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Peak Taxes?

 March 16, 2012 11:31 AM

In TMM's careers there has been no shortage of talking heads calling something a "peak". We've had "Peak Oil", "Peak Housing", "Peak Demographics", "Peak Credit", "Peak Deficits", "Peak Liquidity" etc... All of which come down to some assertion (whether valid or not) that said "thing" cannot go any higher for some sustainability reason. And readers will know, the UK is something of an obsession for TMM given they reside there, so ahead of the Budget - especially given the various calls to drop the 50p tax/introduce a Mansion Tax/introduce a Tycoon Tax etc etc - they decided to have a bit of dig. And TMM reckon that they've spotted another peak: Peak Tax. Or more accurately, Peak Tax Revenues.

Much has been said and written over the years about the cultural willingness to pay higher tax rates in Scandinavian countries, and the relative lack of willingness in Anglo-Saxon countries. TMM do not want to start a political debate about either, and generally consider themselves to not be particularly wedded to any political ideologies having voted for all the main parties in the UK from time to time. They are guided by the pragmatism: if something works, then it's worth doing. Which is why they think this particular subject is important. Because whether or not one believes some form of progressive redistribution is a good thing or not (for the record, TMM do), you can only spend what you reasonably expect to raise in revenues over the cycle.

And this is where the problem lies, because since the mid-1960s, the UK has only managed to raise an average of about 35% of its GDP in taxes (see chart below, blue line), with variations largely being driven by the economic cycle. By contrast, it is clear that expenditure has been on a pretty consistent upward trend (red line), rising to 43% of GDP. Since the mid-1970s, the expenditure share of GDP also oscillated roughly around the same 35% of GDP level, and from the mid-1980s in a counter cyclical manner (Keynesian automatic stabilisers). But then something went wrong.

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