The Stealth Tax Making You Poorer Every Year

Summary

This video discusses the hidden impact of fiscal drag on UK taxpayers, where the government's freeze on income tax thresholds causes many to unknowingly pay higher taxes as their incomes rise with inflation. The speaker highlights how this stealth tax disproportionately affects workers, including teachers and nurses, and stresses the importance of indexation to protect taxpayers. Fiscal drag, now projected to raise billions more than expected, is criticized for its lack of transparency and fairness, especially when it contradicts political claims of not raising taxes. The speaker urges a reassessment of tax policies, advocating for more visible and fair taxation.

Takeaways

• 😀 The UK government is using 'fiscal drag' as a stealth tax, freezing tax thresholds rather than adjusting them for inflation.
• 😀 Fiscal drag is causing more people to pay higher taxes despite stagnant or even lower wages in real terms, with no clear increase in living standards.
• 😀 Over the past 40 years, the additional rate tax has gone from a small tax burden to one that affects millions of workers, including teachers and nurses.
• 😀 The government's approach of freezing tax bands has led to an increase in the share of adults paying higher rate taxes—from 3.5% in 1991 to an expected 14% in the next two years.
• 😀 A pay rise in inflationary times often pushes individuals into higher tax bands, leaving them worse off financially despite nominally higher earnings.
• 😀 The Finance Act of 1977 introduced the Rooker-Wise amendment, which required tax thresholds to be adjusted with inflation, ensuring fairness for the working population.
• 😀 The government has been freezing tax bands since 2019, leading to an increasing tax burden on workers, even as inflation continues to rise.
• 😀 By 2029, it is projected that freezing tax thresholds will raise nearly £40 billion annually, disproportionately affecting middle-income earners.
• 😀 The policy of fiscal drag is being used by politicians to increase revenue without explicitly raising taxes, making it a covert form of taxation.
• 😀 Despite claims of wanting to improve living standards, politicians often fail to acknowledge the impact of fiscal drag, which erodes people's purchasing power and well-being.

Q & A

What is fiscal drag, and how does it affect taxpayers in the UK?

Fiscal drag occurs when inflation increases wages, but the tax thresholds are frozen, pushing more people into higher tax brackets. This means workers end up paying more in taxes, even though their real purchasing power hasn't increased. It's a hidden tax increase that impacts a large portion of the population, even those not considered 'high earners'.

Why was fiscal drag described as 'taxation by stealth' in the UK?

Fiscal drag is called 'taxation by stealth' because it raises taxes without any explicit tax rate increases. Instead, it works by freezing tax thresholds, which means more people pay higher rates as their wages rise due to inflation, making the tax increase less visible and harder to notice.

What role did the Rooker-Wise amendment play in protecting workers from fiscal drag?

The Rooker-Wise amendment, introduced in the 1970s, required that tax bands be uprated annually in line with inflation. This prevented fiscal drag by ensuring that the thresholds adjusted to maintain the same tax burden relative to inflation, offering protection against tax increases hidden in economic growth.

What is the significance of freezing the tax thresholds in terms of government revenue?

By freezing tax thresholds, the government collects more tax revenue without raising rates. This is because, as wages rise with inflation, more people are pushed into higher tax bands. This has resulted in a significant increase in tax revenue, expected to raise billions more annually by 2029.

How has the freezing of tax thresholds impacted different income groups?

Freezing tax thresholds impacts all workers, even those earning relatively modest incomes. For example, someone earning just above £12,570 pays more tax because the point at which they start paying tax hasn't increased with inflation. Higher earners are also affected, but the impact is felt more broadly across the income spectrum.

What example is used to illustrate the impact of fiscal drag on a typical worker?

The example of Sue, earning £50,000 a year, is used to illustrate fiscal drag. If Sue's pay rises to keep up with 10% inflation, she ends up paying 40% tax on the additional income, meaning the pay rise is less effective and she ends up worse off financially despite earning more.

Why is fiscal drag considered a form of 'stealth tax' by politicians?

Fiscal drag is considered a 'stealth tax' because it increases tax revenue without explicitly raising tax rates. Politicians can claim they haven't raised taxes, but by freezing the thresholds, more people end up paying higher taxes, even though this increase is not openly declared.

What is the forecasted revenue impact of the frozen tax bands by 2029?

By 2029, the freezing of tax bands is expected to raise £38.6 billion annually, a significant increase from the original £8 billion projected in 2021. This revenue increase is due to more people being pushed into higher tax bands without any corresponding adjustment to the tax thresholds.

What political motivations are behind the use of fiscal drag, according to the script?

Politicians use fiscal drag because it allows them to increase revenue without openly raising taxes. This helps them avoid political backlash while still benefiting from the additional revenue generated by people being pushed into higher tax bands due to inflation.

What alternatives to fiscal drag are suggested in the script to raise revenue without further burdening workers?

The script suggests looking into wealth taxes and other areas of taxation as alternatives to fiscal drag. It also advocates for greater transparency in tax policy, where politicians openly acknowledge tax increases rather than using stealth tactics like freezing tax thresholds.