Governments are often criticised for raising taxes by stealth – perhaps by not adjusting thresholds in line with inflation or by hiding tax changes in the small print of a budget – but the problem is much more fundamental than that. The whole system by which the government seeks to raise revenues is actually built on stealth.
The aim is to diminish, disguise or displace the taxes that we have to pay. The reason for this is that if we were totally aware of the full extent of the taxation that is imposed upon us then we would be far more questioning about the amount we pay, the fairness of its application and the usage that it is put towards.
The more the government can shroud the practical implementation of its taxation measures the less they will be challenged upon it; the more accepting of it a population will be. So that is what it seeks to do.
This is not to say that the government is doing something wrong or illegal, merely that it is being expedient. Taxes have to be raised and nobody likes paying them. So, if by obscuring their appearance and conveyance, the government can spare us some of the psychological pain of taxation, making the demand for taxes feel less of a burden, then – arguably – so much the better.
Of course, that might be an overly generous interpretation of their intentions – they may also, it has to be said, be thinking about their electoral position – taxing governments aren’t usually very popular.
So, how do governments seek to make taxes go unnoticed or have them unrecognised as an actual tax? What are the tricks to stealthy taxation? There are various techniques that are used:
Diverse sources. In its efforts to shroud the total amount of taxes paid, the government will try to diversify the mechanisms by which it accrues taxes. Rather than having all the money raised come through the same taxation mechanism, by using different taxes it means that people are not always fully aware of the total amount that they are paying.
A bit from here; a bit from there, means that, overall, the burden is less noticeable and therefore less painful.
Two major tax raising elements are income tax and VAT. This means that we are taxed both on what we earn and on what we spend. Taxes are being paid at both ends of our economic activity. By doing this it means that the overall tax cost that the individual feels is less noticeable.
Multiple streams. Different taxation streams are sometimes introduced that can add to the taxes being raised but are, in effect, only an addition to what is already in place. By breaking it down into two different taxes of smaller amounts, it means that a single tax does not appear too severe. Such a new tax is usually given another title and an attractive, purposeful reason for its need.
One of the best examples of this is National Insurance Contributions. This was justified on the basis of it raising funds for a particular purpose – pensions and the National Health Service – and yet, it was not ring-fenced for that purpose and is effectively just another tax on income.
A further example of multiple streaming is excise duty – a tax on such things as alcohol and tobacco. This tax is justified on the basis that people’s behaviours need to change and that by making certain products more expensive through higher taxes it will deter people from making these purchases. Such taxes may purport to be managerial tools, but their main benefit is more likely to be the revenues they raise for the Government.
Targeted application. A third means of shrouding taxation is by targeting it to those activities where it will largely go unnoticed. This is when the tax gets lost in the price of a product. A good example of this is Insurance Premium Tax – a tax on insurance policies. If people are buying insurance, they will hardly notice the extra amount they pay because of this tax. It just becomes part of the cost of insurance.
Likewise, by taxing those that can most afford something, the less likely they are to feel or even to notice the imposition. An example of this is air passenger duty – a tax on flights. If people are paying a substantial amount for a foreign holiday, are they going to be all that concerned about the extra few pounds in taxes they have to pay on it? After all, if somebody can afford to pay for a holiday then they can afford to pay a bit extra in taxation on that holiday.
Excise duties, as a targeted application, could also be considered as inconspicuous. The taxable amount isn’t visibly broken down in the price, so it goes unrecognised.
No loss sensation. Taxation can be shrouded by not giving people the sensation that they are paying anything out. Income tax is a classic example of this as it is a tax that is applied at source. We may see some of the figures on our payslips and wince at the change that occurs between gross pay and net pay. But, psychologically, we don’t feel that we are paying out for something. We never had the money in the first place.
Taking the money at source also means that people neither have the opportunity nor are tempted to refuse, avoid or fiddle their taxes.
Similarly, with regard to VAT, it may be separated for commercial reasons but from a retail point of view, the figure is generally hidden in the total price of a product. It’s therefore something that we don’t particularly think about. It’s another no loss sensation.
If VAT wasn’t pre-loaded into the price then we may object to or have second thoughts about paying it, especially when we think that we are not getting anything for this additional tax amount.
If we buy something for £100 then £20 of that – VAT being charged at 20% – is not part of the product. The £20 doesn’t really belong in the product; it’s merely the tax for the privilege of buying it. We’re not getting anything extra for our money. Frankly, if we realised this figure when we were making purchases, we would be a lot more circumspect with our money and it would also encourage the black economy to thrive.
Commercial intermediary. The government has an inclination to tax through the commercial sector. In so doing, it can increase revenues without having to raise taxes directly on consumers.
By increasing the taxes that commercial organisations have to pay (Corporation tax, import duties, business rates), these organisations are forced to pass on those additional taxes as costs and thereby have to increase their prices to consumers. We therefore end up paying more without necessarily realising that this is not because of general price increases but it is because the government has increased the taxation burden on the commercial sector.
