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Taxes - to cut or not to cut?
Who is cutting what?
The issue of tax cuts is a complex one. A government could reduce the basic rate of income tax, but people could still end up paying more tax. There are so many different types of tax that it is always important to look at the overall picture before trying to judge what a government has really done. One good figure to look at is the tax burden. This is usually
measured as the overall percentage of GDP that is paid in taxation of all different types. If the tax burden goes up we are paying more tax overall whether tax rates have been cut or not, and if the tax burden falls then we are paying less tax overall. However, within the overall tax burden, there can still be important differences in how people are taxed. There are three main types of
taxation:
- Direct taxes - these are taxes that are paid on income. Obviously this includes income tax, but also corporation tax which is paid as a percentage of profits.
- Indirect taxes - these are taxes paid on expenditure and so include VAT and excise duties.
- Wealth taxes - these are taxes paid on wealth and so include taxes like inheritance tax.
Traditionally the Tories have taken the view that it is better to reduce direct taxes as these directly affect people's incentive to work and increase indirect taxes. The argument for this is that it increases the degree of choice about how taxes are paid. If people choose to spend then they will pay indirect taxes on their spending. So when trying to judge whether taxes have been
cut or not, look at the overall balance of the different types of tax. If income tax has been cut, have other indirect taxes been increased instead? If wealth taxes have been cut has income tax increased instead?
Don't think that you have then sussed taxation fully though. Would that it were that simple. Once you've looked at the overall balance, then start to look in detail at the individual taxes. Let's look in more detail at income tax for example. Your total tax bill depends not just on the rate of tax you pay but also the level of income you start and stop paying each rate of tax. Everyone
gets a personal tax allowance - that is a level of income they receive tax-free. If the government increase this allowance they have given a tax cut (which helps the least well off the most) without cutting the tax rate at all. So don't just listen to the political trading of the party spin doctors. Look in detail at the figures for yourself to judge what governments have really
done.
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