Tom Clougherty is executive director of the Adam Smith Institute.
Congratulations, Britons! Today isn’t just a bank holiday, it’s also Tax Freedom Day, the notional day in the year when you’ve collectively earned enough money to pay the country’s annual tax bill, and can start earning for yourselves. So light up the barbeque, pop open the champagne, and celebrate this all-too-brief departure from the road to serfdom. And enjoy while it lasts, because – as usual – there’s less happy news to come…
The first dark cloud is that Tax Freedom Day is coming later this year than it did in 2010. Then, we had to work for the taxman for 146 days. This year, it’s 149. The main reason for the change is that VAT has gone up, and now takes 29 days to pay rather than just 25.
The second dark cloud, this one looming menacingly on the horizon, is that Tax Freedom Day only takes account of the money raised by the government in taxes. No allowance is made for the money government borrows. But if we did have to fully fund our 2011 expenditure through taxes, Tax Freedom Day would not come until July 1. In other words, we’d have to work a full six months for the taxman in order to support government spending.
This, I’m afraid, is a sign of things to come. After all, money the government borrows inevitably has to be paid back by taxpayers at some point, and as the current government works to cover more of its bills through tax revenue, and less through borrowing, Tax Freedom Day is likely to creep later in the year. Gordon Brown’s profligate legacy will be a weight around our necks for some time to come.
So now that I’ve spoiled the party mood, is there anything we can do about how much tax we’re paying? In the short run, well, it’s going to be difficult. We’re still borrowing enormous sums of money on a daily basis, so there is limited scope for tax giveaways – unless, that is, we undertake a far more radical scaling back of the state than the government is currently contemplating. As you might imagine, I’m all for that more radical approach, but perhaps it’s a topic best left for another day.
Assuming the government sticks to its projected expenditure totals, the best we can hope for in the short term is a more rational, more pro-growth tax system. That would involve a big drive for simplification – broadening bases and eliminating exemptions, while gradually reducing headline rates and getting rid of counter-productive political gestures like the 50p income tax band. It would also entail a rebalancing act, shifting the tax burden away from work, investment and saving, and towards consumption and user fees (where appropriate).
There is one other big thing that the government could do to encourage lower taxes in future, and that is to be more transparent about the amount of tax people are actually paying. The current tax system could have been (and possibly was) designed specifically to conceal from people how much of their income ends up in the taxman’s coffers. This needs to stop. If people knew what was really going on, there would be a lot more political pressure to cut taxes, the government would be forced to become more efficient, and in the long run the economy could even grow faster as a result.
Ultimately, this is why we calculate and publicise Tax Freedom Day every year: to give everyone a clear, simple, straightforward idea of just how much tax Britons pay. Funnily enough, that’s precisely why the Treasury hates it!