Written by David Fickling
“We’re bust and we’re going to make ourselves feel richer by printing money," wrote Eamonn Butler of the Adam Smith Institute.
Published in the FT here.Read more...
Workers in the UK have to work until 14 May to cover all of the tax they must pay in 2009, says a think tank.
This is a shorter wait than last year, when the so-called "tax freedom day" arrived on 22 May, the Adam Smith Institute said.
The average worker must work 134 days in 2009 to earn the money going to the government through income tax, National Insurance, VAT and other taxes.
But factoring in government borrowing extends that period to 176 days.
"Running up deficits can be described as a form of deferred taxation," said Gabriel Stein, chief economist at Lombard Street Research who carries out the calculation.
"The effect will be that when the economy recovers - as it will eventually do - the UK tax burden is likely to rise much faster than would otherwise have been the case and tax freedom day is likely to creep later and later in the year."
The calculation also includes outlays such as fuel, alcohol and cigarette duties, car tax, and council tax.
Excluding government borrowing, the day falls earlier than at any time since 1973.
Business failures and rising unemployment means that the government is unable to bring in as much tax revenue, prompting greater borrowing.
The Institute said that the gap between tax freedom day based on actual revenues - 14 May - and tax freedom day based on government spending - 25 June - was the widest it had been since the early 1970s.
The 25 June date was also the latest since 1984.
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Click here to listen to Dr Eamonn Butler discuss Tax Freedom Day on Radio 4. (Starts 53:25)Read more...
Click here to listen to Tom Clougherty discuss Tax Freedom Day on Radio Five Live. (Starts 22:45)Read more...
Written by David Stevenson
Happy Tax Freedom Day!
Today's the day when the average Briton has earned enough to pay his annual tax bill. In other words, today you stop working for the Government, and start working for yourself. And the – apparent - good news is that this year, we're enjoying the earliest Tax Freedom Day since 1973.
But before you start popping the champagne corks, there's a very nasty sting - or two – in the tale... The bad news on Tax Freedom Day
This year, it's 'only' taken British taxpayers the first 135 days of the year to pay off their debt to the taxman, according to the Adam Smith Institute, the independent think-tank which crunches the numbers.
Of course, it doesn't work out that way in practice. Employees on PAYE pay a tax slice every month, while the self-employed get saddled with a once-a-year bill. But it's still a useful guide to see how large a slice of our total incomes is being surgically removed by the Revenue. And this year, Tax Freedom Day has actually come at its earliest date since 1973.
So are celebrations in order? Sadly, no. TF Day is worked out on what we actually pay in tax. As the economy tanks, people pay less tax because incomes shrink and unemployment rises. So that's the reason it's early this year – not because the Government has slashed tax rates.
In fact, if you factor in government borrowing (which we'll have to pay for eventually), then TF Day wouldn't arrive until 25th June – which would be the latest point in the year since 1984.
And the real bad news is that this gap between TF Day based on tax take and TF Day based on total government spending is rapidly widening as the government's annual shortfall gets larger and larger. The official gap this year is forecast to be £175bn. In reality, it's almost certain to be a lot bigger.
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Britons had to work until Thursday May 14 just to earn enough money to cover all the tax they must pay during 2009, research showed.
The Adam Smith Institute said it would take the average worker 134 days to earn the money they would hand over to the Government through income tax, National Insurance, VAT and other taxes.
But it warned that once government borrowing was factored in, people would have to work until June 25 before all Government expenditure had been covered - the worst figure since 1984.
The group said the gap between Tax Freedom Day based on actual revenues and Tax Freedom Day based on Government spending was now the widest it had been since the early 1970s, and possibly since the Second World War.
It added that the June 25 date was also likely to be too early, as the Government's borrowing forecasts were likely to be optimistic, and the actual day was likely to be pushed back beyond the half year mark.
Gabriel Stein, chief economist at Lombard Street Research who calculates Tax Freedom Day, said: "Running up deficits can be described as a form of deferred taxation.
"The effect will be that when the economy recovers - as it will eventually do - the UK tax burden is likely to rise much faster than would otherwise have been the case and Tax Freedom Day is likely to creep later and later in the year."
The group said that although Tax Freedom Day this year was the earliest since 1973, this was only because it reflected the amount of money actually raised through taxes, which have fallen due to rising unemployment and business failures.
It added that the Government's preferences for stealth taxes in the past few years meant it was becoming harder for people to understand how much tax they were paying.
Eamonn Butler, head of the Adam Smith Institute, said: "The average person spends four-and-a-half months of the year working for Gordon Brown. May 14 is the day when we have worked off our tax bill and at last start working for ourselves."
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Government's belt needs to tighten a bit more before it will feel the pain of the private sector
Sir, So local councils are suffering job cuts, too (“Town halls cut jobs as local government loses £2.5 billion of income",May 11. The fact remains that it is the private sector that is taking the full brunt of this financial storm.
In the last quarter of 2008 local government staff levels indeed fell by 6,000. But Gordon Brown simultaneously presided over a 19,000 increase in central government numbers and a 2,000 increase in public corporations. Overall, the seasonally adjusted number of public employees rose by 15,000 just when the rest of us were wondering whether not only our jobs but also our employers would survive.
Looking at last year as a whole, the private sector lost 105,000 jobs while the public sector actually gained 30,000. I am afraid that the Government has a bit of belt-tightening to do yet before it can be claiming to “share our pain".
