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3 June 2016

Welcome to “Tax Freedom Day“: the right’s latest con

Although the day is intended as a shill for smaller government, it can teach us something too.

By john Hood

Today the Adam Smith Institute marks this year’s “Tax Freedom Day”. For those unfamiliar with the concept, “Tax Freedom Day” is defined as “the day when average Britons stop working for the Chancellor and start working for themselves”. In other words, today is the day where you are finally free from the pesky taxman, with every penny you earn going straight into your pocket. Before you start whooping in delight, there’s some bad news – this day comes four days later than last year’s Tax Freedom Day. 

I imagine on hearing this you’re a seething ball of rage, aghast at the audacity of the state to encroach further into your lives, furious at its seemingly unquenchable thirst for your money. Because you earned it, and it’s all yours. No? 

Well if you’re not it’s possible you’ve worked out that Tax Freedom Day is both ridiculous and meaningless. Its celebratory nature rather gives the game away, showing it for the cynical wheeze it is. Instead of tax being a mechanism to provide your children with an education, to support you in old age or to care for you when you’re unwell, it is simply an imposition. Tax is reduced to a form of confiscation, with the Government taking what is rightfully yours. In this explanation of tax, all tax is bad, regardless of how it is collected or used. 

This is troubling enough, but the concept of Tax Freedom Day becomes even more bizarre when you examine how it is measured. According to the Adam Smith Institute it is calculated by comparing general government tax revenue with 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 42.27 per cent. That percentage is then converted to days of the year, starting from 1 January.

In other words, the date of Tax Freedom Day is found by determining the fraction of the UK economy “captured” by taxation. This fraction is then used to determine a date in the calendar that is an equivalent fraction of the year. But does this method work, and can it really measure when an ‘average taxpayer’ can expect to be ‘free’ of taxation? The answer is, not really, and it should be said that the Adam Smith Institute does outline a number of ‘complications’ with its measurement. An obvious flaw that is not mentioned however is that nations clearly don’t pay personal income tax, 

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But let’s for a second actually take this at face value. Let’s suppose you really can measure the day someone is ‘free’ from tax. In reality, there is no single day as there is no ‘average’ person, as the ASI recognises. Our own analysis at the Equality Trust has found that when all taxes on income are taken into account (along with consumption taxes and some business taxes), the richest 10 per cent pay 34 per cent of their income in taxes. However, the poorest 10 per cent actually pay more – 47 per cent. Taken as a fraction of the year, this means that the day someone in the richest 10 per cent stops contributing to tax, or their ‘Tax Freedom Day’, is actually on May 5th. The poorest on the other hand are still waiting for their Tax Freedom Day, which will not come until June 19th, over a month after the richest 10 per cent.

In this sense, Tax Freedom Day can actually teach us something. By at least one important measure, our tax system is still hopelessly regressive. Few of us may be hugely motivated by the prospect of paying tax, and finding more efficient ways to collect and spend tax is of course the correct approach. But tax is an important and widely accepted part of life. We pay it to receive certain public services, many of which have a social value far greater than their financial cost. Tax Freedom Day seeks to obscure this obvious truth by convincing the public that tax is exclusively harmful, and that it can be avoided without cost. What we need is not to demonise all forms of taxation, but to have a clear and honest public debate as to whether our tax system is efficient and fair, and whether it really places the greatest burden on those with the broadest shoulders.