Episode 2 Your Money and How They Spend It

'Welcome to the street of choices.

'How much to spend, how much to tax?

'For years, the occupants of Number 10 have claimed they could spend more without taxing us more...

'..leaving the chancellors in Number 11 to balance the books.

'All too often, they've failed.

'Now, we're living with the consequences.

'In this series, I've been finding out how we got here,

'and examining the demands on the people who have to make the nation's sums add up.

'Right now, the economy is facing the tightest squeeze in decades, and it hurts.'

We put pressure on the Chancellor to spend more and more,

and then we're incredibly resistant to paying more tax to pay for it.

'So why can't politicians protect the have-nots by taxing the have-lots?

'It may not be that simple.'

Taxes are, for the very rich, effectively voluntary.

I think taxes are totally voluntary for the very rich.

'What about those who are not rich, but are certainly better off?'

It's not that I don't want to pay any more, but I feel like we haven't got any more to give.

'And why can't they simplify the bewilderingly complex taxes on what we spend and buy?'

That one doesn't pay, that one does pay VAT.

-Why?

-Don't ask me, I'm not the Chancellor!

Why don't chancellors tax us enough to pay for all the things that we say we want them to spend money on?

Why do the nation's sums fail to add up so often over our history?

Tonight, the trouble with tax on Your Money And How They Spend It.

'Let's begin at the beginning. What is tax?

'We know what it is, don't we?

'It's the Government chasing us for our hard-earned cash.'

-Are you a taxpayer?

-Er, I am, yeah.

-Could I have £5, because somebody over here needs it more than you.

I'm just trying to get money off taxpayers to give to other people.

Are you happy to pay a bit more?

-You probably pay your taxes already, don't you?

-Yeah, I do, mate.

-Too much?

-Too much.

I wondered if I could have some of your money to give to someone who needs it.

-I need it meself.

-You need it yourself?!

-Yeah.

-Where am I going to get it from, then?

-I don't know.

'Manchester's full of good people,

'but giving money to total strangers is perhaps asking a bit much.

'But that's what politicians do.'

There's somebody in need over there. Could I have £5 to give it to them?

-I've just got enough for meself.

-You don't want to give it to the lady over there?

-I can't afford to.

-She needs it, she's got children.

-I need it.

'And now politicians want us to fork out even more

'to pay for the country's huge liabilities.'

I just need a bit of extra money, is that all right?

It's very expensive, the police, the schools,

hospitals, there's a war on, so have you got a fiver each, maybe?

-Governments generally just waste it, don't they?

-Yeah.

They just fritter it away on wars

and giving it away to idlers who don't work.

-Who here can I get to give me some more money, do you think?

-People who have more money?

Who are they? What do I have to look for, people in suits?

-Sir, I'm very sorry to stop you in your lunch break.

-Not at all.

-We...

-Have you got your wallet on you?

-Yes.

There are quite a lot of people in need and a lot of public services to be paid for

and I wonder if you could give me some more money for them.

-I'm afraid I can't afford it.

-No?

-I think that's a familiar story that you'll be hearing.

I don't seem to be able to persuade anybody to part with

their hard-earned cash so I can hand it on to somebody else.

Which is a bit of a problem for governments, really, because

taxes are the way that they take from one and give it to another.

Maybe even back to us, when we're unable to work or sick or old.

And if a nice guy like me can't do it

imagine how much harder it is for politicians.

Well, the public want to spend money on very worthwhile causes

that either affect them or other people.

The public also don't want to pay for it. They believe the Government can find other people to pay.

Talking about tax in politics is like talking about sex in public.

Everybody knows it's around,

but they don't like to talk about it too much.

And I think people tend to be so cynical now about what Government does

it's always going to be a difficult conversation,

but perhaps this is a good time to have it.

'A good time, because we're living way beyond our means.

'Last year the Government raised £549 billion in taxes.

'A huge amount, but much less than they were spending.

'Stimulating growth is one way to close the gap,

'but how else could they raise more to make the books add up?'

Remember that number?

£549 billion, the amount raised in taxes last year.

Well, three big taxes raised more than 60% of that.

The big daddy is income tax. It generated £152 billion.

But as politicians have been afraid to put the rate up for many years

they've looked instead to another tax on our incomes.

It's not called a tax, it's National Insurance,

and it raised more than most people think, £97 billion last year.

The amount raised by VAT, value added tax,

has doubled in the past 30 years.

It raised £86 billion. Since then, of course, the rate's gone up.

No other taxes raise anything like as much as those three.

Businesses pay in all sorts of different ways.

