Stealth tax
Encyclopedia
A stealth tax is a tax
levied in such a way that is largely unnoticed, or not recognized as a tax,. The phrase was generally used in the United Kingdom
by Conservatives
to attack the New Labour government's behaviour. It should not be confused with double taxation
or privatisation.
The exact phrasing stealth tax has been in British political use since 1998 and referred to tax rises that apparently circumvented the 1997 New Labour manifesto commitment that "over the five years of a Labour government ... there will be no increase in the basic or top rates of income tax".
Anne Segall of The Daily Telegraph
claimed on 17 January 1998
that, "taxes will rise by £7 billion this year ... as a result of a variety of measures introduced or extended by the previous chancellor Gordon Brown. Mr Brown's 'stealth' taxes are directed mainly at middle-class voters and in particular at middle-class professionals and those with savings".
On October 19, 1998 Frances Maude, then Shadow Chancellor (the opposition finance minister) claimed the Chancellor Gordon Brown
was imposing "stealth taxes ... designed to conceal their effect".
Previous Prime Minister Tony Blair
only made occasional references to stealth taxes, such as on 1 November 2001 in relation to Company Car taxation, 9 November 2000 in relation to Fuel prices and on 21 October 2002 in reference to Pensions.
, where the British Government diverted revenue from the National Lottery
to fund public spending.
Another form of stealth taxation occurs when deductions or exemptions are reduced based on income level resulting in more taxable income, but the same tax rate for a higher total tax. Under 2007 US tax law 1040 Schedule A itemized deductions and the $3,400 personal exemption are phased out (reduced) at higher income levels ($234,600 for married filers).
Stealth taxes might be recognised as taxation but remain largely unnoticed, as with Value Added Tax
(VAT) in the UK between 1979 and 1991, during which period it rose from 8% first to 15% (compensating for a large reduction in the higher and basic rates of income tax) then to 17.5% (when the Poll Tax
was replaced by a council tax), somewhat shifting the burden of taxation away from income
onto consumption.
In January 1999 Conservative
culture spokesman Peter Ainsworth described the National Lottery
's New Opportunities fund as a "stealth tax". and Conservative leader William Hague
claimed The Labour stealth tax amounts to £1,500 for every working person. In Parliament on 3 November 1999 William Hague accused the government of levying a £500 million 'stealth tax' that would hit IT companies.
Increasing the stamp duty
tax paid on house sales in the UK was also described as a stealth tax. Michael Portillo
claimed that the children's tax credit was a 'stealth tax on marriage'. Conservative Archie Norman claimed that increasing the Council tax
was This is the ultimate stealth tax hike - local residents foot the bill and local councillors take the blame.
On 8 June 2005, revaluation of houses for council tax was put forward as a steath tax, Anne Milton MP asked Will the Minister guarantee that the average council tax bill will remain the same for my residents in Guildford, or will he come clean and admit that the revaluation is simply another opportunity to impose a stealth tax on hard-working families and pensioners?
Any person living in a country using fiat currency (vis-à-vis a hard currency
) is prone to the stealth tax of inflation
. Inflation is typically resorted to by governments using fiat currencies because, in small increments, most people will never notice the effects of the policy.
through tax
ation or borrow
ing from private citizens and corporations, it resorts to borrowing from its central bank
through credit
, i.e. debt financing. To do this, the central bank typically makes a simple bookkeeping entry, crediting the accounts of the government with the newly created amounts of currency, which the government then spends on the open market.
The expenditure of this newly created money allows the government to outbid other buyers. This causes prices to rise, first in a few limited sectors of the economy where government demand for goods and services is relatively high, and then slowly trickling out through the rest of the economy as the new money continues to change hands in transactions.
At the same time as prices are rising, people living on fixed incomes see their cost of living go up. For those who save, the value of their savings deteriorate.
Now, imagine a person had 100 units in their bank account before the inflation, and did not touch it until after the inflation occurred. Also imagine this person wanted to buy a video game console which was priced at 100 units. Unfortunately for that person, the cost of the console is now 105 units due to the five percent inflation of the money supply. The person can no longer afford the product he wanted to purchase because the money he saved is now less valuable. Although the person still has 100 units to spend, it will not buy him what it would have before the inflation occurred.
By increasing the amount of money in the economy, the government has diluted the value of each unit of currency. It is equivalent to if the government had originally taxed the buyer an additional 4.8 percent.
Typically, the connection between the government's deficit spending and the resulting inflationary pressures are not made by consumers. Blame is typically attributed to corporate greed (example: the increase of the cost of petrol since the year 2000 being characterized as the intangible fault of greedy oil companies instead of due to measurable things like inflationary pressures, increased demand in developing economies, and reduced supply as a result of conflicts like the Iraq War), while the government does not face the unpopularity which generally results from increasing taxes.
