Tax Freedom Day 2010

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Tax Freedom Day 2010 is May 30, but budget deficit means tough times ahead for UK taxpayers

Tax Freedom Day 2010 will fall on May 30, according to the Adam Smith Institute (ASI), which has been calculating Britain’s Tax Freedom Day since 1991.

That means that for 149 days of the year – from January 1 to May 29 – every penny earned by UK residents will be taken to pay for government spending.

This year’s Tax Freedom Day comes three days later than in 2009, when Tax Freedom Day was May 27. The most significant driver of this change was the rise in VAT which came into force on January 1: this alone pushed Tax Freedom Day one-and-a-half days further into the year.

But what about the deficit?

Tax Freedom Day is only based on tax receipts, and takes no account of the government’s budget deficit. According to the ASI’s executive director, Tom Clougherty, this can be misleading:

‘Since all budget deficits eventually have to be financed, borrowing should be viewed as deferred taxation. Our government relies so much on debt to fund their spending, that our traditional Tax Freedom Day measure makes them look more virtuous than they actually are. In reality, all they are doing is piling up obligations on future taxpayers.’

According to the Institute’s research, if all the government’s 2010 expenditure was financed by taxes rather than by loans, Tax Freedom Day would not come until July 8 – some 38 days later.

That gap points to Britain’s worst fiscal position since 1976 – when Britain had to be bailed out by the IMF – and suggests that Britons will face savage tax rises unless public spending is urgently brought under control by the next government.

Which taxes are the biggest?

The biggest part of the UK tax burden is income tax, which Britons will have to work 41 days to pay in 2010. They will work another 27 days to pay National Insurance Contributions, and 21 to pay VAT. Thereafter, various excise duties account for 13 days, corporation tax for 12, and council tax and business rates for another 7 days each. Britons will work for 3 days to pay stamp duties, and 18 more days to pay a range of miscellaneous taxes. This includes inheritance tax, which takes 15 hours to pay.

What might have been?

According to the Institute’s research, things could have been radically different if public spending had been kept under control since 2000, the last time the government managed to balance their books.

In 2000-1, three years into the Labour administration, government spending was £367.1bn. For 2010-11, the government is forecasting a figure of £704bn: nearly twice as much. If it had grown in line with inflation since 2000, public spending would now be £440.8bn – £263.2bn less than current estimates. That saving would be enough to wipe out the £163.8bn deficit, abolish all National Insurance contributions, and get rid of inheritance tax.

Dr Eamonn Butler, the Institute’s founder, said:

‘It really is pretty galling to think about. After all, if someone offered you a choice between today’s public services, today’s taxes, and government debt that will take generations to pay off, or 2000’s public services, with no debt and a massive tax cut, which one would you go for? Gordon Brown shouldn’t just be remembered for his irresponsibility, but also for a decade of squandered opportunities.’

How is Tax Freedom Day calculated?

Tax Freedom Day answers the very basic question: ‘how much are Britons actually paying for government?’ It is calculated by comparing general government tax revenue with the Net National Income (NNI). The total of all government tax revenue – direct and indirect taxes, local taxes and National Insurance contributions – is calculated as a percentage of NNI at market prices. This year it comes to 40.9 percent. That percentage is then converted to days of the year, starting from 1 January. The first day of the year that Britons work for themselves rather than the taxman is Tax Freedom Day.

The third man

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The newspapers and the opinion polls have called last night’s prime ministerial debate for David Cameron, generally with Nick Clegg in second and Gordon Brown in third. ConservativeHome’s average of the post-debate polls has Cameron on 37 percent, Clegg on 32 percent, and Brown on 26 percent. That more or less accords with my impression, although I thought Cameron’s victory was more by default than anything else. Clegg’s Mr Exasperation act is starting to wear a little thin now, while Gordon Brown just looks and sounds desperate, flailing away wildly at his opponents in the hope of striking a lucky final round blow.

