Tax Freedom Day has finally come!

Yippee! Wednesday 28 May is Tax Freedom Day. Groan! The average person in Britain has to work 147 days of the year solely to pay taxes. Only then do we start earning for ourselves.

This year Tax Freedom Day falls three days earlier than in 2013. But we still labour nearly five months solid just to meet the Treasury’s demands. Even then, the government borrows another £1 for every £5 it collects in tax – borrowing which future taxpayers will have to repay. Add that in and the total Cost of Government Day does not arrive until 26 June!

The deductions on your payslip show only a small part of your total tax burden. Your employer pays the bulk of your national insurance, and when you start spending your pay you will find yourself paying value added tax and various other levies on alcohol, tobacco, cars, fuel and much else.

A billion here, a billion there all adds up. The Treasury hates Tax Freedom Day precisely because it shows the bottom line so clearly. They try to conceal the take by cooking up stealth taxes or by making the tax rules so complex that nobody can work out what they are really paying. And that has made the UK’s tax code one of the longest and clumsiest in the world.

But we should be told what we are paying. Only then can we see whether we are getting good value for money from our government apparatus. (Do you have to ask, though? That apparatus has grown in size by about a half since Gordon Brown became Chancellor in 1997. Are we really getting half as much benefit again?)

High spending and high taxes stifle economic growth. There is even a graph which economists use to illustrate that point, called the Rahn Curve. A bit of public expenditure seems to help growth – basic infrastructure, policing, defencd and justice have a cost. But when government spending tips over 40% of GDP, growth tends to slow. And we are well past that tipping point.

The message of Tax Freedom Day is simple. We are paying much more tax than we imagine. The lesson for politicians and tax authorities is to accept that, and to reduce and simplify Britain’s taxes.

The history of tax freedom day

Fifty years ago, Tax Freedom Day fell over a month earlier (23 April) than it does now. When England won the World Cup in 1966, it was still only 2 May. Then in the late 1960s, under Harold Wilson's Labour administration, the date moved much later, ending up at 26 May in 1970. The incoming Conservative government of Edward Heath government managed to bring it a little earlier, but before long it moved later again, hitting 2 June in 1975.

Over the next decade, Tax Freedom Day generally moved later, reaching a peak of 12 June in 1983 – reflecting Margaret Thatcher's desperate efforts to balance the government's books, even during a recession. During the rest of her term of office, she brought Tax Freedom Day earlier and earlier in May.

In the late 1990s, when Gordon Brown's expansionary agenda started to bite, Tax Freedom Day moved back into June again. It could have been a lot later, but Brown's massive borrowing enabled him to continue spending without raising the apparent tax burden still further.

Despite the financial crisis and a change of government, the date has remained stuck at the end of May for most of the last twelve years.

The big changes

1973-1974: The massive jump of 16 days was due to the sudden and very high inflation that resulted from the 'Barber Boom'. This pushed many earners into higher tax brackets (fiscal drag), and National Insurance receipts rose as nominal incomes rose too.

1979-81: The even bigger 20-day jump reflects the 1979 'austerity' budget which increased VAT (to 15%) and other taxes. Recession also reduced earnings, leaving the tax burden a higher proportion of the national income. A rising pound slowed export earnings, while another tough Budget increased tax revenues from income and wealth.

1997-2001: Most of this 9-day jump is down to Gordon Brown's first Budget in 1997, which introduced a windfall tax on utilities, changes in advance corporation tax, fuel duty rises, and the end of mortgage interest relief, producing a massive rise in tax revenues.

Happy Tax Freedom Day!

  • Tax Freedom day falls three days earlier than it did in 2013; George Osborne deserves some credit, but…
  • UK residents work 148 days of the year solely to pay taxes; that is every day from January 1 to May 28.
  • Cost of government day is 26th June, six days earlier than in 2013, illustrating that the government is making small efforts to stop borrowing from future tax income.

This year's Tax Freedom Day, the day when Britons stop working for the government and start working for themselves, falls on 28th May, according to Adam Smith Institute calculations.

This means that Britons work 148 days of the year solely to pay their taxes (including direct taxes like income tax and national insurance, and indirect taxes like VAT and corporation tax). This is three days earlier than 2013's Tax Freedom Day, which is not statistically significant.

