What is My Tax Spent On?

Income tax is a bone of perpetual contention amongst the British public. Many feel that we are being taxed too much; others suggest that the rich are paying proportionately too little. Furthermore, it is frequently difficult to truly understand where your money is going.

In the case of Council Tax it is fairly visible; your payments (theoretically) contribute to road repairs, refuse collections and so on. However, income tax, VAT and other duties are sometimes difficult to account for.

Government Spending

Governments derive their income from one of three sources: the issuing of currency, the collection of taxes, and borrowing. However, they can only borrow to the extent that they do as a result of the apparent security offered by guaranteed tax income. According to economists, government spending can be split into three distinct areas. These are:

• Government consumption, which covers the purchasing of items or services that are to be used immediately. This includes spending on areas such as education and defence.
• Government investment, which accounts for purchases that will supposedly create a benefit in the future. This is a broader category as it can include both physical purchases and less tangible investment; the building of a factory would be classed as government investment, as would the cost of putting a child through school.
• Transfer payments account for the final type of expenditure. This covers spending that is not a purchase; for example, Jobseekers Allowance payments or the State Pension.

Fiscal Stimulus

Today, much of our income tax is being spent on 'stimulus' projects to counter the contraction of the economy. This is a technique first advocated by the economist John Maynard Keynes, who suggested that consumption and demand could be increased by extending government spending. As such, a hefty proportion of your tax payments are currently being used to perform tasks that will create jobs, for example the construction of new infrastructure elements.

A pertinent example of this is a current motorway widening project, which the government is funding because private companies are unable to do so themselves. Perhaps more controversially, a significant proportion of tax revenue is also being used to prop up high street banks, with some of your payments acting as insurance against so-called 'toxic' assets held by these institutions.

Regardless of the economic circumstances, your tax is also spent on basic social and welfare projects like benefit payments and the NHS. The police force is funded through income tax payments, although local fire services rely on Council Tax income to a great degree. Similarly, school equipment, student loans, and government agencies like the Office of Fair Trading are all paid for with your tax.

Many people resent the amount they lose from their wage packet in tax payments, and this amount is likely to increase over the coming years as we pay for the current economic problems. However, it is illogical to think of it as a loss; rather, it should be considered an exchange – in exchange for your tax payments, you receive access to the benefits of a functioning state.