Tax Freedom Day is finally here – later than ever before

Jeremy Hunt
Jeremy Hunt

“Every election is a sort of advance auction sale of stolen goods”. So wrote 20th century American satirist H.L Mencken, reminding us that any promises made to voters are ultimately funded by the voters themselves.

Unfortunately, the situation in Britain today is no better. Over the campaign, politicians from all parties have made all sorts of spending pledges. As Manifesto week kicks off, they’ll have the chance to convince us that these are fully costed. More importantly, they’ll need to tell us how much of our money they’ll use to pay for them. After all, there is no such thing as “public money”. There is only taxpayers’ money.

“Ah!” I hear you say, “but both Labour and Conservatives have told us that they’ll cut, or at the very least promise not to raise, our income taxes! So we’re safe there.” But such promises are a symptom of the dishonest way that politicians talk to us about the tax burden. They concentrate on eye-catching headlines, and hope we forget that tax threshold bands have been frozen.

Of course we should welcome a triple lock on taxes and cuts to National Insurance. But frozen income tax thresholds will raise over £33.5 billion in 2028 as 2.7 million taxpayers are dragged into paying the higher rate. And there are multiple other taxes that they are giving themselves the leeway to raise.

In order to expose this, every year the Adam Smith Institute calculates Tax Freedom Day, the day on which we stop working for the Treasury and start working for ourselves. This year, we’re forking out almost £1 trillion pounds to HMRC, meaning that Tax Freedom Day is today, 10th of June. That’s the latest since current records began. At the start of Cameron’s Coalition Government, it fell on the 21st May – almost a whole month earlier.

We measure the total tax take, which includes both direct taxes, such as Income Tax, and indirect taxes, including VAT and Corporation Tax. Taxes on businesses may fall on individual firms, but in reality these companies are legal constructs, meaning that the cost always falls on people.

If that’s not a stark enough image, Cost of Government Day, which takes into account government debt-financed borrowing, will fall on the 20th July. Last year, the Government already spent more on debt interest payments, than it did on defence or public order and safety. And as we all know, government debt is simply taxation on future generations.

Rather than spending the campaign proving Mencken right, politicians should commit to meaningful reforms. As unsexy as it sounds, this should include fixing the cliff edges in income taxes, which currently remove worker’s personal allowances if they earn over £125,000, and strip away child benefit for those earning over £100,000. These hidden marginal rates create perverse incentives. For many, it is simply not worth working harder, to the detriment of the wider economy. They should also abolish inheritance tax which, entirely aside from being unfair and antithetical to human nature, creates more economic distortions.

While the last budget made full expensing permanent, encouraging investment, the UK could still do more on Corporation Tax. The cap on Net Operating Loss carryforwards, which amounts to a sort of startup tax, should be removed. Ireland has no cap, helping businesses who make a loss in their early years but make profits later, boosting growth long term.

More broadly, the whole economy needs rebooting after nearly two lost decades. Economic growth is vital to boosting wages. Solving this requires structural reform, making it easier to build houses and infrastructure, reducing the regulatory burden on entrepreneurs and businesses, and embracing new productivity-boosting technologies like artificial intelligence.

Tax cuts are easy to implement and popular, but supply-side reforms and reducing government spending (of which nearly half goes to welfare, pensions and healthcare) are less so. But all of these in conjunction are needed to bring Tax Freedom Day down. Let’s hope that the next Government grasps the nettle.