They pick up more than half the bill in National Insurance,

they pay rates and other taxes, and then there's corporation tax,

which generated £43 billion last year.

Next comes the little guys,

although it probably doesn't feel like that a lot of the time.

Add fuel tax, for example, to the so-called "sin taxes" on booze and fags.

Last year the Government raised £46 billion.

Council tax, which a lot of people don't like,

added just £26 billion to the nation's coffers last year.

Then there are all those little ones that we like to curse.

Stamp duty when you buy a house, £6 billion,

inheritance tax, £3 billion,

and you can't even fly away from the problem

without paying tax on that plane ticket.

£2 billion.

So, short of inventing an entirely new tax, there are your options.

'Instead of deciding which tax should go up, many start by saying, "Who should pay more tax?"

'Their answer's simple - the rich. Like this man.'

OK, so we're ready for departure if you are.

I'm happy, yeah, thank you very much.

'John Caudwell has all the trappings of enormous wealth.

'A helicopter, a yacht and a vast mansion.'

-That feel good, looking at that?

-It's a fabulous house, isn't it?

-Lovely.

-I've always loved Jacobean architecture, Elizabethan, Jacobean.

'Caudwell's a great British success story.

'His Phones4U mobile-phone business created thousands of jobs

'and, when he sold it, netted him £1.5 billion.'

How does a lad from a terraced house with an outdoor loo here in Stoke

feel about living in that 50-room mansion a few minutes away?

Well, of course I feel, er...lucky. And privileged.

But I don't sort of look at it and it takes me breath away,

because it sort of took me 35 years to get there!

'In some countries, the super-rich have asked to pay more tax

'to help clear their countries' debts.

'Here, billionaire like John Caudwell aren't keen to follow suit.'

How much can you tax the rich before they vote with their feet

and decide to leave the country,

and then the revenue to the Exchequer is reduced rather than increased?

And have you got a sense of how much tax you've been paying in the last few years?

I've got a very great sense of the tax I've paid

-but I don't know whether you could even stand the number.

-Go on.

Well, if we go from what I've already paid since selling the business,

and then include what is due and going to be paid,

we are definitely talking of around about £280 million.

'Caudwell's proud that that sum could pay to build 14 brand-new secondary schools.

'But he doesn't like paying his tax one little bit.'

You choose to give quite a bit of cash now to charities.

Why do you feel better about doing that than paying your tax bill?

HE LAUGHS Do you know, there's no comparison! I'm sorry...

It take me breath away, to be honest, because...we run our charity,

and all my charitable works, like a business,

and we make every last penny really count.

That is incredibly satisfying

and, because I do it voluntarily, it's even more satisfying.

What is satisfying about giving 50% of your income to the Government

and then having it frittered away in many areas that you strongly disagree with?

Few people like taxes, no matter how rich they are.

Parliament echoes to the sound of past struggles

to prise more from the wallets of the wealthy.

The biggest tax of them all

was invented specifically to target them.

200 years ago, like today, Britain faced a mighty big bill.

The Prime Minister, William Pitt, decided the rich should stump up.

You can blame him for income tax.

Its troubled history starts here, in the Parliamentary Archive.

So...here we are, and the original income tax is right here.

This is the original Income Tax Act of 1799.

So if I bin that, I won't have to pay any tax?

I fear it doesn't quite work like that.

-If I just take it off the shelf.

-You can live in hope, can't you?

-Indeed.

-This is it? This is what they wrote?

-This is the original.

As written out in Parliament while the bill was being passed.

'When first introduced, income tax was solely for the wealthy.

'Those earning over £200 a year would pay 10% of their earnings.'

"Most Gracious Sovereign, we, Your Majesty's most dutiful and loyal subjects,

"the Commons of great Britain, in Parliament assembled,

"for granting to His Majesty an aid and contribution for the prosecution of the war."

This great act was introduced to deal with what's now a familiar problem,

a whopping great budget deficit.

But in particular to deal with the costs of war.

And because the idea was so unpopular,

then as well as now, the writers of this document

convinced themselves that it would be temporary.

'But of course income tax is still with us.

'Over the years, more and more people have had to pay it

'and time and again when things got tough

'politicians turned to the wealthy.'

Back in 1973, hammering the rich was thought to be a sure-fire vote winner.

Just before an election, Labour's Shadow Chancellor made this prediction.

I warn you,

there are going to be howls of anguish

from the 80,000 rich people,

people who are rich enough to pay over 75% on the last slice of their income.

Denis Healey boasted that he'd squeeze the rich till the pips squeaked.

