The TaxPayers' Alliance - Economics 101

TaxPayers' Alliance response to the Tory Tax Plans: Too timid, too complex and poorly targeted

While the TaxPayers’ Alliance (TPA) welcomes any plan to reduce the burden on British businesses or ordinary taxpayers, the plans announced by the Conservatives today are disappointing. The TPA today publishes a response to the plans that details why they are too timid, too complex and poorly targeted and suggests alternative public spending savings and tax cuts that would be of greater help to the economy. In the coming days we will also be looking at the Labour and Liberal Democrats' plans shortly. To read the response, click here. 

Matthew Elliott, Chief Executive of the TaxPayers’ Alliance, said:

“We are in a serious economic crisis that demands bold and radical tax cuts, not tinkering around the edges that will do little for firms struggling to survive. While ordinary people and British businesses will welcome any tax cut, this plan is far too complex and timid. Big, headline tax cuts are needed, and they are needed now.”

Key Findings

The opinion of the TaxPayers' Alliance is that the Conservative proposals are:

• Too small scale: An estimated £2.6 billion tax cut is a mere 0.5% of the Government's 07/08 tax take. Given the scale of the crisis, and the fact that Corporation Tax, Business Rates and employers' National Insurance Contributions alone place a burden of over £100 billion on business, much larger tax cuts are needed to help businesses and workers through the recession.
• Too complex: Contrary to the stated Conservative Party principle of tax simplification, this proposal increases the complexity of the tax system with numerous conditions and qualifiers. These not only threaten to increase administration costs for business and Government, but also risk distorting companies' behaviour and even potentially skewing the balance of the economy when it comes to recover from the current crisis.
• Poorly targeted: Because the proposals are targeted at recruitment, they do nothing to help firms which are having to shed jobs. Tax cuts should be aimed at helping companies to avoid having to lay people off in the first place. Any firm making redundancies within three months of recruitment will be barred from the scheme, so businesses most affected by the financial crisis will get no benefit at all.

TaxPayers' Alliance alternative proposals:

Robust cuts in wasteful public spending are clearly needed:

• Scrapping the ineffective Regional Development Agencies would save £2.3 billion a year. TPA research has found the RDAs to be extremely ineffective in helping regional economies.
• Freezing Civil Service recruitment. Over ten years this could save £3.3 billion in annual spending.
• Scrapping ID cards would save as much as £20 billion. This could provide for temporary tax cuts or be used to cover the initial years of a permanent cut.

Radical tax cuts are needed to help business and put money back into the pockets of consumers. Each of these three proposals would cost approximately £10 billion:

• Cutting the basic rate of income tax by 3p.
• Cutting the rate of employers’ national insurance contributions by 2 percentage points.
• Cutting VAT by two percentage points. Cuts by more than 2.5 percentage points would require a change in European Union law but a 2 per cent cut could be implemented immediately.

New poll and new research: CREDIT CRUNCH MAKES TAX CUTS MAINSTREAM

• New poll: Public want tax cuts and no more green taxes
• New research: Average family faces £668,000 lifetime tax bill - up 6% - and poor families suffer 13% tax rise

The TaxPayers' Alliance (TPA) today publishes stark new polling and research evidence that, with the credit crunch tightening its grip, British taxpayers are facing a cripplingly high tax burden, and floating voters are willing to give their vote to the party that promises tax cuts. The annual Lifetime Tax report shows that the average family face a lifetime tax bill of £668,000 at today's prices - an above inflation rise of 6% on last year's figure - whilst poor families have seen their tax bill increase a massive 13% in the past year.

New polling for the TPA shows that in the last twelve months, public opposition to high taxes has grown greatly, a massive cross-party majority has built up against green taxes, and crucial floating voters are up for grabs to the party willing to stamp out waste, reduce spending and cut taxes.

KEY FINDINGS

Lifetime Tax Research:

• The total lifetime tax the average British family can expect to pay if current tax rates continue is £668,000 at today's prices. This is a huge jump from the £631,000 lifetime tax bill we reported last year - a rise of almost 6%. Poor families were even harder hit by rising taxes, seeing their tax bill jump 13% in one year to £264,000, up from £233,000 last year. This shows that any party serious about tackling poverty must address the issue of tax cuts. The full report can be found here. 

