Adam Smith Institute

What is Tax Freedom Day?

When you fill out your self-assessment tax form — or collect your weekly pay packet and see all the deductions for tax and national insurance — it might seem that you spend more time working for the government than for yourself.

But just how much time do you spend working for the government? How long does it take to work off the burden of taxation?

In fact, the average taxpayer works for the government from New Year's Day until sometime in late May — a date which the Adam Smith Institute calculates each year as TAX FREEDOM DAY.

How bad can it get?

Back in 1963, our tax freedom came at the end of April. But the burden of taxation was higher throughout the 1980s than it is today, following Mrs Thatcher's early and sharp tax increases to pay for large-scale economic restructuring.

From its 1982 peak, Tax Freedom Day started to arrive ever earlier, making the UK an attractive low-tax economy for both foreign and domestic investors. This trend has not lasted, however: the tax burden rose again under Tory Chancellor Kenneth Clarke, and the present government has steadily – and stealthily – raised the tax burden. Moreover, the Budget 2007, like its predecessor Budget 2006, forecasts a rising tax burden over coming years. Whether a higher tax ratio is a good thing or a bad thing is to some extent a matter of opinion. Someone who believes that the government (or "the State" or "Society") is better at spending peoples' money than they would be themselves, would presumably approve of a higher tax burden – ultimately reaching 100%. On the other hand, someone who believes that the government is always likely to do this worse than individuals, would presumably approve of a lower tax burden – ultimately perhaps no tax (and so no state) at all. It is unclear whether there is an 'optimum' tax burden. However, what does seem to be clear is that there is a relationship between higher taxes and lower economic growth; and also that a tax burden at around 40% of GDP is unstable in the sense that it always creeps up unless forcibly held down.

It is therefore extremely worrying that – at a time when radical ideas such as flat tax are gaining ground throughout Europe and most governments are attempting to ease the burden of taxation they impose, the Labour government continues to increase the UK tax take. Comparing the years 1997-2008 with the previous ten-year period is rather depressing. Then, the tax burden was clearly trending down. Since 1994, it has been clearly trending up. Moreover, it is alarming to see how New Labour – which came into power to a great extent because the voters had lost faith in the Conservative Party's capacity to run the economy – has clearly wasted the opportunity granted by buoyant tax revenues in earlier years. Instead of returning this money to its owners – the taxpayers – it has committed itself to ever increasing expenditure, which now is plunging its finances deeper and deeper into deficit. For the coming financial year, Mr Darling expects a Public sector Net Cash Requirement (ie, deficit) in excess of £50 billion for the central government.