Monday, 30 May 2011

Tax freedom day 2011

The Adam Smith Institute has published a blog post celebrating today, 29 May 2011, as Tax Freedom Day - the day on which British workers stop working for the state and start working for themselves.  They write:

Today is Tax Freedom Day – the first day of the calendar year that Britons stop working for the state and start working for themselves. This year, we've worked for a full 5 months this year to pay their taxes, with every penny earned in the UK between January 1 and May 29 taken by the taxman to support government expenditure.
· Britons have worked 149 days to pay their taxes in 2011 – three days longer than in 2010.
· Regional figures reveal that Londoners have to work the longest to pay off their income tax burden (51days) whilst the Welsh spend the least time paying their income tax (35days)
· UK income taxpayers would have to work for almost a year and a half with all their money going to the government to pay off our national debt.
This means that Tax Freedom Day, the day when people stop working for the government and start making cash for themselves, will come on May 30 in 2011 – 3 days later than in 2010. The main reason for this is that the government has raised VAT, in order to help reduce the UK’s record budget deficit.
New calculations by the ASI also reveal the worrying extent of the UK’s debt. Our burden of debt is so great that UK income taxpayers would need to work for nearly a year and a half (525 days) - with their entire wage packet going to the government, and not a penny being spent on public services – to pay off the national debt.
Dr Madsen Pirie, President of the Adam Smith Institute, identified the linkage between the lateness of Tax Freedom Day and the government’s attempt to tackle the deficit and UK debt: “The last government left an appalling legacy. Its reckless spending has driven Britain into record levels of debt that threaten the lives and happiness of future generations. Bringing down that debt has to be an absolutely urgent priority. However it isn’t enough to merely cut spending. We need targeted tax cuts to encourage economic growth.”
Sam Bowman, Head of Research, added: “Tax Freedom Day underlines the huge burden of government on working people’s lives. For five months of the year, we are slaves to the state. No wonder growth is so slow – we need robust tax reform now, bringing lower, simpler, flatter taxes. The government should resolve to make Tax Freedom Day something we can celebrate earlier and earlier each year.”
There is so much bad economics in here that it is difficult to know where to start.  However, here are some reflections:

  • Even if the methodology underlying this calculation were sound (it isn't - more of which in a moment) it is nonsense to set up a dichotomy between people and the state.  Obvioiusly, the money doesn't just disappear - it pays for schools, hospitals, doctors, police officers, libraries, the armed forces, rubbish collection.  Now there's obviously an argument about priorities but it's pretty obvious that people benefit from those services (all right, the army isn't a service but to the extent it provides security we're benefitting.  A member of my family had major, life-changing back-surgery on the NHS earlier this year, which will, inter alia, keep her economically active.  At precisely what point did her tax-freedom begin?

  • There's also the obvious fact that some people and entities pay more tax than others, and some receive more tax concessions.  For obvious ideological reasons, the Adam Smith Institute talks about families and wages, but there has been a long term shift in income from wages to profits and the latter are taxed far more likely, with big corporations using various means to reduce their tax bill (like relocation).  And of course there is the vast subsidy of the taxpayer to the tax evader - more than £90bn on some estimates.  When is tax-freedom day for BHS?  Or Vodafone, with billions of pounds of tax liabilities written off by the stroke of George Osborne's pen?

  • I've rehearsed the arguments about the deficit before - I'll simply repeat that by historical standards it isn't that high, and is a result of a tax revenue shock following the crash of 2008, not profligate public spending.  The Adam Smith institute does not distinguish between personal and public debt - the former, according to the OBR, will rise and it is difficult to see how taking £80bn of demand out of the economy will lead to the conditions in which tax revenues will recover.  I'd have more respect for the Adam Smith Institute if they considered the question of transferring debt risks from government to individuals.

  • As economists like Ha-Joon Chang have demonstrated, growth is historically much slower in liberalised economies than those with large interventionist public sectors - something that Keynes foresaw eighty years ago.  There's an argument to be had about what growth means and how far it is valuable, but in the Adam Smith Institute's own terms its argument about the state constraining growth cannot be taken for granted.

An honest and intellectually rigorous approach would measure benefits of taxation against levels, and break it down by different types of economic actor - wage-earners, capital holders, companies. I'd predict it might show that there are huge differences between the rich and poor, and between holders of capital and wage-earners.

In the meantime, let's take the Adam Smith Institute's comments for what they really are - ideology and political grandstanding that have nothing to do with rigorous economics.

No comments:

Post a Comment