New Opinion Poll:

A PoliticsHome Phi5000 poll commissioned by the TaxPayers' Alliance panel found:

An overwhelming 74% of the public now believe that "Politicians are not serious about the environment and are using the issue as an excuse to raise more revenue from green taxes", up from 63% in August 2007. The number of people with faith that politicians are using green taxes for the right reasons has fallen from 20% to 14%. A majority of every party's supporters hold this view: Conservative (87% : 6%); Lib Dem (63% : 20%); Labour (66% : 24%), as do floating voters (74% : 8%). This explains why the Conservative Party is rapidly backing away from their "pay as you burn not pay as you earn" tax strategy.

67% of people agree with the statement "The government spends too much and therefore taxes us too much" - up from 64% in August 2007. Only 5% think the Government taxes too little and spends too little. The view that taxation and spending are too high is now the most popular view in every party and, significantly, an overwhelming 73% of floating voters agree with the proposition:

                                    Lab Con Lib Dem No Party
Tax/spend too much      48   89    58           73
Tax/spend about right   35     5    24           10
Tax/spend too little        8      2     7             5

Asked "For every £100 the Government spends overall how much of that money do you think is wasted through mismanagement or unnecessary spending that doesn't give value for money?", 59% of the public now believe the Government wastes more than £20 in every £100 it spends - up from 53% in August 2007.

Crucial floating voters are more in favour of low taxes. Overall, 36% of people would be more likely to vote for a party that committed not to raise taxes, compared to only 6% who would be less likely to give that party their vote. Crucially, floating voters who registered no party allegiance were the most likely to switch their vote on the basis of of a pledge not to bring in any further further tax rises, with 43% supporting such a pledge and only 5% against.

For the Conservatives in particular, the polling suggests that a policy of lower taxes and no more green taxation would not only gain the strong support of their existing supporters but would appeal strongly to floating voters. Whilst 53% of Conservatives want a commitment to lower taxes, 38% want taxes to stay the same and 3% want higher taxes, floating voters have similar views: 48% support tax cuts, 34% support current tax levels and 6% want higher taxes. Contrary to the stereotype that tax-cutting Tories are out of step with floating voters, actually it is the politicians who support tax rises who are out of step. With the credit crunch, tax cuts have become mainstream.

The full poll results can be found here.

Matthew Elliott, Chief Executive of the TaxPayers' Alliance, said:

"The credit crunch has put families in a situation where they are having to economise at home, so they expect politicians to do likewise and cut back on government spending and give them some of their money back through tax cuts. Voters have also seen right through all the rhetoric about tax rising for green reasons  - they know that the politicians are using it as an excuse to squeeze us for more cash. The whole politics of tax and spend has changed with the credit crunch and voters want to see politicians looking for ways to save money."

Corin Taylor, Research Director at the TaxPayers’ Alliance, said:

“Everyone is tightening their belts at the moment, but much of the savings they make are being wiped out by high taxes. The Government say they sympathise with the plight of ordinary people,but they don’t seem to care about the massive tax burden that people have to pay throughout their lives. People are struggling to make ends meet, and if the Government genuinely wants to help them they must cut taxes.”

Full extent of Gordon Brown's economic failure revealed

On the eve of the Labour Party Conference, and with the City in turmoil, an explosive report from the TaxPayers' Alliance (TPA) demolishes what is left of Gordon Brown's reputation for effective economic and public sector management. Using detailed international comparisons and official statistics, the report reveals that in terms of economic growth, workforce productivity, tax levels and complexity, inflation, pensions, energy policy, public service quality, value for money, real disposable income, national debt, welfare dependency and other key measures, Britain's performance has been poor across the board as a result of Gordon Brown's policies.

Far from being better prepared to weather the credit crunch thanks to his good governance, as the Prime Minister claims, our research suggests that the Government pursued numerous ineffective policies over the last decade that have left Britain more vulnerable to the downturn than our international competitors. The full report can be found here.

PLUS: INTERNET GAME LAUNCHED - THE BROWN CALCULATOR

To accompany the new report, the TPA proudly presents The Brown Calculator, an online Flash game which allows you to do some maths - the Gordon Brown way! Try out any sum you fancy; the answer you get might not be what you expect, but it will reveal a key aspect of Gordon Brown's economic record. The Calculator is the first stage of a large new TPA campaign that will employ new media, social networking sites and Web 2.0 to drive home the message of low taxes and better government. The calculator can be found at www.browncalculator.com. If you would like to link through to the calculator, the downloadable button (see right) and the button's HTML for your web site are here.

