There’s a saying that when you tax something, you get less of it. Sometimes, this is a good thing. The government taxes smoking, alcohol, and petrol partly because we think these things have costly side-effects—like pollution or burdening the NHS—that we want to discourage. But most of our taxes do not fall on activities with costly side-effects: they fall on things like working, travelling, and socialising. And because we have such a high tax burden—this year we’ll work for the chancellor for 154 days before we start working for ourselves on Tax Freedom Day, today—we almost certainly have less of those things. With lower taxes we’d be happier, and our descendants would be richer.
Consider this point: the more money you can earn by working, the more costly it is to take leisure time. Wages affect this, and we see that people who earn high wages—accountants, or lawyers, for instance – take very little leisure at the peaks of their careers. But income tax affects this too.
When there’s no income tax, each hour of leisure costs you the money you could have been making in the time. If you introduce an income tax of 50p in the pound, it only costs you half as much. In effect, this means the incentive to work is reduced, whilst the incentive to take leisure time goes up. Not a bad thing, necessarily, but it’s still worth considering as a consequence of higher taxes.
But this is just the short-term cost of income tax. The long-term ones are much more harmful. Consider the decision between becoming a think tanker or an actuary. An actuary is extremely productive: measuring risk and uncertainty is a fundamental ingredient into investing society’s savings in a way that pays off in the future. But an actuary’s hours are long and hard, and the work is complicated and delicate. A think-tanker’s pay is less tangible: they benefit from shorter hours, media exposure, fulfilling work, and interesting contacts. The income tax doesn’t fall on any of these benefits, it falls narrowly on the one benefit it measures—pay—and hence with high income taxes, people shift their whole training, education, and careers towards things that pay out more in pleasure than financially.
This isn’t to say that we shouldn’t tax anything at all. We need taxes because it’s true to say that some Government activities simply will not be provided by the private sector. But Tax Freedom Day—which measures the total burden of taxation compared to the total incomes Brits earn and which falls today —needn’t be quite so late in the year. What’s more, Tax Freedom Day hasn’t been this late since 2001, and for all the UK’s problems, government services and transfers aren’t all that much better now than then.
A big tax burden has big economic costs. It reduces work hours. It pushes people into more pleasant, but less productive careers. It reduces the capital investment which makes us richer in the future. And all of this means less growth and less of the ingredients of the good life. There are things the government does need to do, but these don’t require them taking some 42 per cent of our net national incomes in tax. If the government cuts the tax burden on the economy—we’ll get more of it.
Ben Southwood is Head of Research at the Adam Smith Institute
Comments