Is there anything they won’t tax?

Death and taxes. The two things that we all know are guaranteed in life; and there seems to be a growing feeling that there is not much that governments would not slap a tax on.

The Chancellor has set the date for her next budget - 26th November - almost as late as she possibly could. Undoubtedly Rachel Reeves has plenty of challenges ahead, many of her own creation, and she will need every day between now and then to try to balance the books. 

The headline debate is always of course about how much tax we pay. I would certainly be in the “we pay too much” camp. As a Conservative I believe in a strong, effective, but small state. Recognising that individuals, families, businesses and communities have the ability to get on with doing most of the things that we want in society. That the solution to every problem is not necessarily more government. 

Back in 1993 the tax burden was 27.4% of GDP. By 27/28 it is projected to reach 37.7% of GDP. There are plenty of reasons for the shift, beyond just the expansionist nature of some governments, including the massive intervention in the employment market, rising levels of worklessness, and less than impressive GDP growth. Those are arguments for another time; but fundamentally, does anyone really think that the State, the things we get from it, and our standard of living are a third better than in the early nineties?

Some will disagree and feel we need yet higher taxes and more government. Or more accurately it is usually someone else who should pay higher taxes in order to pay for a bigger state. 

Cutting taxes means cutting expenditure and so whilst the desire to do the former is almost universally popular there will always be interest groups who oppose the latter. Even through the years of so-called austerity we saw state spending rising, just not as fast as some would have liked. 

There is a real danger that Britain has become addicted to government spending in a way that has crept in since the mid-nineties and leaves us on the brink of the economic challenges last seen in the 1970s. People talk about a post-That her economic consensus, but the size of the government, the areas it seeks to meddle in and the passive acceptance of this by many citizens is a stark contrast to anything Margaret Thatcher would have recognised. 

So the amount of tax we pay matters. It certainly matters in terms of the services provided, but it matters to the health and vibrancy of the country itself. The measure of public spending as a proportion of GDP matters because it is the simplest measure of affordability. The growth of the state matters when it begins to infantilise a population, rather than truly freeing citizens to make the most of their lives. 

Yet this article is not about the overall burden of tax but much more about where that burden falls. Whether you want to increase or decrease (firmly my position) taxation, there are conscious decisions taken by governments about how those taxes are collected. Some of them are so engrained that many take them for granted. 

In the real world Chancellors are making incremental decisions and I freely recognise that my argument here is a purist one. Nevertheless the current government is floundering, in part at least, because it doesn’t seem to know what it stands for. Clear principles need to be established in politics, and mixed with a strong dose of pragmatism when they encounter the real world. 

The basic reason to impose a tax is to raise money, that is true in most cases, but there are also plenty of occasions when the argument for a tax is to change behaviour. “Sin taxes” as they are often known. 

Given that we have fallen out of love with politicians moralising, the acceptance of sin taxes seems remarkable. If governments, with a democratic mandate, wish to ban things they certainly have the power to do so. I stress I am not generally in favour of banning things either. Nevertheless it is within their gift, whether it be about preventing crime, or protecting public health, many things are banned. Taxing to change behaviour has become very popular, but frankly it’s just a bit dishonest and often means the worst outcome for the least well off. 

Minimum unit pricing of alcohol will have much more impact on changing the behaviour of the single mother supporting a family than it will the wealthy stockbroker. Do we really think that they shouldn’t both be able to afford a drink at the end of a hard week?

Congestion charging, such as is now going to be introduced in Oxford will make little difference to the senior employee of a large business able to reclaim their travel expenses; but compare that to a tradesman trying to run their own business or to residents forced onto a less convenient bus route that makes their journey longer. 

Our acceptance of this tax burden was made clear to me a couple of weeks ago when listening to an interview with an economic commentator about a so-called Mansion Tax (changes to Capital Gains Tax). The interviewee was not there to present either side of the debate and was just providing context. Yet he described the fact that Capital Gains Tax (CGT) was not payable on your main home as a “tax break”. Adding it is one of the biggest “giveaways” by the Treasury. I will not debate the rights and wrongs of the Mansion Tax here (that is for another day) but the assumption was staggering. The government is entitled to money from anyone who sells an asset. If the government is feeling nice, then it might not impose it, but taxation of assets is the natural state. 

I do not think you have to be from the radical right to feel at least a little uncomfortable with this position. Surely governments should have to justify to their citizens not just how much money they need, but also how they intend to collect it. 

So we may reluctantly accept the inevitability of death and tax but do we too readily accept almost any kind of taxation regardless of the consequence?

