How to celebrate Tax Freedom Day much earlier in the year

May 29, 2014 12:11 PM

It might not have felt like the most momentous morning yesterday underneath a particularly grim grey sky: according to the Adam Smith Institute, for the first time this year you were working for yourself not the Government. 

It took until May 28th, but the average worker has now paid off their share of the tax burden for the year. Somewhat terrifyingly, this represents progress; last year it was May 30th. The fruits of your labour were two days sooner in coming than last year.

Our tax code is almost designed to obscure quite how much tax is paid by ordinary British workers. Whilst headline rates of income tax grab the attention, at the moment too many taxes that really affect people’s standard of living are hidden away in higher prices, or disguised as levies on business. Employer’s National Insurance Contributions are essentially a tax on employing people – discouraging employers from hiring, of course, but also passed on to employees through lower salaries. By the time you’ve bought a tank of petrol and paid VAT on your shopping bill – with or without Labour’s now infamous VAT-exempt white asparagus - you’re paying through the nose in direct, indirect, and second-effect taxes. If you’re not convinced, in 2010 the TaxPayers’ Alliance worked out that the average working Briton is working for the taxman until 1:21pm on each and every day.

So what it is to be done? The 2020 Tax Commission, a joint project between the TaxPayers’ Alliance and the Institute of Directors, proposed a new tax system which pays for the essentials of state spending, and puts transparency at the heart of a simpler and fairer code.  In short, marginal tax rates would be cut to 30 per cent with a corresponding hike in the personal allowance, and taxes on capital and labour income dressed up as business taxes should be replaced with a tax on distributed income. Unfair “double-taxes” like inheritance tax and stamp duty would be removed. Impartial Centre for Economic and Business Research CEBR modelling suggests the economy would be some 9.3 per cent larger in 2030 than the status quo, largely through boosting business investment. It’s a healthy reminder that no matter what Government programme (take your pick) is dreamed up in Whitehall, the easiest way to create much-needed business investment is to increase the potential rewards as a counterweight to the risks of investment.

Implementing the Single Income Tax would not be revenue neutral. It will require Government to prioritise essential spending over the extraneous programmes that have swollen the size of the state over numerous decades. The plan involves bringing Government spending down to 33 per cent of national income, balancing the budget and bringing the UK in line with Australia and Switzerland.

The Government has taken some positive steps.  Despite party-political squabbling over who should get the credit, the rise in the personal allowance to £10,500 by next April is one of the triumphs of the Parliament, reducing the tax burden on the lowest paid. Critics might argue that it has only been paid for with benefit reductions, but it makes far more sense to leave people’s money in their own pocket rather than taking it with one and giving back with another. There has been an effective 20 per cent cut in fuel duty over the past four years, which the Treasury estimates will boost the economy by 0.3 to 0.5 per cent over the long term. It’s another example of lower taxes, encouraging growth, producing greater tax revenues. But these promising strides are not enough. There is much more to do.

In the back end of this year, the Chancellor will stand up and deliver one of the most important speeches of this Parliament, one which will go a long way to defining the legacy of this occasionally fractious but ultimately functional Coalition. On the one hand, he could deliver a radical shake-up of a 17,000-page tax code that looks increasingly unfit for purpose. He could close the loopholes that allow those who can afford to hire well-compensated accounts to find loopholes the size of a Take That tour bus, and give the British public confidence that everybody is paying their fair share. He could create a transparent tax system that lets everybody know exactly how much they’re paying by merging income tax and national insurance, and challenge taxpayers to call their elected representatives at local and national level to account if those taxes aren’t spent properly. He could create a system designed for taxpayers, not tax collectors.

Or he could tinker at the edges, move a few deckchairs, shift a few tax bands, and miss another opportunity to bring tax freedom to millions of people far earlier in the year than May 28th.

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