KEY FINDINGS

ECONOMIC GROWTH: Whilst Britain has outperformed our European neighbours, all other English-speaking wealthy countries have seen faster growth since Gordon Brown became Chancellor. Had Britain matched US levels of growth since 1997, the UK's GDP would have been £14 billion higher by 2006.

TAX REGIME: Since 1997, the tax burden has increased in real terms by 51 per cent, placing an unsustainable burden on ordinary families and drastically slowing the rate of growth in disposable income. Government spending as a percentage of GDP has soared above the OECD average, corporate tax has remained high whilst competitors have introduced successful cuts, the size of the British tax code has doubled and the cost of administering the tax system has increased by at least 75 per cent.

PUBLIC DEBT: Since the Government's commitment to match Conservative spending plans expired in 2000, public debt has risen by 5.1 percentage points of GDP. When public sector pensions, PFI debt, nuclear decommissioning, Network Rail and Northern Rock are taken into account, actual Government liabilities total £1,898 billion - a massive 129 per cent of GDP.

PENSIONS: Gordon Brown's infamous tax raid on pensions has cost private pension funds between £100 - £150 billion through lower dividends and reduced growth. As a result, the number of private sector workers with pensions has fallen 41 per cent in the last 12 years. If the rate of decline were to continue, there would be no active members of private pension schemes in just 12 years' time. At the same time, the number of public sector workers with largely unfunded defined benefit pensions has increased by 1 million since 1995. The estimate of public sector pension liabilities now stands at over £1 trillion - almost £40,000 per household.

PUBLIC SERVICES: Despite vast increases in spending on the NHS since 1997, the rate of improvement in performance has not increased. Similarly, despite large increases in schools spending Britain's international standing in education has fallen across the board, whilst the number of young people not in employment, education or training has risen against the international falling trend. Spending on law and order has risen substantially, but recorded crime has risen by 9 per cent whilst violent crime has leapt 275 per cent in the last ten years.

BUDGET DEFICIT: Between 1997 and 2008 the UK went from having only the 13th largest budget deficit in the developed world to having the 5th largest. Treasury forecasts have consistently proved to overestimate tax receipts and underestimate public spending over-runs.

INFLATION AND INTEREST RATES: In the last ten years, the British rate of inflation and interest rates have been on average higher than those in the USA and the Eurozone, suggesting that the low rates we have experienced are more an effect of international conditions than Government policies.

PRODUCTIVITY: British workforce productivity continues to lag behind that of many other countries, and the rate at which the UK was catching up has slowed since 1997. In the NHS, productivity fell by 2 per cent a year between 2001 and 2005, a far faster rate than between 1995 and 2000.

TRANSPORT: Public spending on transport has more than doubled in the last decade, but the UK still has fewer miles of motorway per car than all other major EU economies.

WELFARE: The complexity and cost of the welfare and benefits system has boomed under Gordon Brown. This is undermining incentives to work, shown by a 147 per cent rise in the number of people who lose 60 per cent or more of any increase in their income through taxes and lost benefits. People are increasingly being trapped on benefits.

The full report assesses many areas of Gordon Brown's economic record, and can be found here.

Matthew Elliott, Chief Executive of the TaxPayers' Alliance, said:

"For all Gordon Brown's boasting, his economic stewardship has failed people on every count. Ordinary taxpayers have seen their bills rise and rise but our services have not improved in return. With the credit crunch tightening its grip, it's clear that the country is poorly prepared for tough economic conditions, and it is Gordon Brown who is to blame. He has pursued flawed policies, wasted taxpayers' money and further complicated a government structure which is chaotic and in dire need of reform."

Council tax in the Pre-Budget Report

PRE-BUDGET REPORT PROJECTS COUNCIL TAX RISE OF ALMOST 30 PER CENT OVER NEXT FIVE YEARS

HUGE RISE EQUIVALENT TO £370 PER YEAR FOR A BAND D PROPERTY IN ENGLAND

Buried in the small print of the Pre-Budget Report is some very worrying news for council taxpayers, who have already seen council tax almost double over the last decade:

• The Government’s projection of the increase in council tax between 2007-08 and 2008-09 can be found in Table B8.  Council tax revenue is projected to increase by 5.1 per cent, from £23.7 billion to £24.9 billion.
• Paragraph B.52 explains how “the council tax figures for 2008-09 onwards are based upon the arithmetic average of council tax increases over the past three years”.  This means that the same increase of around 5 per cent is expected in future years.
• This 5 per cent, compounded over the five years to 2013 where the public finance projections end, would add up to a 28 per cent increase in council tax revenue. 
• Average council tax on a Band D property in England in 2007-08 is £1,321.   Increasing this by 28 per cent would mean an increase of £370 a year for an average Band D bill.  This means that by 2013 an average Band D bill could reach £1,691.