Tax Freedom Day is designed to illustrate to the public what real level of tax is, which the lengthy, complex nature of Britain’s tax code can often obscure. The UK's Tax Freedom Day is more than a month later than the United States', where citizens start earning for themselves on April 21st.

Cost of Government Day falls on June 26th, six days earlier than it fell in 2013. While this suggests slight improvement from last year, the government continues to drive up the national debt for almost another month after Tax Freedom Day by spending billions of pounds worth of future taxed income.

The ASI calculates Tax Freedom Day by measuring local taxes, direct and indirect national taxes, and national insurance contributions as a proportion of the UK’s national income (41.09% per cent in 2014), mapping that proportion onto the days of the year.

Director of the Adam Smith Institute, Dr Eamonn Butler, says:

“Tax Freedom Day comes three days earlier this year, but it is still outrageous that the average person in Britain has to work nearly five months of every year solely to pay taxes. Are we really getting five months' worth of value from our bloated government sector? Does it really need to do all the things it has taken upon itself, at our expense?

“In this World Cup year, it is salutary to remember that when England collected the trophy in 1966, Tax Freedom Day fell more than a month earlier – and even then, people complained about the burden. Since then, the burden has edged up decade by decade. But high taxes stifle economic growth. And the higher that taxes are, the more people will try to avoid or evade them.

“The Treasury hates Tax Freedom Day because it expresses the real tax burden so starkly. Officials and ministers would much rather rely on stealth taxes and Byzantine complexity in order to conceal the true size of out tax bills. But they won't get away with it – the public has a right to know how much we are being forced to pay in order to support the government.”

Steve Baker, Conservative MP for Wycombe and a member of the Treasury Select Committee adds:

“As an MP, I see how the services provided collectively through the state so often fall short of people’s needs and expectations so it is a shocking fact that Tax Freedom Day falls at the end of May. Even more appalling is that Cost of Government Day falls in late June. The Adam Smith Institute has done a great service by so clearly illustrating the cost of government, the burden of taxation and the scandalous gap between the two. Politicians have a great deal of explaining to do.”

David Ruffley, Conservative MP for Bury St Edmunds, adds:

“Tax Freedom Day is not just an economic argument, it is a moral one. The stubbornly high UK national debt is not just a drag on growth, it is also an unconscionable burden on future generations. To solve this problem we need to do much more to cut the size of the state. This must be accompanied by reductions in personal and corporate tax to unleash the spirit of enterprise that drives economic growth and higher living standards.”

The ASI in the news

Remarkably we have some reasonable economics in The Guardian:

"The contract negotiation they are having is about who gets the profit split on ebooks," said economist and Adam Smith Institute fellow Tim Worstall. "The correct answer emerges from our behaviour as consumers. We don't know what the consumers are valuing most – the distribution system Amazon supplies them with or the new JK Rowling that Hachette publishes. If we value JK Rowling more, then Hachette should win."

The point being that there's no metric by which we can decide what the profit split between a distributor, like Amazon, and a publisher, like Hachette, should be. There's simply no theory which provides us with a guide as to who should gain the lion's, or any other, share of the moolah. It all depends upon what we, the consumers, desire the most. If it's what the publishers provide then they should get that cash. If however most books are very close substitutes for eah other and we value the distribution system more then Amazon should get the folding stuff. And the only method we have of working out which is which is to observe what we all actually do. Will we go around Amazon in order to purchase Hachette products or will we not worry about JK Rowling and read some other Kindle book?

That is, the correct outcome in theory can only be derived from observation of market behaviour. There's simply no other way of doing it other than to watch it emerge.

Is the gender pay gap done to women or by women?

We would really like to know the answer to this question: is the gender pay gap something that is done to women by an uncaring patriarchy or is it something done by women? That is, are we imposing something upon women or is that undoubted pay gap a result of female choices? Voluntary Exchange has made a very clever catch here (and managed the almost unbelievable, found something useful in the writings of Beatrix Campbell) to aid us in answering the question:

Let me make sure I get this right. When women have less freedom to choose their jobs, earnings were equal, but when there is a policy shift that allows women more freedom to choose their jobs their relative earnings fall. Folks … this is prima facie evidence that the gender gap in earnings is caused by women’s choices and not by social restrictions.

