This week is Tax Advice Week. And as William Kay points out in The Sunday Times, it’s just as well: with taxes both far higher and vastly more complicated than even a few years ago, we need all the advice we can get. In 1997, Tolley’s Tax Handbook – which deals with taxes on businesses, personal income, capital and inheritance – contained under 5,000 pages; today it’s twice as long.
Labour tax hikes: what’s the damage?
There have been 80 tax hikes since Labour came to power and the annual tax take exceeds £500bn, or £1m a minute – up from £270bn in 1997, according to Professor Peter Spencer of York University. And taxes are still going up sharply: last week, the Organisation for Economic Co-operation and Development (OECD) revealed that the tax burden jumped from 36% to 37.2% of GDP last year (the OECD average is 36%). This represents an extra £310 for every adult in the country, and means we pay more tax as a percentage of GDP than the Germans, Japanese and Americans. Nine years ago, Britain was in the bottom third of the league of countries listed by tax burden, notes Robert Chote, director of the Institute for Fiscal Studies. Now, we are bang in the middle.
Fiscal drag: why tax bands remained unchanged
The key to the rising tax burden – now approaching its early 1980s peak, when the top rate of income tax was 60% – has been fiscal drag. Incomes have been going up, but tax bands have not, which means more people end up paying more tax. The number of people paying the top rate of income tax has rocketed from two million to 3.5 million and is on track to hit four million by the end of this parliament. Stamp duty and inheritance-tax receipts have tripled and doubled respectively since Labour came to power. “The middle classes are bearing the brunt of Gordon Brown’s tax rampage because the middle classes always do,” says The Times. A couple earning a joint £85,000 a year can now expect to see half its income disappear in direct and indirect taxes, according to Grant Thornton.
The most striking feature of Brown’s tax regime is not that it’s “sneaky” and “irrational” (although it is – he has, for instance, managed to impose a 70% tax on the incremental income of a moderate earner who works overtime), says Irwin Stelzer in The Guardian. Rather, it is its “sheer pettiness”. The premium line set up to enable consumers to renew their car tax by phone has cost taxpayers £410,000 since it was introduced, for example – “peanuts in the total budget, but proof that the Treasury will leave no lemon unsqueezed in its search for money”. Now Brown has noticed that blackberries and computers are used not just for work, but to play games and email friends, and since he “is not one to countenance untaxed personal pleasure”, we are going to have to cough up for them too.
Corporation tax: what high rates mean for business
Corporations also “hardly need reminding” that we now live in a high-tax country, says David Smith in The Sunday Times. Banking giant HSBC is openly contemplating moving its headquarters, while the head of the Confederation of British Industry, Richard Lambert, has warned that “current corporation tax rates are unsustainable” and has floated the spectre of an exodus of major firms. The corporate tax rate was cut to 30% in 1997, but has remained flat since then, even as competitors have cut their rates; the EU average is now 25%. Complex compliance burdens and inconsistent enforcement are also a problem, says the FT. Britain’s most productive sectors “are also the ones that can most easily relocate abroad; to keep them here will require simpler, lower and better-applied taxes”.
In conjunction with higher energy bills, the rising tax burden is squeezing disposable incomes, says Smith; Ernst & Young calculates that the average family is 10% worse off than four years ago. What’s more, polls show that people have noticed that there has been no commensurate improvement in public services. Brown’s tax rises are becoming “a giant millstone around his neck”. When people think of Brown, they think of higher taxes, as one former Government adviser says. And if the Tories don’t start thinking about committing to tax cuts, they may find voters thinking the same of David Cameron.