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Friday, 11 May, 2001, 16:58 GMT
Taxation

Taxation remains one of the crucial elements of any general election. Find out how the picture has changed.


THE TAX BURDEN

One of the most contested areas in the general election will undoubtedly be the question of taxes.

Labour fought the 1997 election on the grounds that it would not raise the basic rate of income tax - a promise it has kept. In fact, the government introduced a new, 10p lower-rate band of income tax.

Labour says the direct tax burden for the average family has actually gone down.

But the Conservatives say that "stealth taxes" introduced by Labour amount to 25bn - or 500 for every individual in Britain.

And the Liberal Democrats say that neither party are being honest about the need for higher taxes to pay for better public services.

WHOSE TAX RISES?


The government argues that it had no choice but to carry on with a series of tax increases that had been put into place by the previous Conservative government, in order to put the public finances on a sound basis.

According to calculations done by the independent Institute for Fiscal Studies, the total tax burden has gone to 40.5% of the size of the total economy, compared with 37.6% in l996-97 at the end of the last government's term of office.

But the introduction of tax cuts in the March budget, including the children's tax credit, will see it fall to 40.1% next year.

But many of the tax increases were not the result of new taxes imposed by Labour - most were the result of carrying on with Conservative plans that were already in the pipeline.

New measures first introduced by Labour in government actually amounted to only 1.6bn, while the total Budget changes during this Parliament increased taxes by 5.7bn, according to IFS calculations.


.That is because tax increases in the first two years that Labour was in power - notably the abolition of tax credits for pension funds' dividends - have been offset by tax cuts in the last two years.

But that does not mean the tax take hasn't gone up for other reasons.

Strong economic growth has meant that there are more people in work and paying tax, and their salaries are higher too.

And as companies have benefited from higher profits, the total amount of government tax revenue has also gone up.

These factors account for most of the 25bn increase in taxes during the past four years - with income tax increasing most of all.

STEALTH REDISTRIBUTION?


One charge - or boast - is that the government has made changes which have made the tax system more progressive.

That is, that the taxes on the richest people have gone up faster than taxes on poor people.

The government has indeed introduced a range of tax and benefit changes designed to boost the income of low-income households.

They include the Working Families Tax Credit (WFTC) for low-income families in work, and increases to means-tested benefits for pensioners and families with children.

As a result, those on the lowest incomes - the bottom 10% of households - have gained, on average, an 11.9% increase in their post-tax incomes.

However, the richest households have also experienced a small rise in their income as a result of direct tax changes.

This can be explained by the fact that the impact of some taxes on households cannot easily be measured - particularly business taxes.

And two tax changes made by Labour in its first year in office have raised business taxes by a net 5bn a year, according to calculations by the IFS.

At the same time, many better-off people have been paying more income tax because of 'fiscal drag' - the fact that while earnings have been rising fast, the threshold for paying tax at the 40% rate is only moved up in line with inflation.

Higher rate taxpayers
1980-81: 796,000
1990-91: 1.7m
2000-01: 2.7m
source: IFS Green Budget
As a result, there are now some 2.7m higher rate taxpayers, compared to 1.7m ten years ago and just 0.8m in 1980.

The Treasury estimates that, because of fiscal drag, the tax burden automatically rises by 0.2% each year.

The Conservatives want to reverse this, raising the higher rate threshold and lowering the tax rate for many people.

In fact, it is the increase in income tax that accounts for most of the rise in the tax burden under Labour.

TORY TAX PLANS

The Conservatives have a very different set of priorities in their approach to taxation.

They want to target taxes that hit small businesses and partially restore the married couples allowance to encourage families to stay together, and cut 6p off the price of a litre of petrol.

And they want to abolish the taxes on savings for individuals who do not pay higher rates of tax, in order to encourage thrift.

The Conservative Party says it can cut taxes on businesses and individuals by an additional 8bn a year. The party hopes to find the money for this by cutting back on non-essential items of public spending.

But the Tories have pledged to keep up with Labour's plans to expand spending on health, education and crime and defence.

That would mean a severe squeeze on other elements of public spending - which Labour argues would cause distress across the UK.


TAXES AND SPENDING

Ultimately, the argument about higher taxes is closely linked to the argument about public spending.

Britain will only spend more money on public services if it can afford to - and that would mean higher taxes in the long run.

The UK has traditionally spent about 40% of its national income on government services - halfway between the United States, which spends around 30% of GDP, and most European governments, which spend around 50% of national income on their services.

Labour has indicated that if it is returned to office, it is likely to keep public spending growth to around 2.5% in its later years in office - the same as the rate of economic growth.

The Liberal Democrats are the only major political party to argue for a tax increase - albeit a modest one - to fund further spending.

So despite all the political debate, the total size of the UK government sector looks unlikely to change dramatically in the long-term.

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