We have, as all will recall, been shouting here for some years now that there isn't actually a gender pay gap at all. There's a motherhood pay gap instead. And as this example shows it's about the choices that women make over children and child care that create it. This must be so: if an increase in economic freedom leads to an increase in the pay gap then it must be the choices that people are making with that new found freedom that is causing said gap.

The pay gap is emergent from the choices of women. QED.

Leaving the EU is an opportunity for a better relationship, openness and choice

Recent European Union debate has misrepresented the case for exit. Those advocating the status quo depict exit as closing Britain off, reducing our influence in Europe, limiting our trade and endangering our economy. Similarly, too many see euroscepticsm as inextricably linked to UKIP, putting off many moderates. Instead, leaving the EU is an opportunity for a new relationship, openness and choice.

A better relationship

As part of a British exit from the EU, we would negotiate a new relationship. Norway, Switzerland, Iceland, and Lichtenstein sit outside the European Union but are members of the European Free Trade Area. This allows them to trade freely with members of the EU. These four EFTA states are richer and freer than the average EU state. Over the last decade, they have enjoyed higher employment, lower inflation, plentiful trade with the world, more EU trade per head, healthier budget positions and relatively robust economic growth. The only jobs that need disappear are those of our MEPs, and the supporting EU bureaucracy targeted at Britain.

Openness to trade

Outside the EU, we could still join the block in trade negotiations. We could also pursue our own free trade deals (potentially with EFTA members) to deepen our ties with the Commonwealth, America, China, and all our favourite country groupings (from the BRICs to the Asian tigers and the Next Eleven). We could even move towards a policy of unilateral free trade.


Outside the EU, we would  be free to determine our own policies and regulations. Much of the European Parliamentary election debate was dominated by immigration. You don’t need to agree with UKIPs proposals to believe that policy is better set by our Parliament, and our voters, rather than imposed from abroad. we would be free from silly laws imposed by Brussels, ranging from the needless bureaucracy of the “bendy banana law”, to proposals for an actively harmful financial transaction tax.

The exact proportion of law that comes from Europe is a matter of debate. It depends how you measure laws, and calculations rarely account for their impact. Regardless, even if the EU share is only around 15%, this is a loss of our fundamental sovereignty and equates to a vast body of regulations costing us hundreds of billions. In just four years, 3,580 new laws have been passed affecting British business. This equates to over 12 million words, which would take the average British business person over 92 days to read.

Do not allow the case for leaving the EU to be misrepresented.  It is an opportunity for a better relationship, greater openness and choice over Britain’s own affairs and future.

Where next for capitalism?

Writing for the BBC today, Madsen outlines his ideas about what capitalism should do to renew itself:

What capitalism should now do is to free itself from these rent-seeking perversions and spread its benefits as widely as possible.

It should act against anti-competitive practices to give people instead the power of free choices between competing goods and services. It should spread ownership of capital and investment as widely as possible through such things as personal pensions and individual savings accounts.

Read the whole thing.

The Bank should raise rates now

No, not the European elections – the really significant news is that the Bank of England's outgoing deputy governor, Charlie Bean, says he expects UK interest rates to rise pretty soon. He expects the official interest rate, which has been at its post-crisis 'emergency' rate of 0.5%, to rise in "baby steps" to around 3% between 2017 and 2019. That is below the rate of about 5% that prevailed before the financial crash, but then world conditions remain shaky, so this is where Bean expects things to settle for a while.

We have long known that all nine members of the Bank's interest-rate-setting Monetary Policy Committee concur that interest rate rises will need to be very gradual, but there seems to be a growing mood that the process needs to start sooner rather than later if this gradualist plan is to succeed. Many economists (including me in my new book The Economics of Success) have been saying for a while that the UK economy is racing ahead too fast – reminiscent of the unsustainable credit and house-price boom that got us into our financial fix in the first place.

