Where do my taxes go? – Financial Management – photo of money

Where do my taxes go?

A 5 minute read • Graham A

Part of our financial management series. Have you ever been shocked by how much of your hard-earned income you have to pay over as tax? And do you wonder what, if anything, you get in return? If so, you’re not alone.

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I can’t say I’ve come to love taxes but there are things I’ve learned during my adult life that make me a bit less resentful about them. And in the spirit of NobodyToldUs.com, I want to share that experience with you.

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Taxes are nothing new. Benjamin Franklin, one of the founding fathers of the United States, famously wrote:

“…in this world nothing can be said to be certain, except death and taxes.”

Benjamin Franklin

And references to taxes go even further back in time: the famous Rosetta Stone (now in the British Museum) depicts the ruler of ancient Egypt granting a tax exemption!

So it looks like taxes are a fact of life. To understand why we need them let’s pick an example and have a look at the big financial picture for the UK. To do so, we’ll have to use some very large numbers: billions of pounds.

Maths tip

One billion pounds = £1,000,000,000

Here’s what happened to taxes in the UK in the year April 2016 to March 2017:

MONEY RECEIVED BY GOVERNMENT IN TAXES ETC.1 £721 billion
Including:
Personal Income Tax, NI etc £322 billion
Tax on purchases (e.g. VAT) £169 billion
Taxes on businesses £79 billion
Council Tax £30 billion
+ MONEY BORROWED BY GOVERNMENT2  £52 billion
= MONEY SPENT BY GOVERNMENT3,4 £773 billion
Including:
Welfare (pensions, tax credits) £218 billion
Health (mainly the NHS) £116 billion
Education £60 billion
Investment/infrastructure £78 billion
Defence £27 billion
Scotland/N Ireland/Wales £44 billion
Debt interest £36 billion

So, from the taxes paid by us as individuals (e.g. as employees, consumers, residents and investors) and the taxes paid by businesses, the Government collects a whopping £721 billion. That’s almost enough to pay for all our public services (including the NHS, schools and pensions for older people), which cost £773 billion in total. There is a £52 billion shortfall and the Government borrows money to close that gap. But interest has to be paid on government borrowing, and the loan will have to be repaid eventually. So – just like you or I – the Government has to be cautious about taking on too much debt, particularly where it pays for day to day costs rather than investment in infrastructure.

The key point is that the Government doesn’t have its ‘own money’, but rather it spends money on our behalf raised from taxes – and borrowing.

From press headlines you might think that a large percentage of tax pays for armies of bureaucrats in Whitehall. In fact, the total cost of administrators in central government is about £10 billion5, or roughly 1% of total spending. And the costs of running Parliament (the Houses of Commons and Lords) is about £300 million6,7, less than 0.04% of public spending.

That’s all very well as a big picture, but you might be thinking:

“Why can’t big businesses pay more tax so that I can pay less?”

“Shouldn’t higher earners pay more tax? Lower earners could then take home more of their pay?”

“I’d be happy to pay more tax if it meant there were more doctors and nurses.”

“It’s great that my grandparents have enough money from their state pensions and winter fuel allowances to stay warm and comfortable, but as a young person I have less money than my parents’ generation, and no prospect of buying a house.”

These questions all represent choices that governments face when they plan future taxes and spending. What can you do to influence the decisions they take about who pays what and where the money goes? Here’s the answer: use your democratic right and VOTE!

Every few years in a General Election we each get a chance to vote on who will represent our interests in Parliament. Each candidate standing for election as the Member of Parliament (MP) for your area will state their views on the important national and local issues. Often this will include their priorities for public spending. Where candidates are members of national political parties (e.g. the Labour or Conservative Parties), the published manifestos of those parties will indicate where they stand on the issues of taxes, spending and borrowing – among many other things.

Where do my taxes go? – Financial Management – votingThe results of the General Election will determine which political party gets to form a Government, aiming to implement as much of its manifesto as possible. So voting in the General Election is the best opportunity we all have for our views and priorities to be taken into account! But even better, get involved in a political party or movement, or a campaign, where you can help shape the policies themselves.

In my experience you have to be realistic and sanguine when voting in a democracy. Yours is one voice out of millions, but your vote might be the one that tips the balance! Former UK Prime Minister Winston Churchill was under no illusion that democracy is perfect:

“Many forms of Government have been tried, and will be tried in this world of sin and woe. No one pretends that democracy is perfect or all-wise. Indeed, it has been said that democracy is the worst form of government except all those other forms that have been tried from time to time.”

Winston Churchill, Hansard, 11 November 1947

But even if it is the ‘best of a bad bunch’, our system of government is what we have to work with for the time being, until we agree on something better.

And finally

So if you haven’t registered to vote, I urge you to do so. And we should all vote when the next General Election is called. At least when you next pay your tax you’ll be able to say you took part in the process that determined your bill – even if you don’t like the result!

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References
1. Table 3.2 of OBR Report
2, 3. Table 1.2, Table 4.16 of OBR Report
4. Table 1.6 of Budget
5. Table 1.7 of Expenditure Analyses
6. Page 70 of Commons Report
7. Page 51 of Lords Report

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