What does the gap between Tax Freedom Day (when UK taxpayers top paying the taxman) and Actual Freedom Day (when they should stop paying the taxman) tell us about the British economy? Rather a lot, says Sophie Mazzier.
The start of a new tax year usually brings feverish calculations on the part of journalists and economists alike as to the implications of changes in personal taxation.
This year, they are weighing up the comparative effects of the rise in the personal allowance to £9,440 (a significant step to reducing the tax burden for low- and middle-income workers) and at the other end of the spectrum, the reduction in the 50 per cent rate to 45 per cent for the highest earners. But so much of the tax burden is hidden or not obvious, and it can be hard to assess the overall impact.
Each year, the Adam Smith Institute calculates “Tax Freedom Day”, the day on which the average taxpayer (counting from 1st January rather than the beginning of the tax year on 6th April), stops working for the taxman and begins to work for himself.
This year, for the first 150 days of the year, every penny earned by the average UK resident will be taken by the government in tax. This year’s Tax Freedom Day falls on 30th May, one day later than it did in 2012, despite the hike in the personal allowance.
In weekly terms, you'll start working for yourself sometime early on Wednesday morning each week. Prefer planning day-to-day? You'll work for HMRC until about 12.17 every day, but your afternoons are your own.
Across the pond, the average US taxpayer would have to devote all the income he or she has earned from 1st January to 18th April 2013 to cover federal, state and local taxes for the year. But it varies from state to state, and while those lucky folks in Iowa started working for themselves yesterday (9th April), the poor (?) New Yorkers won't reach freedom day till 6 May. Envy the Indian taxpayer, however, who works for himself after 14th March, and just be glad you aren't Belgian, as they soldier away until 3rd August for the state.
However, perhaps it is more interesting to consider the length of time between Tax Freedom Day and the day when (if the UK's tax revenues actually covered all its debts) we should stop paying the taxman — let's call it Actual Freedom Day.
Although Tax Freedom Day fell earlier in 2009 than it had any time since 1973, Actual Freedom Day was later, and the period of time between the two was 42 days — the longest it had been since 1973 (when there was a stock market crash, a banking crisis and a property market collapse).
Perhaps that should have told us something about the way the economic wind was blowing. Last year, Tax Freedom Day fell on 29th May and Actual Freedom Day on 23rd June, so the difference was just 26 days. It's mildly heartening to learn that, despite the current economic climate, the gap is getting smaller.
So, if anyone at HM Treasury is thinking of making a new tax year resolution, perhaps it should be ‘mind the gap’. I wonder if Hallmark cards will cover it?
Sophie Mazzier is Counsel at private client firm Maurice Turnor Gardner LLP