28 May 2010

Tax Freedom Day 2010 will fall on May 30, according to the Adam Smith Institute (ASI), which has been calculating Britain’s Tax Freedom Day since 1991.

That means that for 149 days of the year – from January 1 to May 29 – every penny earned by UK residents will be taken to pay for government spending.

This year’s Tax Freedom Day comes three days later than in 2009, when Tax Freedom Day was May 27. The most significant driver of this change was the rise in VAT which came into force on January 1: this alone pushed Tax Freedom Day one-and-a-half days further into the year.

But what about the deficit?

Tax Freedom Day is only based on tax receipts, and takes no account of the government’s budget deficit. According to the ASI’s executive director, Tom Clougherty, this can be misleading:

‘Since all budget deficits eventually have to be financed, borrowing should be viewed as deferred taxation. Our government relies so much on debt to fund their spending, that our traditional Tax Freedom Day measure makes them look more virtuous than they actually are. In reality, all they are doing is piling up obligations on future taxpayers.’

According to the Institute’s research, if all the government’s 2010 expenditure was financed by taxes rather than by loans, Tax Freedom Day would not come until July 8 – some 38 days later.

That gap points to Britain’s worst fiscal position since 1976 – when Britain had to be bailed out by the IMF – and suggests that Britons will face savage tax rises unless public spending is urgently brought under control by the next government.

Which taxes are the biggest?

The biggest part of the UK tax burden is income tax, which Britons will have to work 41 days to pay in 2010. They will work another 27 days to pay National Insurance Contributions, and 21 to pay VAT. Thereafter, various excise duties account for 13 days, corporation tax for 12, and council tax and business rates for another 7 days each. Britons will work for 3 days to pay stamp duties, and 18 more days to pay a range of miscellaneous taxes. This includes inheritance tax, which takes 15 hours to pay.

What might have been?
According to the Institute’s research, things could have been radically different if public spending had been kept under control since 2000, the last time the government managed to balance their books.

In 2000-1, three years into the Labour administration, government spending was £367.1bn. For 2010-11, the government is forecasting a figure of £704bn: nearly twice as much. If it had grown in line with inflation since 2000, public spending would now be £440.8bn – £263.2bn less than current estimates. That saving would be enough to wipe out the £163.8bn deficit, abolish all National Insurance contributions, and get rid of inheritance tax.

Dr Eamonn Butler, the Institute’s founder, said:

‘It really is pretty galling to think about. After all, if someone offered you a choice between today’s public services, today’s taxes, and government debt that will take generations to pay off, or 2000’s public services, with no debt and a massive tax cut, which one would you go for? Gordon Brown shouldn’t just be remembered for his irresponsibility, but also for a decade of squandered opportunities.’

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