In praise of paying tax: A personal polemic

As Nina Simone almost certainly meant to have sung: “It’s a new dawn, it’s a new day, it’s a new tax year for me….and I’m feeling good.”

Ah yes April. The beginning of a new tax year. Empty tax-exempt saving accounts like ISA’s waiting to be filled, new pension allowances just begging to be used, and the excitement of knowing that the tax office will be in touch shortly to remind you that should do your tax return for the last year.

Honestly, that last one is the BEST.

Taxes get a bad rap. I can understand why. I look at my payslip. What I’ve apparently earned vs. what actually landed in my bank account. There is a ma-hoo-sive difference. When I think about how much sooner I would be Financially Independent if I paid less tax it can be quite disheartening. [Ed: Don’t think about it then…]

Then I look across at the shambles going on with the elected politicians in Westminster. They’re meant to be running the country and I wouldn’t trust them to run a school fete. They are the ones who are deciding how best to spend my taxes in as ineffective way as possible. To be clear this isn’t a party political point.  At this stage I don’t trust any political party to be competent.

But, despite all of this, I’m delighted to pay my taxes. This post is about why.

I pay a lot of tax, but I also get a lot back

Everything has a price right? I see taxes as the price that I pay to live in a civilised society. When I pay my taxes they go to pay for teachers, nurses, and policemen. They pay for roads, flood defences, and parks. Without taxes there would be fewer libraries, fewer museums, and fewer researchers.

Could this all be done through private funding? Yes, of course it could. In fact for centuries that was exactly what happened. Things like education and healthcare was dependent on what you could pay. Wealthy benefactors would pay for things like libraries and museums and parks.

I’m very clear that I want live in a country like that. I am hugely privileged to live in a country where those things are available to people free at the point of consumption. That’s what my taxes pay for. I’m delighted to contribute to that.

Yes, taxes go to pay for things that I’m not sure that I would choose to. The thing is, that’s how it works. I don’t get to just pay my taxes for the things that I care about. Shockingly there may be idiots people out there who would spend the tax revenues differently to me. They don’t get to choose either. Public spending comes as a package, and if I don’t like the package that the current government has put together I get to vote for another.

How come I have to pay so much tax when those losers don’t?

The average public spending per person in the UK in 2017/18 was £10,625. As a rough rule of thumb If you pay more than that in tax then you can think of yourself as a net contributor in taxes (see the note at the end why this is actually rather inaccurate but it’ll do for now). Even without thinking about what I pay in VAT, council tax and National Insurance Contributions I pay multiples of that in Income Tax every year and I have done for a while.

I’m putting in far more than I get back.

My taxes are subsiding all those losers out there

Even worse, not only do I pay more than most people in absolute terms, I pay more proportionately. The percentage of my income that I pay in tax goes up the more I earn.

Grr! Outrageous right?

Well, not really.

To pay a lot of tax you have to earn a lot

At its most basic, the flip side to this is that if I didn’t pay very much tax it because I wasn’t earning very much. If I earned less than around £12,500 per year I would pay no income tax at all.

Boom. That, my friends, is how I can stick it to the man. Stop earning once I reach the tax-free threshold.

Except, um, I would like to have a higher salary than that please. To honest I would much, much rather earn what I do and pay the tax than earn less and pay less tax. The end result is that I have more money in my pocket.

Even the point having progressive tax rates is fair. If you earn £15,000 a year and get a windfall of £15 then it may well the be the difference between being able to buy your kid a winter coat or not. If you earn £150,000 then that £15 may be the difference between deciding to open that second bottle of wine on a Thursday night (‘cos “it’s almost the weekend isn’t it?”) rather than just sticking to one (and probably not even that). It seems entirely reasonable to me that the person with a higher salary should pay more of that £15 in tax.

(Yes, I know about the Laffer curve. No, I’m not going to go into it now. My argument is around why taxation, including progressive taxation, is a good thing, not what the optimal tax rates are)

Paying tax is, well, optional

A lot of people think about tax as completely inflexible. It is what it is. That’s both true and untrue. There are a whole bunch of way that we can legally reduce the tax we pay. In fact the government encourage us to take advantage of these. As a result many of us reduce our tax without really thinking about it very much.

Pensions are the most obvious example of that. I can, and do, pay into my pension. If I wanted to that could be up to, I think, £40,000 per year that would be tax free (well technically tax deferred but that’s a discussion for another time). That is all at my highest tax rate.

I’ve talked in the past about how I save into ISAs which are tax exempt. In addition to that I have allowances that are tax free for investment and interest income.

Those are probably the best known ways of doing this. But it’s not all. Two things that I also see as being tax efficient are unpaid holiday and charity giving.

Holidays and charity

One thing that I do to make sure that I enjoy the journey to financial independence is to take unpaid time off work. Obviously, the main point of that is that I don’t get paid. odd quirk to that though is that as I don’t pay the tax on that at my highest tax rate the actual hit to my pay packet is much less that it could be.

Charity giving becomes even more rewarding. Not only do I get I give to charity which means that I can claim back the higher rate portion of that.

In case you somehow didn’t realise, I’m no tax expert so I’m sure that this is not an exhaustive list and you need to check most of the numbers. The point is more that taxes are not as inflexible as you might think.

