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future of tax

Aligning tax perception with tax reality

Author: ICAEW Insights

Published: 03 Jul 2023

London Westminster Great George Street sign building red phone booth ICAEW Future of Tax role of government

Governments are constantly communicating spending decisions to the public, but providing exact details of where and how tax revenue is used has proven difficult.

In the 2012 Budget, then-Chancellor George Osborne set out plans to make spending more transparent by providing an Annual Tax Summary to taxpayers, breaking down how an individual’s tax contribution was spent by the Exchequer. 

At the scheme’s launch in November 2014, Osborne said: “I promised that taxpayers would know much more about how much direct tax they pay and how that money is spent. Now we’re delivering on that promise by giving 24 million taxpayers a new personal tax summary. It’s a revolution in transparency and it will show how hardworking taxpayers have to pay for what governments spend.”

However, the Annual Tax Summary has come under criticism for oversimplification and distorting the reality of public spending. For example, welfare spending is presented as a single block and, at launch, didn’t correlate to what some public sector economists expected to be counted as welfare spending. The summaries also only consider direct personal taxation, despite direct taxation accounting for less than half of government revenue.

There have been other, less formalised attempts to conceptualise taxation and spending. The Blair and Brown Labour governments were dominated by talk of the ‘Golden Rule’ – which stated that, over the economic cycle, the government would only borrow to invest, until the global financial crash required fresh intervention in the economy.

More recently, the ballooning of public spending during the pandemic – and the expected tightening of fiscal policy as a result – has renewed efforts to communicate tax and spending decisions to the public and protect the national bargain. The Office for Budget Responsibility forecasts that the UK’s tax burden is set to hit a post-war high of 37.7% of GDP by 2027/28. 

Sentiment and perception

The public broadly agrees that the ‘national bargain’ – in which public services and welfare benefits are provided in exchange for taxes – is acceptable. But any sense of unfairness or misuse of funds can leave governments on shaky ground. In other words, a government’s legitimacy to collect, allocate and redistribute funds rests squarely on maintaining trust with the public. 

“One of the problems is that the national bargain is very theoretical. The relationship between what you pay and what you get back is divorced. There is no direct link between the money that comes out of your pay packet, and the VAT you pay on goods, with the public services you receive,” says Martin Wheatcroft, ICAEW fellow and external advisor on public finances. 

“This is clearest in local taxation, where people believe council tax and business rates pay for local services. In reality, council tax only funds around a quarter of total local authority spending, while most business rates are swept up nationally and redistributed in grants locally.” 

This lack of clarity in how the taxation system works creates two related problems. Firstly, the public – and many policymakers and politicians – have little understanding of the true cost of public services. Secondly, the idea of a ‘fair’ share to pay in taxation becomes increasingly subjective and detached from reality, placing the national bargain under threat.

“When you go to the dentist and you have this huge bill, it brings home to you how much something costs,” says Wheatcroft. “But when you send your kids to school, there is no bill, so you don’t see the cost. Public bodies in the UK spend more than £1,000 per person per month. That is a lot of money, as even if the per person cost of each public service isn’t that much individually, it all adds up.” 

Ongoing challenges 

Perhaps the biggest challenge in shifting how the public perceives the fairness of the national bargain is a philosophical one around explaining how taxation facilitates the earning of money in the first place. But it’s difficult to change the mindset that money is ‘given up’ to the government through taxation, especially for the self-employed who pay tax separately after receiving their income.

“One of the most fundamental misunderstandings of taxation is that it is presented as the government taking money out of an individual’s pockets,” explains Peter Dietsch, professor in philosophy at the University of Victoria, Canada. “In order to have a market, you need a state. The state creates the laws and frameworks in which the market operates. To have a state, you need taxation to make that possible.”

Additionally, public perception of the fairness of the national bargain is slowly being influenced by longer term demographic and economic changes in the UK. Growth and birth rates are low compared to the 20th century, and at the same time as people are living and retiring for longer and therefore increasingly using public services. This growing imbalance between tax receipts, most of which are paid by a working-age population that is growing slowly, and the increasing costs of supporting a rapidly growing number of people in retirement not only threatens the financial health of future governments, but weakens the strength of the national bargain by distorting the perceived link between tax contributions and the public’s expected levels of spending. 

“I describe it as my bus pass problem,” says Wheatcroft. “I’ve spent most of my adult life paying taxes for older people to have bus passes. But will I get my own bus pass that I’ve been promised? The likelihood of bus passes being means tested between now and my retirement is quite high, and that would break the universality of the national bargain.” 

It’s a problem that will be increasingly tricky for governments to navigate as the years go on. An uncomfortable realignment of people’s expectations may be necessary for the health of the national bargain. Left unchecked, a growing gap between tax reality and tax perception will only weaken trust in our institutions and the services they provide. But such a realignment will require honest and clear communication from government to citizens.

“There is a valid criticism of the short-termism of politics,” says Wheatcroft. “Since the Second World War, we’ve made a lot of incremental changes to our tax system for short-term reasons that have expanded and confused the national bargain. What we lack is a long-term tax strategy.”