Sam Bowman is Deputy Director of the Adam Smith Institute.

Benjamin Franklin said that only two things in life are inevitable: death and taxes. Death is more permanent, but it comes just once in our lives. Taxes are ever-present.

What’s worse, most of us only have a vague idea about how much tax we’re actually paying. 20 per cent? Well, that’s income tax, but we pay National Insurance on our income, too, which adds another 12 per cent. What’s left is taxed when we spend it.

Another 20 per cent goes to VAT on most items, though some essentials like food and energy are exempted or taxed at a lower rate. On naughty things like cigarettes and alcohol we pay another 61 per cent and 16 per cent in excise duties on top of the VAT, which put together mean that 77 per cent of the price of cigarettes and 33 per cent of the price of a pint is tax. Other taxes like Air Passenger Duty, Corporation Tax and council tax add to those.

That’s why Tax Freedom Day, which falls today, is something to celebrate. For the first time this year, the money Britons earn will go into their pockets, not the taxman’s. That means we’ve spent 150 days working to pay off our taxes in 2015 – one day more than last year.

Tax Freedom Day is calculated quite simply. We compare the total tax take, from HM Revenue and Customs, and express that as a percentage of Net National Income, a measure of the total income of the country’s households and businesses. We then apply that percentage to the calendar to see how many days it represents.

This is a simplification. Everybody pays a different proportion of their income on tax: some people spend a large part of their budget on zero-rated food, some people spend a lot on fuel for the drive to and from work. High earners tend to pay more tax as a proportion of their income than low earners, although the ones rich enough to afford an expensive accountant probably dodge enough to pay a small proportion. So everyone’s personal Tax Freedom Day will fall on a different day. Today is a day for the country as a whole.

We count all taxes raised, not just ones paid directly by workers like income tax. So things like Corporation Tax and Stamp Duty are counted too. If that seems unusual, remember that all taxes are eventually paid by households – corporations are legal constructs, and taxes paid by them represent a roundabout way of taxing their owners and their employees.

We use Net National Income instead of GDP as our measure of the economy’s productivity over the year to take into account depreciation and foreign investment earnings. That’s standard around the world, and it’s designed to more closely approximate net wealth creation.

Finally, our figures are based on the most up-to-date estimates given by the Treasury and Office for Budget Responsibility. Three sets of estimates are released for every year: advance projections, early estimates and final calculations. We revise past Tax Freedom Day dates in accordance with the latest figures available, so occasionally the date can change retroactively. This can be confusing for journalists, but it means that we have the most accurate Tax Freedom Day dates possible.

Historically, Tax Freedom Day has bounced between being the 23rd of May and the 4th of June since 1997. It crept forward slowly under the Coalition, driven by small increases to the overall tax take aimed at reducing the deficit.

One of the big problems with Tax Freedom Day is that it doesn’t factor in the cost of borrowing. Since all debt borrowed now will eventually have to be paid off with higher taxes, we also calculate Cost of Government Day, which shows government spending as a proportion of the days of the year. This year, that won’t fall for another four weeks – the 29th of June.

Is Tax Freedom Day too late in the year? We at the Adam Smith Institute think so. Tax cuts, particularly for the working poor, are essential under this Parliament. I would prefer to see the National Insurance threshold raised than the Income Tax threshold, because National Insurance contributions now kick in on much lower earnings than Income Tax. Cutting taxes on capital – corporation tax, capital gains tax – would increase investment and drive economic growth.

You do not need to be a tax-cutting free marketeer to like Tax Freedom Day. Its main purpose is to show people how much is paid in taxes in the UK already. Not everyone is an instinctive tax-cutter, but if more people knew how high taxes are, that might change. If you raise a glass to Tax Freedom this evening, remember how much of it is tax – and let’s hope next year’s Day falls a little bit earlier.

155 comments for: Sam Bowman: Today is Tax Freedom Day. Let’s celebrate it – and hope it comes earlier in 2016

Leave a Reply

You must be logged in to post a comment.