The taxless recovery

This is no ordinary recovery. Not only has it taken a hell of a long time to do not very much, it’s seen collapsing productivity and very little wage growth, even for those who appear to be highly skilled. As a result of all this, even though the economy grew at over 3 percent, the tax revenues didn’t increase at the same rate.

As Sarah O’Connor reported in the FT:

[T]ax receipts have grown just 2 per cent so far this year, compared with the 5 per cent growth the Office for Budget Responsibility forecast in March.

As Ben Chu’s chart shows, most of the rise in tax revenue since the recession is due to VAT.

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Record numbers of people in employment, it seems, hasn’t led to record levels of income tax.

When you break out the figures for income tax, as Michael O’Connor did earlier this week, there is a marked difference between receipts from those on PAYE and those on self-assessment.

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Falling self-assessment receipts are, for the most part, a symptom of falling self-employment incomes. Around three-quarters of the employment growth since the recession has come from self employment yet between them, the self-employed are still delivering a lot less tax. We won’t see the final 2013 HMRC figures for self-employment incomes until January but these charts suggest that the spectacular fall in self-employment earnings between 2008 and 2012 hasn’t improved by much. Probably the closest estimate we have for self-employed pay since 2012 is by Laura Gardiner at the Resolution Foundation. The low tax receipts indicate that self-employed earnings may have continued to fall or are, at best, stagnating.

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Things might be about to get worse for some of the self-employed. As Ben Dellot explains, the new Universal Credit system could leave many of them worse off. According to the RSA’s calculations, 37 percent of the self-employed earn less than the minimum income floor, which is set at around the full-time minimum wage. (That sounds about right. A study by the IFS found that 40 percent of the self-employed earn less than the minimum wage.) Not all the self-employed currently claim tax credits but those who do, and who fall below the income floor under the new system, will find their benefits cut. The self-employed now account for almost a fifth of tax credit claimants so this is likely to affect a lot of people.

It is yet another symptom of the uncertain situation in which many people find themselves. The low tax take and stubbornly high social security costs are two sides of the same story. The number of people in employment might have increased but a lot of that employment is insecure and doesn’t pay very well.

Income tax, VAT and National Insurance are three of the state’s biggest sources of revenue. If any one of them fails to deliver as promised, the government is in a financial hole. People whose employment status and earnings are precarious don’t deliver much in tax. This isn’t a normal recovery. Along with the other epithets being used to describe it – low-wage, slowest-for-a-century, low-productivity and so on – we can now add another; taxless!

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9 Responses to The taxless recovery

  1. SK says:

    The first graph shows that corporation tax is much more than a problem than income/capital gain tax.

    In the end if the gov is looking for revenues there are lots out there like:
    -Removal of CGT allowance
    -Remove of BTL Tax allowances
    -Taxing Inheritance in the same bands as income tax
    -LVT

  2. NeilW says:

    “Income tax, VAT and National Insurance are three of the state’s biggest sources of revenue. If any one of them fails to deliver as promised, the government is in a financial hole.”

    No it isn’t. Very important to get away from that belief. If they fail to deliver it is because people are saving in aggregate, not spending. Money doesn’t stop at its first use!

    £100 of spending generates £100 of taxation for any positive tax rate. It is a simple arithmetic progression as spending moves to income and is taxed with each cycle. What slows that down is people saving along the route.

    The automatic stabilisers work by reducing taxation take and increasing social security spending precisely to increase the amount of savings, and reduce the amount of debt that the private sector has.

    The level of private debt in the UK is colossal and will take a lot of resetting.

  3. Pingback: The taxless recovery – Flip Chart Fairy Tales | Vox Political

  4. Aren’t people just cheating more? We’re an increasingly open economy, businesses are globalized, more people are self-employed (much harder to monitor), much work is for offshore entities, proportions of the population are recent migrants who come from cultures that don’t share the assumption that taxes are things that should be paid.

    The areas where tax receipts are increasing are those that are rather easy to monitor (VAT receipts). Self-assessed income is down, corporate income tax receipts are down. Both are quite easy to game.

    I’d say cheating has become easier, despite better monitoring processes and better IT. The black economy is growing, the visible economy isn’t.

  5. Systems anarchist says:

    The major reason for self-employment rising is because of the draconian measures taken by this govt to harass the unemployed . People are being forced to accept next to no pay (if it leaves you in debt it ain’t worth doing) or disappear off the grid. Self employment (and the black economy) are the only routes left. There is no bounce in this economy now, its as flat as a pancake and Osbourne’s drizzling lemon on it!

  6. Pingback: The NEF blog: Why the cuts aren’t working « Derby People's Assembly

  7. Pingback: Can we afford government for corporate freeloaders? | Peter Batt

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