economic growth than current expenditure by the government. Productivity growth in public bodies has been very weak or even negative for years now.

Too much of the public debate falls into one of two fallacies: it either conveniently forgets that extra spending has a cost which needs to be met by taking money from people via the tax system; or it assumes that increasing the tax take is self-evidently a good thing, and that we need ever more of it to feed the public sector. This second point is in reality deeply contentious. Collectivists believe that the state needs to expand and that the smallish spending cuts being proposed by the coalition need to be stopped; they are the kind of people who routinely describe tax hikes as “money saved”, or tax cuts as a “cost” (as if all income was owned in the first place by the government).

Individualists, by contrast, believe taxes to be a necessary evil that need to be kept to the lowest possible level – but crucially, that this is entirely compatible with tackling poverty and ensuring the best possible schools and hospitals. They believe that cash transfers should be structured as to only help the truly needy, and whenever possible to ensure a hand-up, rather than a hand-out. Perhaps most importantly of all, they want new mechanisms to be adopted to allow the private sector to help run and finance public services, for the UK to learn from the Netherlands, Germany, Australia and Singapore when it comes to the provision of pensions and healthcare, for markets to be introduced into education and for private companies to build and operate far more infrastructure projects, charging users.

Taxes are too high, and yet Britain’s welfare state is in crisis. We need to face up to this lethal dichotomy, and start to think the unthinkable.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath