Over recent years, it’s become clear that UK taxes need to run at around 37 per cent of GDP to keep the UK functioning. To put it another way, the Exchequer has to find some £675bn from taxes every year.
Today’s official figures for income tax receipts for 2016/17 will therefore give the Chancellor some comfort. At £148.8bn, tax receipts are £8.9bn higher than in 2015/16. That’s an increase of 5.3 per cent. Two figures jump out from the statistics. First, PAYE receipts – the mainstay of the income tax system - were up by £4.1bn. However, income tax collected through self-assessment increased by a whopping 17.3 per cent or £4.2bn, mainly because the dividend tax regime.
But there is no scope for complacency in the Treasury.
Increases in the personal tax allowance have taken very large numbers of individuals out of the tax net. While that’s great news for those who no longer pay tax, the result is that tax receipts depend on too few taxpayers. The top 1 per cent of earners are expected to pay 27.7 per cent of all income tax in 2017/18. This is up from 24.4 per cent in 2007/08. This increase in tax contribution does not reflect an increase in incomes: during the same period the share of pre-tax income received by top earners fell from 13.4 per cent to 12.0 per cent.
Individuals who feel over-taxed can choose to work less, engage in tax avoidance schemes or simply leave the country. The government simply cannot afford to let this happen.
With the uncertainties surrounding the impact of Brexit posing a particular risk to the level of taxes which can be extracted from key parts of the UK economy such as the financial sector, concerns are growing as to who will pay tax, and how much, after the UK has left the EU.
The latest example of these concerns was voiced by car fleet operators who face a change in the way CO2 figures are computed as a basis for vehicle taxation, including company car benefits-in-kind. For cars, that’s only part of the story. Fuel duty is an important part of the UK tax regime. However, improvements in vehicle efficiency and the move to hybrid or electric vehicles mean that fuel duty receipts are likely to drop from 1.4 per cent of GDP in 2017/18 (£27.5bn) to just 1.1 per cent in 2030.
In the short-medium term, other taxes which have hitherto been mainstays of the UK Exchequer’s income will change. For example, as more people kick the smoking habit, tobacco duty receipts will decline, potentially halving by 2030. Alcohol duty receipts also look set to decline in line with lower alcohol consumption. The prospect that declining air pollution, smoking and drinking might reduce the strain on the NHS is very attractive. But the reduced contribution of these taxes to public expenditure will have to be made up from other sources.
So where will the extra taxes come from?
Even if the UK’s bid to offer one of the lowest corporation tax rates in the G20 is successful in stimulating economic activity here, the cut in tax rates to 17 per cent from 2020 means that the overall boost to corporation tax receipts is unlikely to be significant.
The impending 'sugar tax' is currently attracting considerable attention. However, it is designed as a deterrent to sugar consumption so, if successful, the levels of tax paid by food manufacturers is likely to be relatively small. The current debate about limiting portion sizes, reducing sugar levels and boosting the use of artificial sweeteners makes that clear. My colleague David Wilson looks at this in more detail below.
There’s an argument that it’s undesirable for every transaction to be taxed, but with important elements of the tax base in decline the UK is already a long way from that ideal. Think of a simple situation, for example an employee buying sandwiches, a soft drink and confectionery for lunch. By the time the wrappers are off, the employee will have suffered income tax and NIC, VAT, the sugar tax (soon) and possibly even the carrier bag “tax” too. Driving to the shop may have brought the individual within the scope of car tax, insurance premium tax, vehicle excise duty and fuel duty. And more exotic purchases may have suffered import duty too.
A broad and stable tax base is important the country, both as a means of providing social justice and also certainty for everybody, including the Chancellor of the Exchequer who is tasked with oversight of the nation’s finances.
The Treasury has recently opened a consultation asking people what they would like to see in the autumn Budget. The reality, of course, is that Parliament will have very little time to debate any tax changes. Brexit will dominate the Parliamentary agenda for years to come. However, the pressures of Brexit should not be allowed to prevent MPs from thinking long and hard about who should pay tax, and how much, in years to come.