Why you have to work one more day this year to pay tax
The government says its tax changes mean people can now work for five more weeks before paying tax – but sadly it is not quite as simple as that.
“Tax Freedom Day” is the symbolic date when workers stop paying tax and start earning for themselves.
In the UK, it’s usually around the end of May. In places like the United States and Australia, it is much earlier – closer to the beginning of April.
On Monday, the Treasury caused a bit of a stir by suggesting that the coalition’s tax changes meant that people would, on average, be able to take home five more weeks’ pay than they did under the Labour government. It suggested that increases to the income tax threshold – the point at which pay starts being taxed – had made this possible.
As such, one would expect that our Tax Freedom Day has moved back accordingly, meaning we in the UK, like in the US and Australia, might already be able to claim we are now earning for ourselves rather than the taxman.
Unfortunately not. While the maths are right – raising the income tax threshold to £9,440 this year and £10,000 next year (up from £6,475 under Labour) does mean that earners are, overall, working for longer before having to pay income tax – it is only one side of the story.
Tax Freedom Day
Tax Freedom Day also takes into account all of the other taxes citizens must pay, such as VAT, and balances them against the country’s GDP – meaning that, in fact, Channel 4 News can reveal that this year’s date is one day later than it was in 2012, falling on 30 May.
Think tank the Adam Smith Institute works out the UK’s Tax Freedom Day and its research director Sam Bowman described the government’s numbers as “misleading”.
“It’s misleading because what matters to people isn’t just their take-home pay, what matters is how much we get to keep for ourselves and how much goes to the government,” he said.
“If the government abolished income tax and raised VAT by the same amount, take-home pay would be bigger but the cost of living would rise. That’s an extreme version of what’s happening here. That movement of tax from income tax to other forms of taxation is arguably positive but it doesn’t make people’s lives better as this claims.”
What matters to people isn’t just their take-home pay, what matters is how much we get to keep for ourselves. Sam Bowman, Adam Smith Institute
Rather than focusing on individual taxation measures, the libertarian think tank works out Tax Freedom Day by looking at GDP and then the amount of money the government takes in tax across the board, balancing them out against each other, then putting the date on the calendar. The main reason it has moved backwards one day this year – it was 29 May in 2012 – is because of weak economic growth rather than any big tax rise.
Static economy
The government is getting about the same amount in tax overall, but the economy is static, so relatively speaking more tax is being taken as a proportion of GDP than previously.
But Mr Bowman said: “I would not use the fact that it is a day later as a stick to beat the government with. They are doing positive things on tax but this shows they are not doing that much.”
In fact, Tax Freedom Day has been slipping back for the last few years as the economic crisis took hold – it was 24 May in 2009, 27 May in 2010, 28 May in 2011, and 29 May in 2012. The dates haven’t changed that much since the Labour government was in power.
The concept of Tax Freedom Day was first thought up by American right-wingers, but it is still a handy way of showing what the tax burden theoretically is on a nation’s citizens. For example in the UK, it’s now 150 days before the average worker has earned enough to pay off all of their taxes.
However, Tax Freedom Day only takes into account the moment when the government stops collecting tax revenues – not when it stops spending them.
The UK economy is in deficit, which means the government spends more than it earns. If the books were balanced, the “cost of government day” – the amount of time UK citizens would need to keep paying tax for before they had raised enough money to pay for all of the government’s bills – would actually be 23 June.
“The government keeps spending money long after it stops taxing people,” said Mr Bowman. “It’s a striking way of showing people what a budget deficit really means.”
Although it could be worse, Mr Bowman added – in France, workers have to wait until July before their own Tax Freedom Day.