Has the tax burden gone too far?

The barely-anticipated Autumn Budget, perhaps predictably, fell by the wayside last week, with the country now heading to the polls next month. No doubt, one of the hot topics in the upcoming general election campaign will be taxation, with the two main parties putting forward radically-different propositions on this front.

Some voters will be keeping a keen eye on the specifics of taxation policy. But for many more, it will all speak to a broader question: are Brits being taxed too much? Or, conversely, should we be paying more into the pot?

A rising tax burden

The Conservatives regularly frame themselves as the party of low tax – a reputation most acutely established during the Thatcher years. However, reality paints a mixed picture. In fact, the Exchequer pocketed a record £627.9bn in personal tax receipts for 2018-19; an increase of roughly £34bn on the year before.

A deeper dive into these HMRC figures offers up some interesting call-outs too. As you might expect, income tax accounts for the greatest share of all tax receipts, totalling £194bn. VAT is next in the queue, amassing £135.6bn – narrowly pipping National Insurance contributions, which came in at £135bn.

Yet what is interesting is just how much these tax revenues have increased. In the case of income tax, the total take has shot up by £31bn since 2014-15, while VAT receipts have climbed nearly 15 per cent over the same timeframe. Other tax revenues have soared too. Insurance Premium Tax, for example, has more than doubled in four years. Meanwhile, capital gains tax has rocketed by 15 per cent in just a year, and 66 per cent since 2014-15. And then there is inheritance tax income, which only saw a modest year-on-year increase of 4 per cent in 2018-19, but, according to Canada Life, is set to double to over £10bn by 2030.

A separate study by the TaxPayers Alliance (TPA) earlier in the year showed that overall revenues hoovered up by the Treasury equate to roughly a third of the size of the UK economy (34.7 per cent), putting the tax burden at levels not seen since Harold Wilson was Prime Minister back in 1969-70. 

The TPA report also produces some surprising findings. Among them is that the poorest 10 per cent of households are coughing up 47.6 per cent of their income on direct or indirect taxes. That’s compared to just 43.2 per cent a decade ago. Or put in real terms, it equates to £5,471 last year, versus £4,409 in 2008-09. Middle-earners have also seen precious little in the way of tax cuts since the financial crisis; contrary to those which they enjoyed in the lead-up to the crash.

There has been no escape for the those at the wealthiest end of the spectrum either, with the top 10 per cent losing 33.5 per cent of their income to tax in 2017-18, rising from 32.9 per cent ten years prior. And the top 1 per cent of earners now contribute 27 per cent of total UK income tax, according to the Institute for Fiscal Studies (IFS).

What really grates for many people though is the principle that many of these indirect taxes are levied on income that has already been taxed, thus continually eroding their earnings, and yielding an ever-greater share of the pie for the taxman. And yet, in return for this high price being paid, public services are ostensibly on the decline, and the national debt runs deeper into the red. In short: how is it that the Exchequer is squeezing record revenues from us, and it still isn’t enough?

The counter-argument

Of course, there is another side to this coin. First and foremost, soaring tax revenues are not necessarily a consequence of rising tax rates. That is not to say that some taxes and allowances haven’t shifted unfavourably in recent times, but, for the average individual, there have been useful tax cuts. 

A good example of this is the Personal Allowance, which has nearly doubled from £6,475 in 2010-11 to £12,500 in 2019-20. According to the IFS, this means that 23 million adults in the UK (or 43 per cent) are not liable to pay a penny of income tax.

Think back to the 1950s and 60s too, when the top rate of income tax hovered around the 90 per cent mark. Even as recently as 1979, the top rate stood at 83 per cent, while the basic rate was 33 per cent. Indeed, it was Thatcher’s premiership which oversaw the most significant income tax cuts, although the trend of diminishing income tax rates has continued steadily ever since.

No matter what we earn, we’re all paying a lower rate of income tax than ever before. Essentially, it could be argued that the good times for the Treasury are thus more attributable to record levels of employment, rather than a concerted effort to milk the people. 

A need to secure our future

It all amounts to a double-edged sword, and it is little wonder that there is such a large degree of divergence within our political class in terms of taxation policy planning. Yet it would be remiss not to highlight basic economic theory at this juncture – in particular the Laffer curve, which demonstrates that, beyond a certain point, increases to tax rates have negative consequences for tax revenue.

Stamp duty is a real-life example of this, whereby rising tax charges have resulted in a 10 per cent year-on-year fall in receipts for 2018-19. Corporation tax, on the other hand, has seen growth in revenue correspond with rate cuts over the past decade. In countries like Malta and Ireland, corporation tax cuts have been even more drastic, as have their resultant increases in receipts.

Ultimately, it is in all of our interests for the Exchequer to do well, not least with the deficit beginning to rise alarmingly once again. Yet whether it be due to direct or indirect taxes, it seems fewer pennies are ending up in our pockets, which surely can’t be good for the economy either. It’s a tough balance to strike. But these are the challenges our politicians must tackle head on to ensure that we can all look forward to a prosperous and sustainable future.