Dr Eamonn Butler explains the concept of Tax Freedom Day and explains why it is getting later and later. He looks at where this money goes and why some of it is in useless hands.

 

THE average Brit spends five months of the year working for the government. From January 1st to May 31st this year, every penny you have earned has gone to the Treasury. Only from then do you start to earn money for yourself.

Each year, the Adam Smith Institute calculates the date, which we call Tax Freedom Day.

It gets worse. If you include the cost of borrowing, which future taxpayers will have to pick up, the burden is another ten days’ hard labour.

And this year you have had to work three days longer for the tax collector than you did in 2004 – and five days longer than you did in 2003.

Historically, these are big annual increases, showing just how fast taxes have been increased in order to fuel Gordon Brown’s huge expansion in public-sector jobs and spending. The bulk of this year’s rise has come from the hike in National Insurance and Council Tax. But, says the Institute, there are plenty of stealth taxes that have been creeping up too.

Where does it all go?

And where does it all go? Well, government spending has been growing much faster than inflation – from £322bn in 1997-98 to an estimated £518bn this year (2005-06) – a cash rise of 60% since Labour came to power.

The NHS budget has grown faster than any – in cash terms it has more than doubled, from £35bn when Labour took office to £78bn this year. But even on the government’s figures, nearly half the extra cash vanishes into higher cost. NHS output rose only 4.1% in 2003, the last year for which figures are available, despite an 8% increase in budget that year. NHS productivity is falling as the growth of new administrators exceeds the number of doctors and nurses being hired.

Pouring more tax money into the NHS seems to be like pouring more petrol into a rusty engine. It still doesn’t go any better. If our hard-earned cash is to do any good, we need a complete reform in how healthcare is delivered.
And that goes for other services that are swamped by bureaucracy too, like schools.”

Public sector “jobs binge”

The Institute is also critical of the “public sector jobs binge” that has soaked up much of the extra cash stumped up by taxpayers. It highlights the armies of “Real Nappy Officers” whose job is to persuade us to us washable rather than the “environmentally unfriendly” disposable nappies. But a four-year study by the Environment Agency has shown that disposables are no worse for the environment than washables – proof, says the Institute, that “these Real Nappy Officers are themselves disposable”.

The same is true of the NHS “Five a Day Officers”, tasked with encouraging us to eat more fruit. Since recent studies have shown that three pieces of fruit or vegetables a day is just as good for you as five, shouldn’t these workers be volunteering themselves for 40% lay-offs, asks the Institute.

Throttling economic growth

“The fact that Tax Freedom Day is getting later in the year is worrying for another reason,” says Gabriel Stein, International Economist at Lombard Street Research, who does the number-crunching for the Adam Smith Institute. “There are signs that today’s high taxes are choking off the economic growth that is needed to sustain consumer spending – and the Chancellor’s spending
too.”

Indeed, an important OECD study in 2001 showed that countries where half the
national income went in taxes had output levels 13% lower than ones with just 30% tax ratios. High taxes simply reduce the incentive for people to work and to expand their businesses and boost employment.

Tax in Britain has also become very complicated, particularly with Mr Brown’s various “tax credits” which many people leave unclaimed because they do not understand them. Pensions minister Malcolm Wicks told the House of Commons in March that less than two-thirds of eligible households took up the savings credit due to pensioners.

Tax is also stealthy – the headline rate of income tax has not changed but at least 66 stealth taxes have risen, according to the Tories.

The result of all this stealth and complexity is that people do not understand just how much tax they really pay. But if we put it in terms of how many days the average person has to work solely in order to pay taxes, that brings it home to people.

This year, an average taxpayer – an average, not a super-rich taxpayer – spends five months enslaved to the Chancellor. But we are not getting value for that effort we are putting in. Surely it is time for us tax serfs to break free.