Dr Eamonn Butler
Director, Adam Smith Institute
Author, The Rotten State of Britai
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Written by Dr Eamonn Butler, Director, Adam Smith Institute
The Chancellor would get a C for his new tax rises and fail history outright. He will also leave the Treasury worse off.
Given the damage that the new 50 per cent tax rate will probably inflict on the UK economy, the Chancellor seems to have been very cavalier about it. When the House of Commons Treasury Select Committee asked how he decided to impose the new rate on everyone earning £150,000 or more, he replied: “There was no science behind it. It was simply my judgment."
No science? If there is one part of economics that lends itself to scientific analysis, it is tax policy. Taxation has been under the microscope ever since Adam Smith first distilled the principles of good and bad taxation in the 18th century. Two hundred years of evidence later the science is clear: high taxes don't work. They bring the Treasury less revenue, not more. And on the way, they really mess up your economy.
It's shocking that the Chancellor, in his desire to wrongfoot the Tories, has simply ignored this evidence. In the science of taxation, he wouldn't merit a grade C at GCSE. And he would fail history outright, having completely forgotten the lessons of an earlier Labour Chancellor, Denis Healey.
Healey actually relished the “howls of anguish" from the 80,000 people rich enough to pay his top tax rates of 83 per cent - or even 98 per cent for those who lived off investments. But as capital took flight and brains drained from Britain, Healey was forced to go to the IMF for a bailout. Labour's reputation never recovered and, 30 years ago this week, the country fell sobbing into the arms of Margaret Thatcher.
Despite these economic and political warnings, the Chancellor's “judgment" is that it makes sense to impose higher taxes not on just 80,000 people but, according to Treasury figures, on 283,000 - the top 1 per cent of UK taxpayers. That's a lot of folk.
And the tax rise is massive, too. It might sound like just another 10 per cent, but if you're paying tax at 40 per cent and the rate goes up to 50 per cent, you are actually shelling out 25 per cent more than you did before.
Which means a lot of people face a lot more tax, and Darling's unscientific tax rise will have a large - and damaging - effect, just as Healey's did. A 25 per cent tax hike is well worth avoiding, even if you earn £150,000. People will simply hire expensive accountants to find ways round it, or do what Sir Michael Caine is threatening and shift themselves or their money abroad. Or take longer holidays and retire early.
In fact the Treasury itself thinks that 69 per cent of those hit by the new tax will find ways to escape it. That's why the respected Institute for Fiscal Studies figures that the tax won't raise anything like the £1.3 billion that Darling forecasts - if it raises anything at all. And the Centre for Economic and Business Research reckons that 25,000 entrepreneurs may simply emigrate, costing the UK £800 million.
Raising taxes, then, can leave the Treasury worse off - a simple piece of tax science popularised by the American economist Arthur Laffer with his “Laffer Curve", and of which the Chancellor should be fully aware.
And contrariwise, scrapping high tax rates actually boosts both the economy and tax revenues. In 1979 the Conservative Chancellor Geoffrey Howe slashed the top rate from 83 per cent to 60 per cent. Before the cut, the top 1 per cent of taxpayers - Darling's target group today - paid just 10 per cent of the total tax take. By 1988 they were paying 14 per cent of it.
Then Nigel Lawson cut top rates even more, from 60 per cent to 40 per cent and revenues surged again. By the time of the 1997 election, the top 1 per cent of earners paid a whopping 21 per cent of the total tax bill. By halving the top rate of tax, Howe and Lawson had doubled the amount paid by top earners.
Other countries back up this simple science. The United States has had four big tax cuts over the past century. In 1921, President Coolidge cut the top rate from 63 per cent to 25 per cent. Five years later the top earners (people on incomes over $100,000) were paying 86.3 per cent more than they had before. The economic boost fuelled the Roaring Twenties.
In 1964 President Kennedy cut the top rate from 91 per cent to 70 per cent. Two years later the top 5 per cent of earners were paying 7.7 per cent more in taxes, while the bottom half were paying 9.2 per cent less.
When President Reagan cut the top rate from 70 per cent to just 28 per cent between 1981 and 1988, the share of revenues paid by the top 1 per cent of taxpayers rocketed from 17.6 per cent to 27.5 per cent. He cut capital gains tax as well, from 28 per cent to 20 per cent - and again, revenues leapt by half, from $12.5 billion to $18.7 billion in only two years. The cuts launched the longest period of wealth creation the world has known. And under George Bush's cuts too the wealthy ended up paying more, not less.
Nearer home, a dozen of the former Soviet countries, including Russia, Estonia and Latvia, have replaced their high, complicated, dysfunctional tax rates with a single-rate flat tax as low as 10 per cent. They enjoyed a huge economic boost as a result. Ivan Miklos, the former Finance Minister of Slovakia, told me that slashing taxes was the only decision he lost sleep over: but in fact his flat tax was a huge success, and Slovakia never looked back.
Alistair Darling, by contrast, has made several mistakes all at once. His new tax is so high that people will do their darnedest not to pay it. He won't pull in the revenues he needs to pay off his spiralling public debts.
At the same time, his changes to allowances and national insurance further complicates a tax code that runs to 10,000 pages - great for accountants and tax bureaucrats, perhaps, but not for the rest of Britain.
Third, he has forgotten that “the rich" don't just inherit their money any more. Most of them today earn it. His new tax on work will simply drive the UK's entrepreneurial spirits - and their money - abroad.
It's science, Mr Darling. But it's not rocket science.
Dr Eamonn Butler is director of the Adam Smith Institute and author of The Rotten State of Britain
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