Adam Smith Institute

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Making taxes transparent

It is a good thing for both democracy and liberty if government tells people openly and honestly how much it is taking from them in taxation. Most people accept that government must finance essential services and the public services that enjoy popular support, and are prepared to pay taxes to finance them. But this should be above board, not something done in an underhand and deceptive manner.

Stealth taxes are wrong in principle because they are based on concealment and deception. The aim of them is to levy taxation that people are not aware of, and people cannot consent to something if they are not aware of it. They thus break the principle of consent that underlies honest taxation.

Gordon Brown was the master of underhand, stealthy taxes, but it looks as though Rishi Sunak will take his title. One of the most common stealth taxes is achieved by fiscal drag, by failing to increase thresholds in line with inflation, so that people not earning any more in real terms are sucked into a higher tax bracket that makes them pay more.

Another stealth tax is achieved in National Insurance by labelling part of it the ‘employer contribution’ so that the employees are unaware that they are actually paying it themselves. To the employer it is part of the wage pool that would be available to the employee if the government did not take it.

The government, and the Treasury in particular, like stealth taxes because they do not want people to know how much tax they are paying, fearing public resistance if they knew how much the government was taking from them.

Many motorists do not realize that the pump price contains the fuel duty, currently 56.95p per litre for petrol and diesel, and that the VAT of 20 percent is then added on top, charging the customer VAT on the fuel duty as well as on their fuel. Many whisky drinkers are probably unaware that a similar principle is applied to their tipple, and that VAT is charged on the total cost including the duty, making a tax upon a tax, and that £3 in every £4 spent on it goes to the Chancellor. The same applies to tobacco products.

Taxes on airline tickets, insurance policies, and many other products, are contained in the price, such that most customers are scarcely aware of how much of what they are paying is taken by the government.

All of this means that instead of knowing and consenting to the amount taken from them in taxation, most of the electorate does not even know how much that is. They are tricked by deceit and concealment into paying sums they are unaware of.

A partial solution to this would be achieved if the price before taxation were listed alongside the final price paid. Customers would see at a glance how much of what they were paying was going to the government. This should be done at petrol and diesel pumps, on alcohol products, on tobacco products, on airline tickets and insurance policies, on purchases subject to VAT, and everywhere it could be applied. Furthermore, the “price before tax” should not be buried somewhere in the small print, but should feature prominently alongside the final price that includes the tax.

Companies selling fuel, or alcohol and tobacco products, could start the ball rolling by voluntarily doing this, but ultimately it would be up to Parliament to make this mandatory. It would be a major stride towards honest and open government by those who profess to favour that.