Any rise in interest rates, even "baby steps", will cause problems for business and domestic borrowers. When rates are at 0.5%, even a baby step of 0.25% represents a big increase. Sure, real-world interest rates are already above this figure set by the Bank, but the point remains. There will be mortgage defaults, and some of those 40,000 zombie businesses identified by the Adam Smith Institute will fail.

That is not entirely a bad thing. Our present economic pain is the result of our cheap-credit binge of the late 1990s and early 200s. It is the hangover after the party, and sadly, a hair of the dog will not cure it, but make the inevitable reckoning worse. Boom-time assets, financial, physical and human, need to be reassigned to more productive uses. We cannot live in a fantasy economy forever.

The most pain, as usual, will be felt by taxpayers. The government does get away with paying very low rates for its borrowing – partly because in these turbulent times it is regarded as about the least-unsafe place to put your savings. Even if rates go up in baby steps, the impact on the government's interest bill will be large. There will be more business-killing calls to "make the rich pay more".

It all goes to show: F A Hayek was right: the best policy is not to get into boom-bust cycles in the first place.

UKTI Fails Small Exporters

The primary purpose of UK Trade and Investment (UKTI) is to help small exporters. Large companies, whether exporters or those concerned with inward or outward investment, can mostly look after themselves, calling on Whitehall when they need to.  Small and medium enterprises (SMEs) have neither the strings to pull nor the resources to divert to tangling with bureaucracy.

Following the crash, banks rebuilt their capital by reducing credit, especially to those most in need of it.  Exporting SMEs were seen to be high risk and had their credit withdrawn across the board.  Rebuilding the banks’ capital at the expense of the economy was the right medicine at the wrong time.

You might think that UKTI would have leapt to the defence of small exporters and taken their part in securing credit or, at the very least, preventing banks from taking punitive action without warning.  You would be wrong.

Many SME directors only discovered that their credit cards had been cancelled when they were checking out of overseas hotels at the end of their export missions. Some were trapped in foreign countries until alternative payments could be made. Each of these episodes cost the SME hundreds of pounds as it made alternative arrangements.  One director, in the USA, landed up in gaol.  And of course the embarrassment did nothing for the SMEs’ export market credibility, never mind the inconvenience and loss of working time.

Apparently word buzzed around the SME community quickly and they began using travellers’ cheques again.  This may be old (2011) news to some but it has not been widely published.  It was brought to my attention by a group of Cambridge based SMEs which had read my recent ASI report (“Is government helping exports?” 16 May 2014) on UKTI.

Apparently my critique was not the half of it.  They are mostly technology companies and, I was told, UKTI does not even get to first base when it comes to technology.  Time for a serious review of UKTI?

On Mike Milken being history's greatest feminist

This will cause much spluttering amoung the bien pensants of our age but it is at least arguable that Mike Milken, the corporate raider, was actually history's greatest feminist. The case is ably made by Noah Smith:

Unless, of course, it can’t. Becker theorized that regulation and other government protections can shield discriminatory companies against attack. That would protect the jobs of the people who worked at those old-line companies, but would perpetuate workplace unfairness in the process.  In other words, Becker thought that competition kills discrimination. Open up the floodgates of dog-eat-dog capitalism, and women and minorities will win greater equality in the workplace.

And what was it that opened up those flood gates of dog eat dog capitalism? The invention of junk bond financing in the late 70s and early 80s in the US. And this is also exactly the time when the gender pay gap (and also the minorities one) started to shrink in that country. True, this is correlation, not a proof of causation. But when you've got a theory that predicts that if A then B, and A happens and then B does, you can start to have at least a little confidence in causation.

Further, when examining the same theory, you see that not A happening leads to not B happening then your confidence in the theory can rise again. As in Japan where the very concept of a hostile takeover is impossible to imagine, let alone a successful one, we see one of the largest gender employment gaps in the world.

All of which leads to a certain puzzlement. We have the likes of Beatrix Campbell insisting that this market orientated neoliberalism is the neopatriarchy, something that is designed to continue to keep the wimmin down. But it's precisely that market dogmatism that has led to womens' advances so far. For as Gary Becker pointed out, in a free market discrimination costs the discriminator and thus they do less of it.

Or, as we might put it, we should and do support free market liberalism precisely because it sets everyone free, women and minorities included.