Londoners pay £3,000 more in tax than they receive back: However you slice it, everybody’s getting a raw deal from Britain’s tax code

“Those with the broadest shoulders must bear the biggest burden”…  “We’re doing our utmost to lift the poorest out of tax altogether.”

 

The phrases slip off politicians’ tongues with the regularity of clockwork, as much a part of our political environment as Prime Minister’s Questions. Yet it’s clear from even the most cursory look at official figures that the messages conveyed are based far more on perception than on reality.

 

New research published today by the TaxPayers’ Alliance puts the lie to much of the rhetoric. The truth is, our tax system is neither progressive nor fair, and it's in need of radical reform.

 

Start with the poorest. Despite the welcome changes to the Income Tax Personal Allowance in recent years, the lowest 10 per cent of earners still cough up nearly half their income – a full 45 per cent – to the Treasury, largely through VAT, consumption taxes and Council Tax.

 

That’s the highest tax bill as a proportion of income of any income group, meaning that our tax system is hitting the poorest hardest.

 

The so-called middle class? The average family pays in some £465 more in taxation than they receive in benefits, either of the cash or service variety.

 

And for those who say our tax system isn’t ‘progressive’ enough, try this one for size: before taxes and benefits are factored in, those in the top 10 per cent of earners receive 27 times the income of those at the bottom, but after tax that ratio falls to just 6.1.

 

However you slice it, everybody’s getting a raw deal from Britain’s tax code.

 

What to do, then? How does a tax system that is working for nobody start working for everybody?

 

The chancellor has already announced a welcome consultation into merging Income Tax and National Insurance, hopefully hiking the thresholds of the latter to give a welcome fillip to those on low incomes. He should go further on VAT, too – where EU rules allow, he should look at broadening the base but lowering the rates as part of a wider simplification process.

 

Thinking more radically, he should allow different areas of the country to keep more of the revenue they raise in taxation, and indeed, give them more flexibility on what those rates are.

 

Though Londoners receive the most cash benefits, the average London family is still putting £3,000 more in to the Treasury than they receive in benefits and services. Creating real tax competition to rebalance the economy across the country could be a win-win for provincial cities and the capital alike, giving London fiscal powers more like that of other global cities.

 

Ultimately, though, the chancellor needs to stick to his spending targets. The easiest way to allow room for tax cuts is to reduce spending. Though there are sound arguments that lower taxes allow for growth in the economy, the short-term revenue reduction that would come with tax cuts would be politically difficult.

 

This government has set itself a tough spending target, but has slipped recently, and there are signs the chancellor is worryingly tempted to use tax hikes to meet it – some estimates suggest he has already increased the overall tax burden by £6.5bn since May.

 

Eliminating the deficit is necessary – but it should come from reducing spending, and not from hitting each and every taxpayer with an ever growing bill.