The 1970s all over again

Ed Balls’s speech promising a return to the 50p tax rate seems to have provoked all sorts of scare stories about a risk that Britain returns to the dark old days of the 1970s. Which is odd because when you take time to examine the data, in tax terms, we are already there. True, we no longer have the scary top marginal rate of 83%. The country is no longer under IMF control. But in terms of overall taxation, Britain has considerably more onerous tax levels today – in terms of the proportion of our overall national income we pay in taxes.

Yes, I know, this might come as something of a surprise. But it really is true. The average level of UK tax revenue in the 1970s was 33.8% of GDP, peaking at 36.7% in 1970. The average level of UK tax revenues in the 2000s was 35.4%, peaking at 36.4% in 2000. For what it’s worth, the level of UK tax revenues in the latest year for which we have data, 2012, was, at 35.2% of GDP, higher than in any year of the ’70s, save for 1970 itself.

You’re probably surprised to hear this, because most of the charts you’ll have seen of UK total taxation (as a percentage of GDP) tend to look a little like the red line in the chart below, peaking at 45% in the 1970s. The problem is that this measure of total UK tax revenues – the one published by the Treasury – is not only what we’d tend to think of as taxation today. It also includes special dividends and proceeds from the nationalised industries, of which there were, of course, far more in the 1970s.

The upshot is to make the apparent levels of taxation during this period look far higher, in large part because they are distorted by revenues from, for instance, British Steel and British Telecom. Far better is to use the measure favoured by the OECD, which strips out all of that, and focuses specifically on taxation. You can see it in the chart below in blue. As you might expect, the two lines have converged over time, as more and more industries were privatised.

However, what’s striking is how stable the line has been over time. Next time you hear someone refer to the horror of returning to the over-taxed ’70s, remember this chart. Because in one sense, we’re already there.