It should also be noted that by also imposing more regulations on commercial organisations (health and safety measures, food standards compliance), those organisations may be forced to raise their prices. The government will make regulatory changes in order to secure certain ends, but they will come at a cost to commercial organisations. Businesses have to pass on those extra costs to consumers. Indirectly, this is a form of taxation – consumers are having to pay to fulfil government policies.
Third Party delegation. This is similar to that of a commercial intermediary, but in this situation there is no effort to hide the tax. Instead, the tax is administered and collected by a third party. By giving authority to another organisation to raise their own funds a government can distance itself from certain taxes. This spares the government from any direct responsibility (and subsequent criticism) for it.
An example of this would be local authority charges like the Council Tax. It’s another tax demand but because it is separated from central taxes it may not always be thought of as part of an individual’s full tax burden.
Emotional Engagement. By nurturing an emotion or cause, a population can be induced into paying money that enables a government to raise funds.
Lotteries are sometimes criticised as being a stealth tax. They are also disproportionately played by poorer rather than affluent people. By giving participants the feeling that they have the chance of winning life-changing amounts, players are induced into handing over their money. Lottery funds can then sometimes be used to finance aspects of public spending.
One might also suggest that the growth of charities and their money raising efforts is an example of a government delegating its responsibilities to a third-party organisation and tapping into people’s emotional engagement to meet what might otherwise be considered as governmental expenditures – for instance, donations to food banks and foreign aid.
False description. By giving a tax an alternate name, taxes can be disguised. They then become less recognised or thought of as being taxes. They might, for instance, be described as a charge, levy, surcharge, license or duty.
Examples include; Stamp Duty, Climate Change Levy, Fire Arms Licenses, Air Passenger Duty. There may be fine operating distinctions between each of these, but they all amount to the same thing – an additional cost to consumers, an additional tax.
Administrative action. The government will make administrative and regulatory demands of us which we are actually obliged to pay for. If we want to travel abroad then we have to buy a passport; if we want to watch certain television channels then we have to buy a television license. These fees are in effect shrouded taxes.
Gainful taxation. Although people never like paying taxes they will be more tolerant and accepting of those taxes that are on funds which they have incidentally acquired. Inheritance tax and possibly Capital Gains Tax are examples of such. We are more likely to treat and receive these incomes as a bonus. It is money that we weren’t necessarily expecting; we are therefore not quite so annoyed if some of it is skimmed off in taxes. That makes it an attractive target for a Chancellor.
If the tax can also be taken prior to the funds being distributed, then so much the better. Like with income tax being deducted at source, the recipient is not overly mindful of the loss; they’re more appreciative of the gain.
Whether or not the government would agree with this stealth analysis is questionable. The term “stealth” has negative connotations. It hints at acting underhand, at being furtive or sneaky. These tend to not be qualities that a government wants to be associated with.
Instead, governments will argue that by taking tax through different mechanisms it is a more balanced approach, one that ensures greater fairness and doesn’t overly disturb our economic behaviour.
And yet, when viewed as a whole, there is a preference for a stealth approach to government taxation policy. They do try to spread the pain so that we don’t notice it; they do try to distance themselves from it so that they are not seen as being wholly responsible for it; they do try to downplay its size so that we are not overawed by it.
This is because if we do rationalise it, if we do recognise how significant its overall impact is, we might begin to question it, even to object to it.
Non-compliance and resistance to taxation is always an underlying threat for any society. Should it emerge, it could endanger both the political and economic system. Governments therefore tend to be wary of the introduction and collection of new taxes. It can all too easily go wrong, as happened in the UK in the 1980’s with the Poll tax.
Governments will therefore endeavour to seek out taxes that stay off people’s radar, with the most effective taxes being those that satisfy multiple stealth criteria.
Taxation in Practice.
Do we really know how much things are costing us in relation to the taxes that we are obliged to pay? To fully highlight the amount we pay in taxation and the stealthy way that it is acquired we need to drill into some figures.
(These figures are based on the UK taxation system but it will be similar in other countries).
For an average UK tax payer (paying 20% income tax), for every £100 spent, that person will have had to earn an extra £25 to cover income tax and an extra £11.36 to cover National Insurance Contributions. To be able to spend £100 they will therefore have had to earn £136.36.
Then, when they actually pay for the £100 item, 20% of that is the VAT amount which goes directly to the government. That’s another £20.
This means that for every £100 spent by a tax-paying consumer the government receives £56.36.
Sometimes the government will feel that this is not enough and certain products will have additional taxes imposed – excise duties, travel taxes, environmental surcharges.
So how much does a £10 bottle of wine cost?
Income Tax (Basic rate – 20%) £2.50
National Insurance Contributions £1.14
Excise Duty £2.24 (Based on 12% abv and a 75ml bottle)
Total tax paid £7.88
So, for that £10 bottle of wine, the individual will effectively pay and the government will receive £7.88 in taxes.