Beware Gordon's stealth taxes

by Emma Tyrrell

9 March 2005

What would you prefer – a straightforward punch on the jaw, or a sneaky jab to the back of the head? A thief who rifles through your bag in front of you, or one who pilfers from it when you're not looking?

If you've got any sense, your reply would probably be “neither”, but we're talking tax here.

As far as Labour's eight years in power are concerned, the approach has been very much towards the sneaky jab or the quiet pilfer.

Almost a decade ago, in the long run up to Labour's landslide 1997 victory, Tony Blair told us he had “no plans to increase tax at all”.

The key word there was “plans”. Since 1997 Labour has brought in 157 tax-raising measures. That's according to economic think-tank The Institute for Fiscal Studies, which also tells us that in the same time Chancellor Gordon Brown has introduced 215 tax-cutting measures.

But the tax hikes have raised more for the Exchequer than the tax cuts have cost it, with the result that the Government is scooping an extra 2.1 per cent of national income in revenues than it was when Labour came to power, equivalent to £26.4 billion.

While headline basic and starting rates of income tax have fallen, other “stealth taxes” have been quietly increased. These stealth taxes are so called because they allow the Government to raise billions of pounds, while still making ministers appear at first glance to be a lovely cuddly tax-cutting bunch of chaps.

This plan worked brilliantly for the first few years after Labour's landslide 1997 election victory, as newspaper headlines the day after Budget Day trumpeted the income tax rate cuts, winter fuel allowances, or the introduction of children's tax credits, for example. When the devil in the detail trickled out a few days later, the more negative stories were often confined to the personal finance sections, rather than the front pages.

These days we're a bit more suspicious, but many stealth taxes can be slipped past us because of their complexity, with politicians relying on the fact that most people won't understand the effect of technical tax changes.

A classic, and early, example came in Chancellor Gordon Brown's first budget in July 1997, with the abolition of the so-called ACT tax credit. This change meant that personal and occupational pension funds could no longer reclaim advanced corporation tax, costing them £5 billion a year. It was techy enough for the Government to slip it past most pension savers unnoticed, but its effect has been to slash the future retirement incomes of almost every one of us with pension savings.

Other stealth taxes are even more cunning, and because they result from the Government failing to stop the tax-take rising, rather than actively snatching it. The failure to increase income tax thresholds in line with average earnings, for example, means there are 1.3 million more people paying the top rate of 40 per cent tax in 2004-5 than there were in 1996-7, when only 2.1 million paid it. Instead the threshold has been uplifted only in line with inflation, which tends to rise more slowly than average earnings.

The longer this continues, the closer we get to a situation in which higher-rate tax, once only paid by the wealthy, is paid by people earning the average wage. By the 2009-10 tax year, for example, the higher rate tax threshold is predicted to be only 133 per cent of average earnings, pulling 4.2 million people within the higher-rate net.

Another clever Gordon move was to freeze the personal tax-free allowance at £4,615 from 2002-3 to 2003-4, effectively setting back even inflationary increases by one year.

More serious problems have been caused by the freezing of the lower threshold for stamp duty on property purchases. When Labour came to power stamp duty was charged at 1 per cent on all properties costing over £60,000. That starting threshold remains unchanged, even though figures from the Halifax bank show the cost of the average property has shot up by 139 per cent per cent, from £68,085 in May 1997 to £162,816 today. If it had been uprated in line with house price inflation, only those buying houses worth around £143,000 or more would pay stamp duty.

Stamp duty now affects three quarters of first-time buyers, according to the Council of Mortgage Lenders, compared with around a quarter when Labour came to power.

In addition, Labour has increased the stamp duty for properties costing over £250,000 to 3 per cent, and bumped the duty up to 4 per cent for properties costing over £500,000. The duty is paid on the whole cost of the house, and not just the part falling into each band.

Inheritance tax is another tax which was once only of concern to the rich, but which now threatens many ordinary families, as a result of the threshold (now £263,000 ) failing to keep up with house prices.

Council tax increases have also proved a classic stealth tax. Because the Government does not set council tax rates, it can try to wash its hands of the responsibility for their inflation busting rises. But central government funding of local authorities, and the demands it places on them, must affect rates indirectly.

Council tax has been the fastest rising tax over Labour's first two terms, according to the Institute for Fiscal Studies, with the average household almost £232 a year worse off, compared to 1997. This increase has been more than enough to wipe out the average £43.68 benefit that the average household has gained as a result of tax-cut and benefit measures such as tax credits.

Speaking of tax credits: other sneaky stealth tax tricks to watch out for include announcing tax-cutting measures a couple of years early (that way you can announce them twice!), while replacement tax increases arrive sooner. Gordon's 1999 budget, for example, announced that married couple's allowance would be scrapped, but that a new children's tax credit would be introduced. But while the married couple's allowance was to go in April 2000, the children's tax credit would not be brought in until a year later. In addition, millions of married couples would not receive the new tax credit, either because they failed the means-test, or they had no school-age children.

The all-time classic stealth tax has to be National Insurance, because it doesn't even call itself a tax. Like the wolf in little Red Riding Hood who posed as the grandmother, it's dressed up as something comforting – the idea that you're saving towards your retirement – but it's really a tax, with nasty sharp pointy teeth.

In 1996-7, the main rate of employees NI was 10 per cent, paid on earnings between £3,172 and £23,660 a year, with those earning over £3,172 paying 2 per cent on that first chunk of their income. Because any earnings over £23,660 a year did not attract national insurance, it was effectively capped at a maximum payment of £2,112.24 that year. Today the lower 2 per cent charge has gone, but the main rate is charged at 11 per cent on a much wider band of earnings - between £4,732 and £31,720 – and is no longer capped, with a 1 per cent charge on everything over £31,720.

By making those earning above the upper limit pay more, the final pretence that this is an insurance system should have been removed. Anything where you pay without limit for a limited benefit is a tax, not an insurance policy.

There have been many more stealth taxes than those mentioned here. The Conservatives reckon they've identified 66 of them, and imply that they'll be more upfront about our taxes. (Though they also say they'll save loadsamoney from cutting Government bureaucracy, and we've all heard that one before.) Which brings us back to whether you'd like your wallet pilfered “honestly” or by stealth, and whether it makes a difference to you. Those nurses, teachers and policemen have to be paid for somehow, and in the run-up to the next election you'll need to decide how.

Next week Brown will unveil his pre-election budget. With poll-day looming, it's unlikely to include any obvious tax hikes. But as in previous years, the devil may well be lurking in the detail. Look closely, and you may see Gordon baring his teeth underneath that fetching grandmother's bonnet.