On Radio 4 this morning, I heard someone describe Gordon Brown’s opening statement as amounting to the following: ‘I may go around insulting blameless old ladies, but vote for me anyway because I can manage the economy’. But does anyone really believe that? That Gordon Brown can manage the economy? It is, frankly, unbelievable that he still gets away with making that assertion. After all, every aspect of his economic policy over the last thirteen years – fiscal, monetary, regulatory – has been characterized by nothing less than abject failure.

Fiscal – we’ve had countless tax rises over the last decade, and yet we still have the biggest budget deficit in the developed world, and debts that will take generations to pay off. Monetary – the framework Gordon Brown put in place resulted in sustained double-digit growth in the money supply, stoked massive asset and house price inflation, triggered a financial crisis, and led to Britain becoming the world’s second most indebted industrialized nation. Regulatory – as well as sucking the life out of British businesses, especially the smaller ones without compliance and HR departments, Brown’s regulatory leviathan state failed utterly to prevent the collapse of the UK’s banking sector.

And he wrecked the best private pensions system in Europe, he sold gold at the bottom of the market and cost the country as much as Black Wednesday – I could go on, but do I really need to? If this is his idea of good economic management, then insulting old ladies is really the least of his problems.

What you didn't hear in the economy debate

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According to Nationwide, the average cost of a UK home rose by more than 10 percent in the past year – the fastest increase in nearly three years. But as MoneyWeek’s Merryn Somerset Webb put it a couple of weeks ago:

‘The truth being that with house prices still massively overpriced by historical standards; with interest rates only able to rise from here; with unemployment and taxes set to soar; and with mortgages still relatively hard to come by, it is almost impossible to make a case for house prices across the nation to keep on going up.’

Can anyone seriously argue that this isn’t just another bubble? Or are we prepared to accept the obvious: that rising house prices are a sure sign that reflationary monetary and fiscal policies have prevented the economy from rebalancing, and that we’re storing up more trouble for the future?

As far as I can see, house prices simply have to fall again, and while necessary in the long run, that is bound to cause problems for the next government – whether it is a slowdown in consumer spending because people feel less wealthy, households slipping into negative equity, or bank assets declining in value (not least the £282bn of RBS’ toxic assets that the taxpayer is on the hook for).

I hate to say it, but between this and the Greek meltdown, I think boom and bust is going to be with us for a while yet. Until politicians realize that their attempts to control the business cycle just make things worse, history is doomed to repeat itself. Long-term fiscal discipline and sound money offer a way out, but will the next government be brave enough to take it?

Sally Thompson joins the ASI

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Yesterday finally heralded my first day at the ASI as the Communications Manager, following a rather extended holiday due to the Icelandic ash cloud. After being cut off from the British news for nearly four weeks, it has been rather a shock to return to all the election hype and Nick Clegg-mania, but I’m very much looking forward to getting stuck into work at the ASI.

Prior to the ASI I worked for a large consumer brand PR agency, working with global brands across the pharmaceutical, financial and FMCG sectors. I also hold a PGCE from Oxford University, but one year working in comprehensive schools with all the paperwork and its dull and limited curriculum was more than enough to cure me of my desire to teach. I studied my undergraduate degree around the corner from where the handsome Adam Smith Monument now stands in Edinburgh, and it was whilst studying English Literature there that I first encountered ‘The Wealth of Nations’ and Adam Smith as part of my reading list!

In my spare time I enjoy going to the theatre, drinking far too much coffee and reading fiction. To counterbalance these more sedentary activities, I play netball and am training for a half marathon. I also love travelling and plan to see two-thirds of the countries in the world before I die. Any suggestions on how I can manage this, do let me know! I’m very much looking forward to meeting everyone and reading your blog comments etc – expect to hear more from me over the coming months!

Looking for a new fix?

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Madsen supplies the policy solutions here.

Is disaster just around the corner?

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[I]f you treat voters like children, and constantly promise them free money and handouts, don’t be shocked when they throw their toys out of the pram when cuts are forced upon them when economic reality becomes impossible to ignore any longer. That is what is happening now in Greece, with endless riots, demos and strikes; it is what is likely to happen in Britain when voters are finally told the truth by our supine, vote-craving political establishment.