Had the government enacted a five percent tax, they would have collected the amount of money necessary to meet the shortfall. Additionally, the government would have gotten a discount on the goods and services they needed: an economic slowdown due to consumers having five percent less money to spend tends to drive prices down as sellers attempted to move their products. The resulting economic slowdown may not be a bad thing, however, as the government spending may absolutely offset and balance it.
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
levied in such a way that is largely unnoticed, or not recognized as a tax,. The phrase was generally used in the United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
by Conservatives
Conservative Party (UK)
The Conservative Party, formally the Conservative and Unionist Party, is a centre-right political party in the United Kingdom that adheres to the philosophies of conservatism and British unionism. It is the largest political party in the UK, and is currently the largest single party in the House...
to attack the New Labour government's behaviour. It should not be confused with double taxation
Double taxation
Double taxation is the systematic imposition of two or more taxes on the same income , asset , or financial transaction . It refers to taxation by two or more countries of the same income, asset or transaction, for example income paid by an entity of one country to a resident of a different country...
or privatisation.
Origins
On 16 September 1996 the National Association of Pension Funds demanded a reverse to a tax on UK pension funds' dividends. Anne Robinson, their director general said pension funds are being "taxed by stealth".The exact phrasing stealth tax has been in British political use since 1998 and referred to tax rises that apparently circumvented the 1997 New Labour manifesto commitment that "over the five years of a Labour government ... there will be no increase in the basic or top rates of income tax".
Anne Segall of The Daily Telegraph
The Daily Telegraph
The Daily Telegraph is a daily morning broadsheet newspaper distributed throughout the United Kingdom and internationally. The newspaper was founded by Arthur B...
claimed on 17 January 1998
that, "taxes will rise by £7 billion this year ... as a result of a variety of measures introduced or extended by the previous chancellor Gordon Brown. Mr Brown's 'stealth' taxes are directed mainly at middle-class voters and in particular at middle-class professionals and those with savings".
On October 19, 1998 Frances Maude, then Shadow Chancellor (the opposition finance minister) claimed the Chancellor Gordon Brown
Gordon Brown
James Gordon Brown is a British Labour Party politician who was the Prime Minister of the United Kingdom and Leader of the Labour Party from 2007 until 2010. He previously served as Chancellor of the Exchequer in the Labour Government from 1997 to 2007...
was imposing "stealth taxes ... designed to conceal their effect".
Previous Prime Minister Tony Blair
Tony Blair
Anthony Charles Lynton Blair is a former British Labour Party politician who served as the Prime Minister of the United Kingdom from 2 May 1997 to 27 June 2007. He was the Member of Parliament for Sedgefield from 1983 to 2007 and Leader of the Labour Party from 1994 to 2007...
only made occasional references to stealth taxes, such as on 1 November 2001 in relation to Company Car taxation, 9 November 2000 in relation to Fuel prices and on 21 October 2002 in reference to Pensions.
Examples
One example of a stealth tax is in the United KingdomUnited Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
, where the British Government diverted revenue from the National Lottery
National Lottery (United Kingdom)
The National Lottery is the state-franchised national lottery in the United Kingdom and the Isle of Man.It is operated by Camelot Group, to whom the licence was granted in 1994, 2001 and again in 2007. The lottery is regulated by the National Lottery Commission, and was established by the then...
to fund public spending.
Another form of stealth taxation occurs when deductions or exemptions are reduced based on income level resulting in more taxable income, but the same tax rate for a higher total tax. Under 2007 US tax law 1040 Schedule A itemized deductions and the $3,400 personal exemption are phased out (reduced) at higher income levels ($234,600 for married filers).
Stealth taxes might be recognised as taxation but remain largely unnoticed, as with Value Added Tax
Value added tax
A value added tax or value-added tax is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the "value added" to a product, material or service, from an accounting point of view, by this stage of its...
(VAT) in the UK between 1979 and 1991, during which period it rose from 8% first to 15% (compensating for a large reduction in the higher and basic rates of income tax) then to 17.5% (when the Poll Tax
Poll tax
A poll tax is a tax of a portioned, fixed amount per individual in accordance with the census . When a corvée is commuted for cash payment, in effect it becomes a poll tax...
was replaced by a council tax), somewhat shifting the burden of taxation away from income
Income tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
onto consumption.
Regressive stealth taxation
Stealth taxes can be viewed as regressive, as more affluent people are less affected by VAT, for example. State lotteries may also be viewed as a form of taxation, and there is evidence that they are played more by poor people than by the affluent.In January 1999 Conservative
Conservative Party (UK)
The Conservative Party, formally the Conservative and Unionist Party, is a centre-right political party in the United Kingdom that adheres to the philosophies of conservatism and British unionism. It is the largest political party in the UK, and is currently the largest single party in the House...
culture spokesman Peter Ainsworth described the National Lottery
National Lottery (United Kingdom)
The National Lottery is the state-franchised national lottery in the United Kingdom and the Isle of Man.It is operated by Camelot Group, to whom the licence was granted in 1994, 2001 and again in 2007. The lottery is regulated by the National Lottery Commission, and was established by the then...
