At last: a nice surprise from the taxman

24th March, 2012

‘Income tax payers will receive a personal statement next year in an effort to increase the transparency of government financing and stir public resentment at the level of taxes and borrowing.’

Financial Times, March 19

Stir public resentment?

That one’s a bit weird, isn’t it? The assumption seems to be that if only people knew how much tax they were paying and the outrageous things the money was being spent on, they would immediately come round to the small-government Conservative way of thinking.

Would they?

I’m not sure. My back-of-the-envelope calculations show that about a quarter of income taxpayers pay more than the average income tax bill, and about three quarters pay less than the average.

What kind of witchcraft mathematics is that?

The rich pay a lot of income tax because they face higher tax rates and have a lot of income. The average income tax bill, per taxpayer, is roughly £5,000 – about £150bn spread over about 30m people. But you’d need to earn more than three-quarters of your fellow income taxpayers do before you paid that much tax. The top 1 per cent of income taxpayers pay more than a quarter of all income tax.

Sounds like the rich are getting a rough deal.

Not necessarily, but it does sound as if they’re useful to have around if you want to pay for public services. My point is that when these tax statements arrive, three quarters of people will be paying less income tax than the average. They might be pleasantly surprised.

So will these statements change the way people behave?

I doubt it. The economists Ritva Reinikka and Jakob Svensson published a study showing that transparency about grants to local schools in Uganda dramatically reduced corruption. The UK government is releasing a lot more data about spending on big contracts, which is welcome – but unlikely to reveal Ugandan-scale graft. Another economist, Raj Chetty, has demonstrated that making sales taxes more obvious to shoppers can discourage them from spending . But it’s hard to make the leap from such research to a major change in attitudes in the UK.

I read in the Guardian that the statements lump together unemployment benefit with more popular spending on pensions, family and disability benefits, to discredit the idea of “welfare”.

Yes, I read that piece, and was baffled about what the problem was supposed to be. I admit that in choosing what to lump together and what to itemise, the government can influence us in subtle ways. But the mock-up tax statement – so much clearer than any document I’ve yet received from the taxman – breaks out unemployment, pensions, family support, housing benefit and disability benefits. Until I saw the breakdown I had no idea that spending on unemployment benefit was so tiny, at 3 per cent of the welfare budget.

Any other surprises in this tax statement?

I hadn’t realised defence cost more than the police, the courts, the fire service and prisons put together. And I hadn’t realised that we spend more on “recreation, culture and religion” than on universities. The statements are a real eye-opener, but will they stir resentment? I’m not sure. Take the Treasury’s hypothetical taxpayer, on £15,000 a year, who pays nearly £2,500 in income tax and national insurance. He will be told that he is paying £12.13 for the fire service and another £12.13 for a contribution to the European Union. Not obviously an outrage. Nor will he necessarily faint when he discovers that the three biggest items on his tax statement are pensions, schools and the NHS.

But these tax statements are still tricksy. They deliberately omit regressive taxes such as council tax, VAT, fuel duty and taxes on alcohol and cigarettes.

Hold on a second. What you’re saying makes no sense on so many levels. First, council tax already comes with a similar kind of statement. Second, the government can’t tell you how much you’ve spent on indirect taxes unless they collect data on every penny you spend. Third, fuel duty isn’t regressive because the poorest people rarely own cars. VAT isn’t regressive either – because poorer households spend disproportionately on low- or zero-VAT items such as food and heating.

And cigarettes?

I would gladly have a pie-chart from the Treasury slapped on every packet of ciggies, both as a gesture of transparency and as an incentive to quit.

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