Matthew Sinclair, Policy Analyst at the TaxPayers’ Alliance, said:

“These new rises will mean more pain for council taxpayers, particularly retired people who are the ones that suffer most from this unfair tax.  With no clear accountability for council tax rises it is too easy for government to blame councils and councils to blame government when big new bills land on people’s doormats.  Taxpayers need a cut in council tax not inflation-busting increases.”

Download the TaxPayers' Alliance response to the Pre-Budget Report's projections for council tax (PDF)

TaxPayers' Alliance response to the Quality of Life Policy Group

This document sets out the problems with the "Blueprint for a Green Economy:  Submission to the Shadow Cabinet" report of the Conservative Quality of Life Policy Group.

It details how the report is based upon highly suspect assumptions and proposes increased taxes, increased regulation, new quangos, a curb to vital infrastructure investment and a retreat from free-trade.

Download TaxPayers' Alliance Response:  Quality of Life Policy Group Report (PDF)

Cost of Government Day: Monday 23 July

The TPA has extended the concept of Tax Freedom Day, long championed by the Adam Smith Institute and now an established part of the political calendar (in 2007 it fell on 1 June) and can now provide an estimate of the Cost of Government Day.  This is the date in the calendar year on which the average person has earned enough gross income to pay off his or her share of government spending and regulation.

The result for 2007 is as follows:

• The average person must work for 204 days of the year to pay off his or her share of government spending and regulation.

• The Cost of Government Day in 2007 is 23 July.

The Cost of Government Day calculation is done in two parts:

1. According to the OECD, total government expenditure will be 44.9 per cent of GDP this year. This means that for 2007:

• The average person must work for 164 days of the year to pay off his or her share of government spending.

• The average person was free of the cost of government spending in 2007 on 13 June.

2. The Better Regulation Task Force (now the Better Regulation Executive), which is sponsored by the Government, has estimated that the cost of government regulation is between 10 and 12 per cent of GDP.  Taking a mid point of 11 per cent means that for 2007:

• The average person must work a further 40 days of the year to pay off his or her share of government regulation.

• The average person must work from 13 June to 23 July just to pay off the cost of government regulation.

The Cost of Government Day is an important concept to develop as it captures the hidden costs of government, which encompass far more than stealth taxes:

• Under Gordon Brown, government spending has for a number of years been higher than government receipts.  The resultant government borrowing will have to be paid off by taxpayers eventually – the future bill is being accrued this year.

• The cost of government regulation on the economy is even murkier, but it will eventually fall on taxpayers in the form of lower wages, higher prices and fewer jobs.

Cost of Government Day has been getting later in recent years and falls later in the year than in many other OECD countries:

• In 2000, the Cost of Government day fell on 26 June, almost a full month earlier than this year’s date.

• The Cost of Government Day in 17 OECD countries falls earlier than in Britain in 2007.

Download the full Cost of Government Day report (PDF)

Tax Freedom Day response

TPA response to Tax Freedom Day, which in 2007 fell on 1 June. The report compares estimates of Tax Freedom Day in other countries.

Download Tax Freedom Day response (PDF)

Poorest fifth pay the highest tax burden

This report analyses official data for the last 20 years and finds that the gap between the tax burden facing the poorest fifth and the richest fifth of households has widened under Gordon Brown. The poor pay higher taxes than the rich.

Download Poorest fifth pay the highest tax burden (PDF)

Dynamic model of the UK economy

The TPA commissioned the respected Centre for Economics and Business Research to build a dynamic model of the UK, to show how tax reductions will benefit the economy. This report explains how the model was set up and simulates a reduction in the corporation tax rate to the Irish rate of 12.5 per cent over nine years. The results are quite dramatic!

Download The dynamic impact of the 2007 Budget and a comparison with the impact of gradually introducing an Irish level of corporation tax (PDF)

Download the press release accompanying the report (PDF)

Budget 2007: tax cuts abroad

In advance of the Budget in March 2007, the TPA detailed a large number of countries abroad that had cut taxes in the past two years, putting pressure on Gordon Brown to follow suit.

Download Budget 2007: tax cuts abroad (PDF)