by Harry Fone, Grassroots Campaign Manager
Readers born before 1990 will likely remember a series of adverts by the Inland Revenue (as HMRC used to be known) that professed, “Tax doesn’t have to be taxing”. Well unfortunately it is, very taxing. In fact, our recent research crunched the numbers and revealed that the tax burden, i.e. tax as a proportion of GDP, has hit an almost 50 year high of 34.6 per cent.
Hidden away in budget documents, we found that the tax burden is actually due to increase on the forecasts from last March, running at more than a third of our GDP. That means that the level of tax today is higher than it ever was under the Tony Blair or Gordon Brown years. In fact, if we were to set taxes to their 1997 levels, we would free taxpayers from nearly £68 billion of punishing levies. As a result we could abolish, Air Passenger Duty, Capital Gains Tax, Inheritance Tax, Stamp Duty Land Tax and even Council Tax. As our interactive tool shows, there are literally hundreds of examples of tax cuts that could be made.
In the last fifty years, only Harold Wilson’s government had a higher tax burden of 35.0 per cent in 1969-70, with the lowest tax burden attributable to John Major in 1993-94. The key questions though are why does it matter how high the tax burden is? And if a lower tax burden is a good thing how do we go about achieving that?
Why does it matter?
For the current financial year (2018-19) the government will raise £787 billion in taxation yet total spending will be £813 billion, a deficit of £26 billion. Despite collecting such a large amount of money from hard working taxpayers the government is still unable to balance the books. To eradicate the deficit the government has to either increase the tax revenue it receives, reduce spending or a combination of both.
Many politicians believe that higher taxes are the solution to increasing tax revenue, but ultimately this will stunt economic growth, with a rise in unemployment becoming a very real possibility. This happens because consumers will have less disposable income and will spend less money on the goods and services they desire. In turn, due to a decrease in their revenue, businesses have to cut costs by either sourcing cheaper raw materials, cutting workers’ wages or laying them off. Worse still, many businesses may go bust which doesn’t benefit anyone.
If consumers have more money in their pockets, through lower taxes, the economy will be stimulated and the tax take will actually increase. This is borne out by recent data that shows when the chancellor Philip Hammond reduced corporation tax from 28 per cent (in 2010-11) to 19 per cent in (2017-18), receipts increased by 25 per cent in real terms. An even larger increase in receipts of 37 per cent was recorded when the top rate of income tax was cut in 2013-14. These are the modern day examples politicians should be learning from.
How do we lower the tax burden?
To lower the tax burden now more than ever, we must get spending under control and cut taxes. Government expenditure now sits at £29,000 per household, approximately the same as the average annual salary in the UK. In 2015 we released our groundbreaking report, The Spending Plan which identified a number of wasteful, unnecessary programmes and departments that could be eradicated. It was pleasing to hear Liz Truss, chief secretary to the Treasury, recently talking about some of the ideas set out in the report.
Taxes also need to be cut, with some, such as the distortional and unfair inheritance tax, needing to be abolished. The government should also resist calls for new taxes on meat, plastic and digital services. All these will do is push up prices and reduce choice for consumers. In the case of the digital services tax, it may well make things worse for workers employed by large tech giants, as my colleague Ben Ramanauskas argues.
Eradicating wasteful government spending coupled with radical yet realistic reform of our tax system (including the tax code which is over 25,000 pages long) is a sure-fire way to see our economy enter a new phase of high economic growth and prosperity. It’s time to cut waste and cut taxes!
If you would like to find out more about our proposals for a simplified tax system click here.