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26 April 2024

You’re not paying as much tax as you think

The latest data from the OECD suggests high-tax Britain is a myth.

By Will Dunn

One thing we can all agree on is that taxes are up. “The people in the engine room of the economy are increasingly prevailed upon to stump up more,” says the Telegraph. The Lib Dems say the middle class are being “squeezed” as “soaring taxes” are “clobbering families”. Even the Guardian is wondering, “What are we paying for?” In this strange new country, “high-tax Britain”, a More in Common poll has found that voters associate the Tories with higher taxes more than Labour. But we must stop agreeing on this, because it isn’t true.

Yesterday, the OECD (an intergovernmental organisation representing 38 member states) published its yearly report on wage taxation. You didn’t read it, because you’re nothing like as tedious as I am, but it has plenty to say about your tax bill.

For middle-class families in the UK, the OECD says taxes have fallen since 2010. It measures a combination of taxes and benefits to get a sense of the real tax “wedge” taken from wages, and the data shows that for a typical family in the UK (a married couple with two kids, one adult earning 100 per cent of average income and the other earning 67 per cent of average income), that “wedge” has fallen from 28.4 per cent in 2010 to 27.2 per cent in 2023. Families in which both parents earn average income are also paying less tax as a proportion of their total labour costs than they were in 2010.

Similarly, for a single earner with no kids on average income, the wedge has never risen above the level it was at when the Tories came to power in the 2010 coalition, and is now 1.3 percentage points lower.

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So who is paying more tax? The OECD’s data says the biggest proportionate change is among single parents with low incomes. A single parent, making 67 per cent of average income and supporting two children, has seen their tax wedge rise from 9.3 per cent to 17.2 per cent between 2010 and 2023. This results not just from tax being increased but from benefits being reduced, although it’s also true that more of single parents’ income has been made taxable by fiscal drag and by other taxes, such as council tax, having risen. The Conservatives might be accused of a tax raid on Middle England, but in reality they’re cracking on with the Tory project of taking money from single mums and giving it to their managers.

Higher earners have also paid more – the tax wedge on the income of a single person making 167 per cent of the average salary has risen by 0.9 percentage points since 2010 – but the important word here is “earners”. The tax paid by the rich varies a lot more than any other group: those on high salaries typically pay a lot of tax, and good on them for that. Others, who enjoy investment income or capital gains, don’t pay as much, and if you’re really well off you can afford some professionals to make sure you contribute as little as possible to society. As work by Arun Advani has shown, the average person making £10m a year has an effective annual tax rate lower than someone on a £30,000 salary. The very rich pay more tax in total, but they keep more of each pound they get.

This allows a number of apparently contradictory statements to be true. Jeremy Hunt was right to say that average earners are now on “the lowest effective personal tax rate since 1975”, but Keir Starmer was also technically correct in calling the tax take “the highest tax burden for 70 years”. Both statements are generalisations that wilfully ignore the contributions of other people and companies (a lot of the increased tax take comes from businesses).

At an international level, the OECD data shows that Jeremy Hunt’s communist dystopia has some catching up to do. If you take the average of the tax wedge for all groups, the UK is taxing earners at a rate several percentage points below the international average.

So why do people feel like they're paying more tax? Research conducted last year by Pranesh Narayanan at the Institute for Public Policy Research (IPPR) showed that the UK is late to the tax party: since the late 1980s, our tax-to-GDP ratio has lagged behind other advanced economies. This, Narayanan argued, was a bad thing for us: our economic and physical neighbours (Denmark, France and Germany) taxed more, and their citizens enjoyed higher real wage growth as a result of the greater public investment in schools, transport and other infrastructure this provided for.

George Dibb, the IPPR’s associate director for economic policy, says this is probably the reason why people now feel short-changed by government: “Increasingly, the things that are supported by tax don't feel as good as they were several years ago.” In a country now noticeably short on GP appointments and dentists, with potholed roads and crumbling schools, “people are quite justifiably feeling a bit aggrieved at the way that their money is being spent”. But as the chair of the Public Accounts Committee, Meg Hillier, told me recently, this is fundamentally a competence problem, not a tax problem.

It’s not going to help Labour or the Conservatives to pretend that the UK is a high-tax state that should be seeking cuts, because on top of all the spending challenges that already exist there are the growing liabilities of our ageing society and the climate crisis, and government borrowing is already very high. There is no point pretending that the next government, or the one after that, will be able to do anything other than raise the tax take. The only question is who is going to pick up the bill.

[See also: Humza Yousaf is finished]

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