Allister Heath 'Sovereign disaster looms ever closer' CityAM

Unpaid internships

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The website ‘Unfair Internships’ argues that unpaid internships are, well, unfair, campaigning for a US-style system, where:

There aren't many circumstances where you can have an internship [at a for-profit company] and not be paid and still be in compliance with the law” (Taken from a WSJ article, quoting a US Labour Department Official).

It is argued, on ‘Unfair Internships’, that unpaid internships violate a principle apparently at the “core of the capitalist system”, namely that “work should be compensated according to productivity”. The author of the blog even goes as far as to accuse the WSJ editorial staff of not understanding economics.

The basic principle alluded to is completely false. A wage is a price at which a worker is prepared to sell her/his labour, this price is defined as the equilibrium between what the employer is prepared to pay and the labourer is prepared to sell at. Expected productivity is one input into deciding how high a price the firm will pay for the worker’s labour, while the circumstances of the labourer and how much they value the possibility of working for the employer (experience, working environment etc.) also affect the wage. It can be assumed that a profit-maximising firm will pay as low a wage as the worker is prepared to work for, so an unpaid internship indicates that the worker values something – possibly the experience gained or the contacts made – about the work placement that cancels out their need for monetary compensation. Another ‘capitalist principle’ is that workers should be free to value their own labour; unpaid internships fit in with capitalist principles thus.

An objection to this view could be that would-be interns from families who cannot support an unpaid family member are discriminated against and will lose out to the rich, who can afford to forgo a wage for some months. This may be true, but it is equally unfair to expect companies to compensate for this, the likelihood is that if forced to pay interns, many such intern opportunities would disappear. There are many ways in which a rich background benefits those beginning a career, but forcing companies to pay interns a wage risks getting rid of such schemes altogether, definitely not beneficial to anyone.

If the campaigners for mandatory-wage internships want to reduce their perceived inequality here, they would do better to look at in a wider framework of government programs to encourage social mobility; to suggest that the burden of redistributionary measures should be carried by firms is likely to have the opposite effect.

Parochialism of London Underground

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My wife, who is presently training to become a nurse with the NHS, was recently scheduled for her first weekend shift. She was supposed to start work before 7 am in North East London. Turning up shortly after 6 am at Baker street station she was in for a surprise.

The first train on the Bakerloo line was leaving at 7:24 am on a Sunday in the sleepy Roman village Londonium. The officer of Transport for London could not see my wife's point of view, telling her: "after all, tube transport staff have families". But who is supposed to help these families when they are in trouble out-of-hours? If you can’t afford a car, how can you supposed to get around in London?

Now consider the often belittled and much smaller continental rival capitals. They also resort to night buses for a short period after midnight. But in Berlin you certainly can catch a tube in Spandau at 3:15 am and any time later on a Sunday morning and travel all the way to Pankow at the eastern end of town.

In Paris you have no problem catching a train at Gare du Nord at 3:22 am and any time later on a Sunday and travel wherever you like. In London you are depending on the night buses until 5 or 6 AM during the week and later at weekends.

Germany and France have a reputation of being even more unionized than Britain but they manage to get their transport running at times necessary for maintaining essential services in a world capital. Given the money TfL takes in fares and the government subsidies, I am at a loss why we can’t do the same.

Young Writer on Liberty - last week

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As April 30th draws closer, time is running out to enter the ASI’s ‘Young Writer on Liberty’ competition. With economic freedom eroded by taxes and regulations and civil liberties trampled underfoot, we want to know what the next generation would do to reverse this depressing state of affairs.

For a chance to become the ASI’s ‘Young Writer for Liberty’ 2010, simply submit 3 short articles, each on a different ‘Way to Advance Liberty’. You might support drug legalization, an open borders policy or dismantling the state completely; we are open to all ideas for making the UK a freer place.

Incentives matter, which is why winners will receive literature to further their quest for liberty and see their work published on our blog, while the top prize includes £500 cash.