For a much better analysis of this concept, see this thought provoking post from indeedably about why taxes are indeed optional.

Paying taxes, and using tax efficiency allows me to retire, and retire early

As I look towards a financial plan for retirement paying my taxes mean I am building up an entitlement to a state pension. This is explicit. I need to pay into the system for a certain number of years to get my state pension. Let’s be honest though. The state pension system is under pressure. In a quarter of a century or so when I might be able to draw it down it may not still be there. Or more, that it will be so significantly means tested that I won’t get anything. But, as it stands that is something that I explicitly get from paying my taxes.

More interestingly is the deferred tax on my private pension contributions. This is allowing me to build up a pot of money that looks like it will be able to cover my living expenses when I can draw it down. Even if I don’t put anything more in it will allow me to do live well (at my Level 3 “Comfortable FI” stage of FI). It means that, even ignoring my non-pension savings, I can retire in my late 50s. For most people that would be a very early retirement (but, of course, I don’t want to wait that long!).

Without the public sector that my taxes pay for I wouldn’t have the life I enjoy today – I may not even be alive.

One of the reasons that I am happy to pay my taxes is that I have personal experience of the good that public services can do. My family has never had to go on the dole but that’s not all that there is. Let me give you two examples: Education and Health.

Education

I was educated by the state and educated well. My primary school was fine and, importantly, did its job of socialising me and teaching me how to get on with people. My secondary school was excellent. Not only did it give me a superb academic education that led me to a top university, it had an incredible set of extracurricular activities. As a result, outside of school hours, I did everything from acting, to public speaking, to playing rugby, singing in a choir, playing chess and playing in an orchestra. Those extra bits are what has allowed me to hold my own with the incredibly smooth public school kids that I come across daily.

The availability of free public libraries also gave me a desk and quiet place to study. I revised for both my A-Levels and my GCSEs in the library. It gave me at least a couple of hours each night to focus. Without it I’m not sure that I would have got the grades I needed to get into university. Without the badge that my university gave me I wouldn’t earn what I do today.

Health

I could give several examples of when the NHS has transformed my life but let me give one from my childhood. When I was younger I had childhood asthma really badly. I would be rushed into hospital once a year or so until I was about 9 or 10 as I couldn’t breathe. They would keep me in for a couple of days until I stabilised and then let me go until the next time. The NHS literally kept me alive on a few occasions by pumping me full of various drugs

I have private health insurance now. I’ve had it since I started work and I have only used it once to expedite a routine operation. But, when it comes to difficult and/or long-term illnesses, everything that I have heard suggests that the NHS is where everyone turns to.

I reckon my taxes are well spent on keeping me alive aren’t they?

But what about the waste?

When arguing against taxation it is very easy to find examples of waste and inefficiency in the public sector that you can point to. Those criticisms are fair. As it happens I worked in the public sector for a number of years so I have an insider’s view on how poor the system can be. There’s no excuse for that, but is the answer to tear the system down? I don’t think that it is. Having spent most of my career in the private sector I see just as much waste here – there’s just less scrutiny of it. No waste and inefficiency is right, but I’ve not seen any evidence that the public sector is worse than the private sector. What public spending can do is bring economies of scale and scope to bear, particularly in area where it is harder to realise the benefits of competition.

Looking more widely it’s not clear that privatised services are better that public services. The oft-cited comparison is between the UK and US health systems. But I think you can also compare the UK’s privatised train system with the public train systems on the continent. Or state education with private education. How about the old Soviet state retail system to Western-style capitalism?

It seems to me that the only conclusion that you can draw is that sometimes a state system is better and sometime the private system is better.

Ultimately if something is well funded and well managed it will do well. The source of the funding is secondary.

Final comments

I realise that I have setup something of a strawman here. All but the most ardent libertarians would agree with paying taxes for some things. The arguments are more about how big government should be, or the rights of society versus the rights of the individual.

Nonetheless I hear and read a lot of complaints about having to pay taxes and complaining about public services. Most articles talking about taxation are about why they are necessary, not about why they are good. Taxes are portrayed as something that people should hand over grudgingly rather than joyfully. What I have seen much less of is someone standing up for why they are a wonderful thing.

So I thought I would have a go.  And this was it

Thoughts?

Do you agree with any aspect of this?

Are you happy to pay taxes?

Do concerns about waste and inefficiency outweigh the benefits of the public sector for you?

A caveat on the numbers

Right. “public spending” in this context includes spending by central government, local government and public corporations. It may well be that there are other areas of public spending but that feels like it covers most of it.

To be precise the identifiable public spending per person in 2017/18 was £9,350. Identifiable spending is actually only 88% of all spending.  It doesn’t include things like defence that can’t be attributed to an individual. So to try to get a more accurate figure I have grossed that up to £10,625.

There are also other sources of revenue for the government in things like corporation tax, business rates, etc. The UK is also running a deficit at the moment so it is spending more than it is bringing in.

All of that means that the £10,625 figure is wrong. Having said that, the precise number isn’t critical to the point I’m making in this post. If someone can point to a more authoritative analysis I’d be happy to link to it.

If you want to see where I sourced my numbers, you can find them at the House of Commons Library here.