Tax is inevitably a drag, a burden, a restriction. That is why it has so often been used to seek to prohibit things. I am not for one moment suggesting we could or should do away with all taxation. We need a functioning state. Generally it is accepted that taxes on personal income and corporate profits are a broadly fair way of collecting taxes. It is seen as transparent, reasonably fair, and is based on an ability to pay. Undoubtedly these can be seen as a tax on success, almost punishing the earning of a wage or the creation of wealth. Whilst I understand the argument there are much more egregious examples. Even if we accept Income Tax and Corporation Tax as necessary evils in order to fund our public services we should surely examine the myriad of other ways in which the state takes our money from us.

Sometimes this is a matter of deception. Hiding the true cost of policy, because the tax is less direct. On occasions it is about being seen to shift the burden, but more often than not, many of the taxes we take for granted hit the poorest the hardest.

The focus on those who seek a so-called progressive tax system seek to maximise income and corporation taxes on the most well off. Yet it is undeniable that the rich already pay the most significant proportion of income to the Exchequer. According to the Institute for Fiscal Studies (IFS) in 2023/24 Those earning more than £125,140 (very well off, but hardly the mega-rich) accounted for the top 2% of adults. Yet their contribution to income tax was a whopping 39%. Drop the threshold down to include Higher Rate tax payers (those earning £50k+) and you now take in a total to 12% of taxpayers. Together they contribute 71% of all income tax revenue.

So maybe income tax is not the problem that some people think it is. More than a third of the population no longer pay any income tax - arguably a problem in itself, but it can hardly be seen as a system that hits the poor.

I got back to my original question. Is there anything they won’t tax?

Business rates, fuel duty, alcohol duty, VAT, stamp duty, the Green Gas Levy, Road Fund Licence, Council Tax, National Insurance and many more. Each of these has negative impacts, often putting a brake on growth and pushing up the cost of living for the public. Put aside for one moment the need to raise revenue or questions over how high those taxes should be, but think again about why we tax particular things.

Business rates or National Non-Domestic Rates as they are correctly known. A tax on the physical premises used by businesses (and public bodies). Why would we want to prevent, or at the very least make it harder for businesses to operate in physical locations? Many businesses have no alternative but to exist in the real world. The local mechanic offering MOT services cannot exist in a purely online world, there is no option, and yet they must pay the government, over and above their profits, simply to occupy a space they have already had to rent or buy. Arguably this tax has always been flawed, but at a time when retail businesses struggle to survive on the high street, we have a system that penalises physical shops in favour of large online retailers who consolidate all of their physical presence into comparatively much cheaper distribution space. As importantly it is a barrier to small businesses and those seeking to expand. From day one businesses are faced with a bill however successful or otherwise their operation might be. Corporation Tax at least, by its nature only taxes profits. If a business is growing and investing this is reflected in their tax burden - because that’s presumably what we want to encourage, thriving, growing businesses. Yet business rates are nothing but a drag. If you are lucky you might be able to claim some form of rate relief; but this is likely to be limited, adds complexity and does not remove the real problem. We are simply penalising people for having physical business premises.

National insurance no longer acts as an insurance scheme, not that it could ever really be said to have been. It has never been anything more than a state-sponsored Ponzi scheme, using current income to pay current benefits, with the hope of an ever growing pool in the future. The idea that you are paying into a pot for your own social security provision is something that most people now realise is just a myth. For most people it is effectively another form of income tax, paid on their earnings to fund public expenditure. 

It cannot even be said that paying national insurance any longer buys you access to the system, with more and more state benefits that are not conditional on previous contributions. Often citizenship, or even residency, is enough to withdraw from the system that generations were told would be their own social security insurance. 

National Insurance is however a tax of two halves and more recently has become known as the jobs tax. Undoubtedly that is a useful political tag to bash the current government with, but it also happens to be true. The more jobs you create, the more people your business employs (normally considered to be things governments want to promote) then the more money the Treasury will take from you. As we are seeing at the moment, this has a dampening effect on the jobs market and the economy more broadly. Again the method of taxation, not just the rate creates a perverse pressure on the market. 

In the hospitality industry it is not a new idea that the Treasury makes more money from each pint sold than the landlord. Of course there are a variety of costs and plenty of others in the supply chain, such as brewers, who will extract profit, but Alcohol Duty is one of those classic examples of a “sin tax”. Successive governments try to change behaviour by pricing more and more people out of the market for things that governments disapprove of, yet things that remain perfectly legal. 

The impact of these forms of taxation is to put more pressure on the worst off and least able to pay. Seeking to curtail their “unwanted behaviour” significantly more than those on higher incomes who can afford the increased levels of taxation. Minimum Unit Pricing is the perfect example of this. In the meantime it makes the margins for pubs, bars, hotels and restaurants even tighter. 

