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What Tax Freedom Day means

Tax Freedom Day shows the total tax paid each year by a taxpayer on average income, including indirect taxes, local taxes and National Insurance contributions, as a percentage of that individual’s total income.  It is calculated by comparing general government tax rev¬enue with the Net National Income (NNI).  The total of all government tax revenue — direct and indirect taxes, local taxes and National Insurance contributions — is calculated as a percentage of NNI at market prices.  The result is then converted to days of the year, starting from 1 January. 

There is some debate on which measure is the more correct to use when measuring the tax burden. One school holds that to use NNI is to complicate matters. In the general political debate, the tax burden is generally referred to as a percentage of GDP. Also, GDP is a measure published everywhere, including in the Budget. By measuring Tax Freedom Day as the tax burden relative to GDP rather than relative to NNI, it is possible for anyone simply to look up one single table and find the figures. It also makes it easier to compare the UK with other countries without going through the complications of calculating their NNIs - which in any case may be defined in different manners. Further, it could be argued that capital consumption should not be deducted from gross income before calculating the tax burden since this is done on taxed capital.

GDP is a larger measure than NNI. Measuring the tax burden by using GDP rather than NNI also has the effect of making Tax Freedom Day appear earlier in the year. But this is, as it were, a once-off effect. The development of Tax Freedom Day over the years would be identical.

The income side. However, for various reasons, the Adam Smith Institute has chosen to use NNI. The reason for using NNI, rather than the more commonly known measure Gross Domestic Product (GDP), is that it excludes capital consumption, which is an expense and not part of net income, while it includes net property income from abroad. NNI is thus the closest macroeconomic equivalent to personal income on the individual level. This method is essentially the same as that used since 1929 by the Tax Foundation (www.taxfoundation.org) for calculating Tax Freedom Day in the United States.

The tax side.  All taxes are included in the tax burden as calculated here.  This includes direct taxes, such as income tax, capital gains tax, inheritance tax and corporate taxes (which ultimately are paid by the owners of each business). It also includes all kinds of indirect taxes, such as VAT, duties on petrol, alcohol and tobacco, stamp duty, vehicle tax, council tax and so on. 

Government income from various fees and charges is not included (because they represent a payment for goods or services, which would still be due even if they were supplied by the private sector). Government interest and dividends received are similarly excluded (because they are pure business income, which is not levied by legislative force).

The Tax Freedom dates given for the years 2009 and 2010 are an estimate and a forecast respectively.  This is because the calculations use official government statistics, some of which are published as provisional, with definitive figures appearing only later.  In addition, one of the relevant figures for these calculations, capital consumption, is published only after an interval of about two years.  As definitive figures are published, Tax Freedom Day dates may therefore be subject to minor revisions.