Let’s embrace low taxes and then watch Britain prosper

Matt Kilcoyne

May 29, 2018

It’s Tax Freedom Day! The first day of the year that you’ve stopped working solely for the taxman and started to earn for yourself. That’s 148 days working, and a combined £700bn, just to pay for the promises of politicians.

This is the latest it’s been since at least 1995. Annoyingly, the Office for National Statistics made any meaningful comparison before then impossible after they overhauled the measurements last year.

In Britain today, 40% of our net national income goes to the Treasury in tax. This includes everything from the obvious Income Tax and National Insurance to the less well known Insurance Premium Tax and Air Passenger Duty. This is by no means an exhaustive list of course — the tax code in the UK is now 12 times the length of the King James Bible.

You might think that any tax cut from such a high level would be good for the country. Broadly, this is correct. The Rahn curve suggests that there is an optimal public sector spend for growth, the Laffer curve suggests there is an optimal tax take. When we cut income taxes at the top level the Treasury actually raised more money.

So should we reduce taxes? Well, some tax cuts are better than others because they are more effective at undoing distortions and perverse incentives in the economy.

Broad-based taxes on consumption, the likes of VAT, tend to hit growth less than other taxes. But other taxes are more pernicious and have a lasting impact on the country’s growth, productivity and your future wages.

We have singled out Stamp Duty Land Tax because of its absurd effect on the housing market. The cost of moving rises and people get stuck in houses that are less suitable for them, and in locations and jobs where they are less productive.

Some of the worst taxes are those on capital. My colleague Sam Dumitriu notes that Nobel Prize-winning economist Robert Lucas estimated that eliminating all capital taxes (and replacing them with consumption taxes) would do more good than abolishing boom and bust altogether.

Of course, for Tax Freedom Day we’re calculating an average. And there is no average person. If you’re a young person then your own personal Tax Freedom Day was likely earlier in the year. That’s not to say that you’re not going to end up paying though. Britain is still living beyond her means. We’re going to be adding £52bn to our net debt this year – one day that will need to be paid.

We actually measure two days: Tax Freedom Day and the Cost of Government Day. The latter factors in borrowing as well as taxes. The later it is then the more money borrowed, and the more the buck is passed to your generation and the ones to follow.

You’re already feeling the effects of this. Not just through 8 years of austerity government but also the near £40bn we spend on interest payments on our national debt. By the government’s own figures that is more than the country spends on Defence or the Police.

The good news is that for the past 8 years, the Government has been reducing the costs it imposes on us all. Just after the financial crisis, the gap between Cost of Government Day and Tax Freedom Day was 65 days, this year it is 23 days.

But the job isn’t done. Let’s look at the injustice between the generations. Older people have a triple-lock pension, rising with inflation or wages, or at 2.5%, whichever is the largest. They have free travel passes, a Christmas bonus, and a winter fuel allowance. Those over 75 have free TV licences, plus free or reduced admission to many attractions and services. Many are home-owners, free of mortgages, with private pensions to supplement the state’s provision.

Those of us under 35 are finding our choices of renting or owning a home diminished, as restrictive government rules hold back new development; childcare costs are well above what we need to be paying; and as we look at reforming social care we appear to be looking at significantly higher tax bills to pay for that too.

Politicians of all stripes think that they can spend their way to victory — whether it is more money for #OurPreciousNHS or Labour’s £50bn election pledges. Our futures rely on prudence from those that govern us; they should learn that when given the freedom to keep more for ourselves we are usually keen to do so, and we collectively make the country richer as we do it.

Let this Tax Freedom Day mark the high watermark, let’s reject unfunded promises and the siren songs to abandon austerity, let’s eliminate costly regulation and reform the tax code to boost growth. And let’s watch Britain prosper.


Matthew Kilcoyne is Head of Communications at the Adam Smith Institute.


Written by Matt Kilcoyne

Matt Kilcoyne is Head of Communications of the Adam Smith Institute.


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