Of course if truly successful these policies would be self defeating. If taxation on alcohol is intended to reduce consumption, then eventually it should generate no income. If however that is not the end game and revenue is the goal, it simply serves as a regressive tax that hinders the economy. 

One of the great challenges for the British economy for the last couple of decades has been stagnant productivity. A key to unleashing growth and productivity could indeed be to tackle the huge costs for energy that we see in the UK. Whether it is electricity, gas or petrol/diesel, it is energy that drives our modern world. As soon as you start your new business, paying your business rates for your empty premises, you will also be paying 20% in VAT once you turn the light switch on. Another barrier, another cost, with no direct benefit beyond pulling in more cash for the Treasury. 

That is before we start adding in the variety of green taxes levelled against businesses and households. This is not a place for the argument for or against net zero, but I seek to highlight again the fact that the sledgehammer approach of using taxation to seek to change behaviour simply leaves us all worse off. Not just the individual taxpayer but as a country due to lower growth and lower spending power. 

One of the biggest costs for households is indeed the almost ubiquitous Value Added Tax (VAT). Sales taxes of various kinds are common around the world, but certainly not universal. The fact of passing taxation down the supply chain simply passes on costs to individual citizens - whilst creating significant costs to businesses as they act as government agents in collecting tax revenue. Another area we take for granted but one that adds (usually) 20% to almost anything we purchase. One of the most regressive of all the taxes as the amount paid is entirely unrelated to someone’s ability to pay.

Of course the impact is not just on us as individuals and our ability to pay for goods and services in the economy, but also a drag on business growth. Plenty of small firms and sole traders seek to keep below the threshold for VAT registration, often in an attempt to keep their prices low and stay competitive. This is because they see VAT for exactly what it is, a tax on their ability to sell their wares and to expand their business. 

The list of taxes we pay in the UK goes on and on, many hypothecated (or thought to be so) in areas that are no longer relevant. The Vehicle Excise Duty (VED or Road Tax) was only actually ring-fenced for our roads for around 16 years, and has now morphed into a pollution tax. This is the perfect example of where the “sin taxes” fall down. The advent of electric cars (which has been brought about by technological advances and legislative change, not by taxation) is leading to declining revenues from VED. As a result governments are having to wrestle with the problem of how to tax electric vehicles in order to bring in more money. Again the worst off are penalised for having older vehicles. Those in rural areas with little access to public transport suffer disproportionately. Ultimately it is a policy that seeks to reduce choice by citizens and at the same time brings in less money. 

Of course in many of the examples I give, as with this omitted, there will be a range of exemptions and reliefs. These do not nullify my argument, but rather enhance it. Every time a government offers a tax relief in a niche area of policy, what they are actually doing is acknowledging that this particular tax causes problems that need to be alleviated. The VAT reductions on certain products is an admission that it artificially inflates prices and impacts on the market and consumers. The small business reliefs that are sometimes available demonstrate that these tax arrangements hinder growth. That is without even considering the cost to taxpayers and the state in creating, administering, paying and checking the myriad of discounts available. As if a benevolent government has the right to all available resources, but will graciously return some of it, less the costs of administrations. 

Why does any of this matter? We all know we need the government to pay for things, we all need to contribute, does the method matter?

Remember the Poll Tax riots that sealed the end of Margaret Thatcher’s terms as Prime Minister. That was not just a protest about the imposition of taxation, but about the way in which that tax was collected. It matters how Chancellors chose to exercise their tax raising powers and in what areas. The proposed changes to inheritance tax for agricultural properties (better known as the family farm tax) has led to significant concern about the impact it will have not just on the families involved, but how it may change the countryside and affect our food supply.

Eventually the Poll Tax was replaced by our current Council Tax system, but it remains unfair, based on asset values, not on the ability to pay. It is also arguably one of the most resented taxes - not just because many people will question whether their local authorities use their money wisely - but because it is arguably the most visible tax. For those paying through PAYE, Council Tax is probably the only direct taxation they actually receive a specific bill for and see money disappearing from their bank accounts every month.

It is no doubt impractical to have a complete bonfire of our taxes in order to bring about a truly radical simplification, but we should all question, not just the level of tax we pay, but why we pay for particular things. As with so much in the UK, our rich history has meant that things evolve gradually, that is certainly true with taxation, but periodically we need to take a step back and ask why.

I will argue elsewhere why and how we should look to reduce our tax burden, but regardless of whether you want a smaller or a larger state, I say we are taxed not just too much, but too often. It drags down productivity, punishes innovation and reduces our freedom to decide for ourselves. This is certainly an area where less is more.