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Well, yes, this is how it works, taxation makes people poorer

Summary:
It is entirely true that some of the things government does makes us, all or some people, richer. Equally true is that the act of taxation itself makes those being taxed poorer. So this is not exactly a great surprise:Stealth taxes are forcing more people into higher tax brackets and cutting child benefit payments because the thresholds are not moving in line with inflation or wages, the Institute for Fiscal Studies has warned.As the ageing population puts more strain on the health and pensions budgets, its likely the Government will have to impose significant further tax rises on high and middle earners in the years ahead.Relying on inflation to pull more people into higher tax brackets means families are paying more tax even though their incomes have not risen in real terms, leaving them

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It is entirely true that some of the things government does makes us, all or some people, richer. Equally true is that the act of taxation itself makes those being taxed poorer. So this is not exactly a great surprise:

Stealth taxes are forcing more people into higher tax brackets and cutting child benefit payments because the thresholds are not moving in line with inflation or wages, the Institute for Fiscal Studies has warned.

As the ageing population puts more strain on the health and pensions budgets, its likely the Government will have to impose significant further tax rises on high and middle earners in the years ahead.

Relying on inflation to pull more people into higher tax brackets means families are paying more tax even though their incomes have not risen in real terms, leaving them worse off overall.

Increase the taxation of the population and the population will be, as a result, poorer. Yes, again, it’s worth considering what the cash is then spent upon but this is the effect of the taxing itself - people have less money themselves, they are poorer.

The actual mechanism is called fiscal drag. Don’t upgrade taxation brackets by earnings growth say. Earnings do grow, generally speaking, in real terms over time. So holding the brackets static captures ever more people at ever lower percentages of average income. A more extreme form is not even to upgrade by inflation - Gordon Brown did that with the personal allowance at least once.

Our own - successful - campaign around here to raise the personal allowance to £12,500 was at heart just a reversal of decades of this fiscal drag. There was a time when only those on greater than median earnings entered the income tax net. Now it starts before even a full year of work on the minimum wage. And that’s after the near tripling of that personal allowance - that’s the effect of fiscal drag over time.

The IFS’s basic contention here, tax people more and they’re poorer, is uncontestable. Which does open up that question of why we keep trying to d so. It’s not a known aim of economic policy to make people poorer now, is it?

Tim Worstall
Tim Worstall is a British-born writer and Senior Fellow of the Adam Smith Institute. Worstall is a regular contributor to Forbes and the Register. He has also written for the Guardian, the New York Times, PandoDaily, the Daily Telegraph blogs, the Times, and The Wall Street Journal. In 2010 his blog was listed as one of the top 100 UK political blogs by Total Politics.

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