Britain's tax take is at a 30-year high, so where is all the money coming from?
Britain’s ability to attract successful companies and talented people has rarely been as important to its future prosperity as it is right now. As Brexit trade arrangements remain uncertain and global economic growth seems to be weakening, the country’s preparedness for what lies ahead is crucial if it is to flourish.
There is a widespread perception that Britain, unlike countries such as France or Sweden, is a low-tax nation, with a small state and a preference for keeping the tax burden as low as possible to boost growth and attract investment.
In reality, the tax burden is at a 30-year high as a share of GDP. So, with that in mind, how much tax do Britons really pay? Where is it all coming from? And how does it compare internationally?
Taxes amounted to one-third of GDP last year, according to the Organisation for Economic Co-operation and Development (OECD).
That is the highest level since 1988 and above average for the past 50 years.
This amounted to 9.1pc of GDP - above the OECD’s 8.3pc average, but below the UK’s long-running level of around 9.7pc.
This is partly thanks to increases in the tax-free allowance, which is how much money people can earn before they start paying tax, and a gradual rise in the level of income people earn before having to pay the higher rate of tax.
This is partly thanks to increases in the tax-free allowance, which is how much money people can earn before they start paying tax, and a gradual rise in the level of income people earn before having to pay the higher rate of tax.
By raising the threshold at which income tax is paid, millions of workers have seen their income tax bills fall.
Social security contributions - including national insurance - raked in another £130bn last year. Employees paid 2.5pc of GDP on this while employers spent 3.7pc.
VAT is another big chunk of the tax take. Sales taxes brought in £139bn last year.
At 6.8pc of GDP, VAT is almost precisely in line with the OECD’s average, and has risen slowly but steadily as a proportion of the economy since the 1970s.
Property taxes are also on the up, contributing £85bn to the Treasury last year. This is equal to 4.2pc of GDP, the highest level since 1989.
It is also more than twice the OECD’s average of 1.9pc of GDP, running counter to the oft-heard claim that property here is taxed lightly. In fact, this level of property taxation is close to that of the US and France.
It is not only higher tax rates that boost the tax take, however. Government revenues tend to peak at the top of the economic cycle when growth is strongest. Confident consumers spend more, boosting VAT revenues. Pay rises push workers into higher tax brackets, adding to the Treasury’s haul. Companies’ earnings rise. The global upswing last year will have contributed to a higher tax intake.
What do taxes do to the economy?
Julian Jessop, chief economist at the Institute of Economic Affairs, puts it nicely when he says: “If you tax the profits of companies, you are taxing jobs, you are taxing investment, you are taxing all sorts of things which you don’t necessarily want to."
He continues: “You encourage companies to locate in your country. They might pay less tax than if the rates were higher, but the people they employ will earn more, the companies in supply chains will benefit, they will spend more on local services. You need to view the whole thing in the round.”
Some countries, such as Ireland, have extremely low rates of corporation tax. The UK has cut the headline rate of corporation tax in recent years, from 28pc in 2010 to 19pc now, in a bid to become more competitive in the aftermath of the financial crisis.
As Jessop explains, high corporation tax is counter-productive and curtails growth, but this is also true of other forms of taxation.
As Jessop explains, high corporation tax is counter-productive and curtails growth, but this is also true of other forms of taxation.
Indeed, Governments use tax rises precisely for this purpose, to prevent growth in areas they might deem harmful, such as alcohol, tobacco or diesel.
Governments also tend to reverse tax increases when they see the damage it does to the economy. France, for instance, scrapped its 75pc top rate of income tax and lowered its wealth tax because it led to a mass exodus of high earners.
A recent hike in property taxes in Britain, particularly on homes worth more than £1.5m, appears to be hitting the housing market.
Stamp duty bills on home sales can easily run into the tens or even hundreds of thousands of pounds and the Government has enjoyed rising revenues from this tax as property prices have soared.
But in a less confident market, with Brexit uncertainty looming, the US-China trade war showing no sign of abating, and the general outlook for the global economy fragile, the higher level of tax is just an extra barrier to moving, which may be putting off many would-be buyers.
An additional levy on landlords and second-home owners has flattened the market even more.
As a result, prices in many parts of the country are stagnating, particularly in upmarket neighbourhoods in London that had previously enjoyed double-digit increases each year. Transaction levels have fallen through the floor and suddenly tax revenues from stamp duty are down as a result.
Fundamentally, Jessop says politicians and civil servants and, to some extent, the general public, must recognise that tax increases do more harm than good because they harm a country's competitiveness and they should not be a means to raising money quickly.
“The tax burden is high and expected to remain high. All of the debate seems to be about whether taxes should rise further, not go down,” he says.
“You see it across the board, for example in what could be done with £39bn instead of giving it to the EU - the debate is all about spending it rather than cutting taxes. There is something in the psyche that if you get more money in, you should spend it, but that mindset needs to change. Cutting tax rates can end up yielding more money for the Treasury."
