While UK ‘Tories’ talk tax cuts, hidden taxes are draining families

The leader of the UK Conservative Party, Liz Truss, gave a surprisingly passionate moral defense of tax cuts this week, but even the meager tax cuts her government is bringing in are being canceled out by major tax rises caused by the fiscal recession, according to a report.

For every one pound (£1) the average UK household will have on top of the high-profile tax cut announced by the government two weeks ago, it will actually lose two pounds (£2) in so-called stealth taxes, according to report of The Institute for Fiscal Studies (IFS) said. The worrying findings show that the big political theater surrounding the cut in the basic rate of income tax by one penny in the pound (from 20% to 19%) is really an accounting trick to mask the real gains the government will make at the expense of households in the coming years caused by the fiscal recession.

Fiscal backlash is a function of governments setting absolute tax limits but then not revising them over time, meaning that a tax that may once, decades ago, have been intended to affect only the very rich could over time to hit the middle or even the working class as inflation pushes wages up. While a fair and just government would naturally move tax bands to account for inflation, they have a strong incentive not to: letting frozen real tax collections grow without politicians having to take the reputational hit of having to announce new taxes.

As the IFS puts it in its report:

…freezes reduce household incomes and strengthen public finances – all the more so in the high inflation environment we are currently in. These freezes – representing a hidden and arbitrary way to raise tax revenue – often have a greater impact on household incomes than more flashy discretionary measures…freezes reduce the transparency of tax reforms and benefits by allowing the size of of the system with secrecy.

In the UK, this effect has become extremely pronounced, with the highest rate tax bands very close to the same today as they were a decade ago. Even a 2014 Breitbart report found that a tax bracket created to punish the very rich but that had not kept pace with inflation was now reaping the profits of upper- and middle-class occupations like teachers. and police officers.

Because this process occurs passively and slowly over time, economists consider fiscal drag a hidden tax. It is generally—badly—little discussed, but has re-entered the political lexicon in recent weeks after the new government’s failed attempt to show it was in favor of ambition by cutting taxes and then reversing parts of the idea.

The IFS report found that by not revising the level at which basic and then higher personal income tax starts, the government stands to make an extra £30bn a year. An average household would see its real income fall by £1,250 a year by 2026 through this process, they said.

When this fiscal setback is added to other freezes, in effect the government’s new “tax cuts” are offset by hidden tax increases by a factor of two to one, leaving Britons far worse off.

The speed with which higher tax – again, introduced for the rich, but slowly filtering down since then – is crushing the “squeezed middle” classes is astonishing. While 3.6 million people were higher rate taxpayers in 2014, the IFS report estimates that with these band freezes this number will continue to rise to 7.7 million by 2026.

A reference to The times reports that when approached for comment on the matter, a Treasury spokesman gave a nice-sounding but – in light of the effects of fiscal drag – utterly hollow answer: “Helping people keep more of the money they earn with effort is a key priority. “

The revelations, which have been clear for years but come in the biggest relief since producing alarming estimates in reports, come just a day after the UK’s new prime minister Liz Truss gave one of the strongest defenses of tax cuts by a Conservative leader. in a generation.

While the words were strong, the significant extent to which it appears to be mere theater to distract attention from the fact that the new Chancellor has decided not to overturn the previous government’s tax freeze will leave Conservatives disappointed. As reported yesterday, Truss spoke at the Conservative Party’s annual conference in Birmingham and presented the tax cuts as a moral imperative. He said:

Cutting taxes is the morally and economically right thing to do. Morally, because the state does not spend its own money. He spends the people’s money. Financially, because if people keep more of their own money, they are inspired to do more of what they do best. And that’s what grows the economy. When government plays too big a role, people feel smaller. High taxes mean it feels less worthwhile working that extra hour, going for a better job or starting your own business.

…I remember my shock, opening my first paycheck, seeing how much the taxman had made. I know this sentiment is echoed across the country!

With just over two years to go until the next UK general election, Truss will have to convince would-be voters that she means what she says or not.

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