Changing Profiles of Revenue Squeezes

In the previous section we commented on the apparent disappearance of the 'hard' revenue-only squeeze in the later part of our period. As with spending, the composition of taxation changed substantially over the century, as shown

Trends in disaggregated revenue categories as a percentage of GDP Source

Figure 2.2. Trends in disaggregated revenue categories as a percentage of GDP Source: 1900-49: Middleton (1996) Appendix 1;1949-2014: ONS (2014) Public Sector Finances supplementary tables, includes local and central government revenue but excludes public corporations. Post Office treated as a Public Corporation after 1961. There is a break in the data in 1949 due to differences in sources.

in Figure 2.2, and that alteration may explain the change in revenue squeezes. Figure 2.2 shows three components of taxation, namely: taxes on income, wealth, and profits; taxes on expenditure (customs, excise, and other sales taxes); and compulsory contributions for health and welfare benefits, in effect a second income tax for employees combined with a payroll tax on employers and roughly equivalent to social security taxes in other countries but called 'National Insurance contributions' in UK parlance. Those contributions were originally (and ostensibly remain) an 'insurance' levy, and traditionally were not fully graduated relative to income, so they fell proportionately harder on middle and lower earners than on the topmost earners. As can be seen, this second income tax rose from 0.1 per cent or so of GDP in the early 1910s to 6 or 7 per cent a hundred years later, and that change needs to be considered when considering what happened to the total taxation of income over the period.

As can also be seen from Figure 2.2, revenue from taxes on expenditure and consumption was exceeded by that from taxes on income, wealth, and profits as a share of GDP in the two twentieth-century world wars (when rates of income and wealth taxation were raised vertiginously) and a short period in the early 1970s. But for the remaining part of the century the revenue from expenditure taxes was slightly higher (and rather less volatile) as a proportion of GDP than taxes on income, wealth, and profits.

The relative proportions of the three categories of taxation shown in Figure 2.2 varied considerably among the seven revenue squeezes (calculated on the ratio method) over the century). We might expect left-leaning governments to put more emphasis during revenue squeezes on income and wealth taxation relative to expenditure taxes and/or social security contributions, with right-leaning governments doing the opposite. But only one of the seven ratio- method revenue squeeze episodes over our period (the tax increases imposed by the minority Labour Government in 1931/32) clearly fits such expectations.

Indeed, along with the apparent decline of hard revenue squeezes from the early 1980s, as noted earlier, there seems to have been a change in the type of taxes used in fiscal squeezes in the later part of our period. For example, as the seventh column of Table 2.3 shows, the pre-1980 revenue squeezes all involved rises in income tax rates (with the exception of the 1940s and 1950s) whereas since 1980, when there was only one hard revenue squeeze, the revenue squeezes involved marked falls in income tax rates.[1]

  • [1] Figure A1 in the Appendix shows the change graphically.
 
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