Budget latest: income tax to rise!

Imagine the shock if Gordon Brown stood at the dispatch box on Wednesday to deliver his eleventh and almost-certainly final Budget and announced a seven pence increase in the basic rate of income tax. There would be uproar and Mr Brown’s election chances would fade faster than Ryanair’s profits under a Tory Government. Yet this is, in effect, exactly what the Chancellor has done since Labour came to power in 1997.

By increasing income tax thresholds only in line with prices rather than economic growth, the Chancellor has more than doubled the amount he has raised from the tax over the last ten years. This means the UK’s army of 28 million workers have paid £29 billion more to the Treasury than they might otherwise have done – the equivalent of 7p in the pounds on the basic rate of income tax.

An extra 1.5 million workers are also paying the 40 per cent higher rate of income tax compared to 1997.

The Chancellor is also raking in twice as much in inheritance tax and almost six times as much stamp duty than in 1997. Overall, the tax burden as a proportion of Gross Domestic Product has increased from 34.8 per cent in 1996-97 to 37.8 per cent in 2007-08. This is the equivalent of 10p in the pound on the basic rate of income tax.

Most people haven’t noticed that they are paying so much more in tax because it has coincided with an even bigger increase in our income and has happened over such a long period of time. But that does not mean that we should be happy about it – especially if the money has been wasted. If we paid the same proportion of our earnings in income tax now as we did in 1997, we would each have more than £1,000 extra in our bank accounts – enough to put towards a few years’ private health cover.

Whether we are happy to pay more tax as a proportion of our income is a political question. Most people probably don’t object as long as their income keeps rising faster than the tax burden and public services improve.

But nobody should be fooled into thinking that taxes haven’t gone up just because the increases have not been immediately obvious.