Adam Smith Institute

The overall picture

Tax Freedom Day came later and later in the 1960s, though there was some respite in the early years of the 1970s: while the tax burden in most industrialised states was tend¬ing to increase, the then British government actually decreased it.  There was another short and less pronounced reduction in the burden in the three years following the 1975 peak.  The gen¬eral trend, however, was for Tax Freedom Day to fall later and later during the years from the mid-1960s to the early 1980s.

More recently we saw a 10-year period during which Tax Freedom Day broadly moved earlier and earlier in the calendar, from a high of 15 June in 1982, to 22 May in 1993 and 1994.  Since 1994, Tax Freedom Day has again generally – if erratically – moved later in the calendar. This fiscal tightness seems likely to continue.

* Leap years make Tax Freedom Day appear 1 day earlier in the year.

The big changes
 
Over the past three decades years there have been three “leaps”, when Tax Freedom Day moved unusually far in one year.  These are 1973-1974, 1979-1980 and 1980-1981.  Why?

The 1973-1974 leap.  The first of these leaps — the 1973-74 rise of 16 days, from 12 May to 28 May — was due partly to the sudden onset of high inflation.  Inflation in 1974 was twice as high as in 1973, and ushered in a period of 8 years when inflation would fall below 10 percent only once.  The higher inflation pushed a large num¬ber of income earners into higher tax brackets, thus automati¬cally increas¬ing their tax burden — fiscal drag.  From 1973 to 1974, current taxes as a proportion of NNI increased by 3.3 percentage points, the equivalent of a 12-day delay in the arrival of Tax Freedom Day.  In addition, National Insurance contributions as a proportion of NNI rose by 1 percentage point, the equivalent of a 3.6 day postponement of Tax Freedom Day.  

Income tax revenue continued to rise sharply in 1975, but the rise in total tax burden was tempered by the fall in revenue from other taxes, including indirect taxes and taxes on cap¬ital gains and corporate profits.  Furthermore, in 1974 real GDP growth de¬clined drastically. So although Tax Freedom Day came later than ever in 1975, this advance was much less than the 1974 change.

The 1979-1980 leap.  Between the years 1979 and 1980, Tax Freedom Day moved on twelve days, from 25 May to 5 June. This was due partly to the 1979 budget, when VAT increased to 15 percent.  Taxes on income and production, which rose by 0.6 percentage points of NNI in 1979, jumped by 2.5 percentage points — equivalent to a nine-day extension to the taxpayer’s servitude to the government — in 1980.  In addition, the recession of the early 1980s led to a fall in real GDP of 2.2 percent in 1980.

The 1980-1981 leap.  The following year’s leap — when Tax Freedom Day arriving another nine days later (5 to 13 June) — is due to more complex fac¬tors.  The pound rose strongly against the Deutschemark in 1981.  The consequent slow-down in exports combined with a fall in real demand brought on by a tough budget to cause another fall in real GDP of a further 1.3 percent.  In addition, income tax rates were not in¬dexed.  The main tax revenue increase came from taxes on income and wealth etc, which rose by 1.1 percentage points of NNI, the equivalent of a 4-day postponement of Tax Freedom Day. 

Mr Brown’s July 1997 Budget

Although the change in Tax Freedom Day under the present government does not qualify as a “leap” in the same sense as the three years described above, it is of some interest, since most of the move stems from Gordon Brown’s first Budget as Chancellor in July 1997. This introduced a windfall tax on privatised utilities, changes in advance corporation tax, a rise in fuel duties, and the phasing out of mortgage interest relief. The net effect was to raise taxes by £5.96 billion in 1997-98 and by another £6.665 billion in 1998-99 — the equivalent of adding two days to Tax Freedom Day in 1997 and another two days in 1998.

The big movements following the July 1997 Budget disguise the underlying trend in the tax burden. In Tax Freedom Day 1999, therefore, the Adam Smith Institute decided to average out the changes over the 1997-99 period. The average tax burden for those three years was 150 days, four days later than the 146-day burden left by the previous administration in 1996.

Labour’s “stealth taxes”

The use of “stealth taxes” - taxes announced at other times than the Budget, or announced one or more Budgets in advance so as to mute their impact when they actually occur - is a hallmark feature of the current Labour administration. One such example from the 2002 and 2003 Budgets is the increase in employee National Insurance contributions. In 2002, Mr Brown announced that as of a year later, these would not only rise from 10% to 11%, but that the extra 1% would be levied on all pay, not just between the upper and lower earnings limits. Since this change had already been announced well in advance, there was no need to stress it again in the 2003 Budget. But its impact was nevertheless felt by all those who suddenly discovered that they were paying more taxes and then wondering why.

Since 2003, there have been fewer stealth taxes. However, in the late 2006 Pre-Budget Report, Mr Brown returned to form by announcing a doubling of the air passenger duty. This will raise another £1 billion for the Treasury – in Tax Freedom Day terms, one-third of one day extra work for all of us.

This process continued in Budget 2008. Mr Darling presented a number of different measures, some of them raising taxes, some of them cutting taxes. But overall, measures announced in this Budget will allegedly lower the tax burden by £140 million in 2008-09 – but only to raise it by £1.87 billion by 2010-11. In Tax Freedom Day terms, this is broadly speaking equivalent to
 
For more on the stealth taxes, see Technical stuff.