's New Opportunities fund as a "stealth tax". and Conservative leader William Hague
William Hague
William Jefferson Hague is the British Foreign Secretary and First Secretary of State. He served as Leader of the Conservative Party from June 1997 to September 2001...
claimed The Labour stealth tax amounts to £1,500 for every working person. In Parliament on 3 November 1999 William Hague accused the government of levying a £500 million 'stealth tax' that would hit IT companies.
Increasing the stamp duty
Stamp duty
Stamp duty is a tax that is levied on documents. Historically, this included the majority of legal documents such as cheques, receipts, military commissions, marriage licences and land transactions. A physical stamp had to be attached to or impressed upon the document to denote that stamp duty...
tax paid on house sales in the UK was also described as a stealth tax. Michael Portillo
Michael Portillo
Michael Denzil Xavier Portillo is a British journalist, broadcaster, and former Conservative Party politician and Cabinet Minister...
claimed that the children's tax credit was a 'stealth tax on marriage'. Conservative Archie Norman claimed that increasing the Council tax
Council tax
Council Tax is the system of local taxation used in England, Scotland and Wales to part fund the services provided by local government in each country. It was introduced in 1993 by the Local Government Finance Act 1992, as a successor to the unpopular Community Charge...
was This is the ultimate stealth tax hike - local residents foot the bill and local councillors take the blame.
On 8 June 2005, revaluation of houses for council tax was put forward as a steath tax, Anne Milton MP asked Will the Minister guarantee that the average council tax bill will remain the same for my residents in Guildford, or will he come clean and admit that the revaluation is simply another opportunity to impose a stealth tax on hard-working families and pensioners?
Inflation as stealth taxation
Any person living in a country using fiat currency (vis-à-vis a hard currency
Commodity money
Commodity money is money whose value comes from a commodity out of which it is made. It is objects that have value in themselves as well as for use as money....
) is prone to the stealth tax of inflation
Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a...
. Inflation is typically resorted to by governments using fiat currencies because, in small increments, most people will never notice the effects of the policy.
How it works
When governments aren't able to bring in enough revenueRevenue
In business, revenue is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. In many countries, such as the United Kingdom, revenue is referred to as turnover....
through tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
ation or borrow
Borrow
Borrow or borrowing can mean: to receive from somebody temporarily, expecting to return it.*In finance, monetary debt*In language, the use of loanwords...
ing from private citizens and corporations, it resorts to borrowing from its central bank
Central bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
through credit
Credit (finance)
Credit is the trust which allows one party to provide resources to another party where that second party does not reimburse the first party immediately , but instead arranges either to repay or return those resources at a later date. The resources provided may be financial Credit is the trust...
, i.e. debt financing. To do this, the central bank typically makes a simple bookkeeping entry, crediting the accounts of the government with the newly created amounts of currency, which the government then spends on the open market.
The expenditure of this newly created money allows the government to outbid other buyers. This causes prices to rise, first in a few limited sectors of the economy where government demand for goods and services is relatively high, and then slowly trickling out through the rest of the economy as the new money continues to change hands in transactions.
At the same time as prices are rising, people living on fixed incomes see their cost of living go up. For those who save, the value of their savings deteriorate.
Example
Imagine there is one trillion monetary units in the economy. Governmental budgetary shortfalls are 50 billion units. The central bank credits the government with the newly created, additional money to meet the government's shortfalls. This equates to a five percent increase in the money supply.Now, imagine a person had 100 units in their bank account before the inflation, and did not touch it until after the inflation occurred. Also imagine this person wanted to buy a video game console which was priced at 100 units. Unfortunately for that person, the cost of the console is now 105 units due to the five percent inflation of the money supply. The person can no longer afford the product he wanted to purchase because the money he saved is now less valuable. Although the person still has 100 units to spend, it will not buy him what it would have before the inflation occurred.
By increasing the amount of money in the economy, the government has diluted the value of each unit of currency. It is equivalent to if the government had originally taxed the buyer an additional 4.8 percent.
Typically, the connection between the government's deficit spending and the resulting inflationary pressures are not made by consumers. Blame is typically attributed to corporate greed (example: the increase of the cost of petrol since the year 2000 being characterized as the intangible fault of greedy oil companies instead of due to measurable things like inflationary pressures, increased demand in developing economies, and reduced supply as a result of conflicts like the Iraq War), while the government does not face the unpopularity which generally results from increasing taxes.
Had the government enacted a five percent tax, they would have collected the amount of money necessary to meet the shortfall. Additionally, the government would have gotten a discount on the goods and services they needed: an economic slowdown due to consumers having five percent less money to spend tends to drive prices down as sellers attempted to move their products. The resulting economic slowdown may not be a bad thing, however, as the government spending may absolutely offset and balance it.