Entrants must be under 20 years of age on the day of the deadline. For more details, click here.

Gordon Brown’s Economic Record

Monetary policy was kept too loose for too long. The Bank of England averted its eyes from the rapid expansion of the balance sheets of the banks. It ignored the bubble in house prices that its policies built up, targeting only increases in the prices of goods and services, and not the prices of assets like houses.

While he was Chancellor, Mr Brown made inadequate budgetary provision for the occurrence of a recession. Why did he fail to act? Perhaps he believed the siren voices of those American economists who told him that they had solved the problem of preventing recessions. Whatever the reason, as late as March 2007 he was still repeating his claim that “we will never return to the old boom and bust”. Martin Weale, Director of the National Institute of Economic and Social Research, has estimated that Brown’s rule of delivering a current budget balance over the cycle was too slack by about 3% of GDP.

The result of that error was revealed in the Budget of 2009. Large budget deficits will persist for almost a decade, long after the recession is over and the growth of the economy has resumed. This means that for years to come the country is condemned both to an effective standstill in the provision of public services and to increases in taxation that will affect all families, not just the rich.

The third failed area of economic policy is in the regulation of financial markets. During the boom, neither the Bank of England nor the FSA exercised their powers to oblige the banks to keep more liquidity or to build up more capital. This was in large part because in 1997 Brown unwisely split responsibility for supervising the banking system between them.

The current British framework for financial regulation was created by Brown himself with some help from Alastair Darling: it is embodied in The Financial Services and Markets Act of 2000. Unlike, for example, Canadian banking regulation which restrained reckless lending by that country’s banks, so that none collapsed during the financial crisis, bank lending in Britain to people who couldn’t afford to repay their loans was not just tolerated but actively encouraged by the Government in the name of ‘social inclusiveness’.

The other major omission of Brown’s banking legislation is that it made no provision for the orderly liquidation of a bank in the event of its insolvency. This meant that the Government was forced into an emergency £50 billion bail-out of the banks in the autumn of 2008. Had that money been available for spending on infrastructure, it could have provided a more productive use of taxpayers’ money.

People may also remember Brown’s ill-judged decision to sell off half the nation’s stock of gold in 2002, when the price of gold stood at one quarter of its present level. It is said that when your neighbour loses his job that is a recession, whereas when you lose your own job, it’s a depression. Many people might think that when Gordon Brown loses his job, it will signal the beginning of a recovery.

David Simpson is a former Economic Adviser to Standard Life. He is also the author of The Recession: Causes and cures (PDF), which was published by the Adam Smith Institute in June 2009.

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Gordon Brown has claimed his management of the economy is the main reason why his Government should be re-elected. In view of his responsibility for the recession and the wreckage of the public finances, this is a breathtaking claim. For Mr Brown to claim credit for managing the economy during the recession is rather like a driver responsible for a major road crash claiming credit for taking the survivors to hospital.

The Brown storyline is that the recession was a one-off unforeseeable event, global in origin. It was created by greedy bankers who had to be rescued from their own folly. The truth is rather different.

The present recession was neither unique nor unforeseeable. A cycle of boom and bust has always been a feature of market economies: there were recessions in the UK as recently as 1975, 1981 and 1992 and a major stock market crash in 2001. As with earlier recessions, the bust of 2008-2009 was the result of a preceding credit-fuelled boom which artificially inflated the prices of houses, shares and other assets and securities. And although the consequences of the present recession were global, its origins were not. These origins are to be found in the lax way from 2000 onwards that the authorities in the UK and the US controlled the money supply and public expenditure, and regulated banking.

Just as the only way to escape a hangover is not to drink too much, so the only way to avoid a recession is to moderate the preceding boom. To do this, governments have at their disposal three instruments of policy, monetary - control of the money supply, fiscal - the power to vary taxes and government spending, and regulatory – the power to supervise the conduct of banks. Between 2000 and 2007, the Labour Government made major policy mistakes in all of these areas. Continue reading...