At the Treasury, he went further,

raising the top rate of income tax to 83%.

It was in fact the Stones, not the pips, that did the squeaking.

They and other celebrities complained bitterly.

Basically we have to give all the money to the Revenue, bless them.

They should be promoting the tour,

I mean, they're doing very well out of it.

The Rolling Stones could avoid their soaring tax bill

by rolling out of Britain, along with Rod Stewart, Michael Caine

and countless other wealthy people,

leaving Labour to be branded the high-tax party.

By the end of the '70s, a new Tory government came to office,

promising lower income tax for all.

The basic rate was cut to 30%, the top rate to 60%.

But it was the next dramatic step which changed everything.

One day, one speech, one Budget transformed the politics of tax.

It was 15th March 1988

when Margaret Thatcher's Chancellor, Nigel Lawson,

cut not just the basic rate of income tax, but slashed the top rate too.

There were cries of "Shame!" from within the Commons.

But the echoes died remarkably quickly.

'A reduction in the top rates of income tax can, over time,

'result in a higher and not a lower yield to the Exchequer.'

We had a system of taxation that was a result of Labour governments

putting up the top rates of income tax, and Conservative governments

not reducing them again,

so we had an absurdly high top rate of income tax

which was having very great ill effects.

'Excessive rates of income tax destroy enterprise,

'encourage avoidance and drive talent to more hospitable shores overseas.'

'I propose to abolish all the higher rates of income tax above 40%.

CHEERING AND JEERING

There was uproar in the House. It was quite extraordinary.

It was in fact...the only Budget there's ever been in which

the House of Commons...the sitting had to be suspended.

-SHOUTING This major reform...

-Order! Order!

-SHOUTING CONTINUES

-ORDER!

Order! Sitting suspended for ten minutes!

SHOUTING CONTINUES, THEN FADES DOOR SLAMS

'Outrage would soon turn into acceptance.

'The new lower rates of income tax became politically untouchable.

'A decade later, New Labour and Tony Blair

'pledged not to raise income tax, even for the rich.'

'If we had not capped the top rate,'

people would've said, you know,

"This increase in taxation is coming our way,

"gradually, step-by-step." It wouldn't end

at the relatively very rich, it would start encroaching,

you know, on the not-so-rich and the people who want more.

That in short was the dilemma

which the last Labour Government wrestled with.

How do you target the rich to pay more tax

without alienating the people who aspire to be rich one day

or indeed everybody else who fears that you might come for them next?

In short, how exactly do you decide who are the rich?

'It's race day at Newbury in Berkshire,

'home, surely, to one or two rich people.'

Come on!

'I'm certainly not making MY fortune, but surely this is just the place

'to find the people who we all agree should pay more tax. Don't we?'

Where are the rich? Who are the rich?

-I wish I knew, but it's not me.

-It's not you?

-No!

I have come in search of the rich. Who are the rich? Is it you?

-No chance.

-Is it him?

-It's not.

-Who are the rich?

-Yeah.

The blokes over in those boxes?

-I would imagine so, yeah. They've got a nice life, haven't they?

-Yeah.

-Who are the rich?

-Not us. LAUGHTER

-No?

-Not this evening.

-And we won't be after this is finished.

-Yeah?

No, by the rich, you mean the very rich, that's what it means. Not the middle people like us.

'No luck, then, in finding people who think THEY are rich.

'So let's try another tack. On a range of pay scales,

'from about 20 grand to half-a-million-plus,

'where does being rich begin?'

Where on here would you instinctively think rich begins?

-There?

-Definitely.

Where do you think the rich starts, then? Is it that one or there?

-Round here.

-About there?

-Round here.

-So I guess you're the top bit.

-Where do I come in?

-I think you must be here.

-I can...

-Judging by the BBC thing, I guess you're here.

You are absolutely right, I am on this sheet(!)

Thank you very much indeed!

I think rich, I hate to tell you, but I think it begins round about here.

-119,000 a year?

-Yeah.

-There.

-119,000? That's rich.

-Yeah.

'So, some agreement about who the rich are,

'but how many people ARE that well-paid?'

-How many people earn that sort of money?

-Oh, not many, not many.

-About how many?

-Um... Oh! About 20%.

-20% earn more than 120,000?

-Yeah.

-I would say 10.

-10%?

-25% of the country earn more than 119,000?

-Yeah.

-Shall I tell you the answer?

-Go on, then.

-1%.

-Oh, is that right?!

-Only 1?

-Only 1%?

-Is that really?

-1% of the country.

-Crikey!

-Is it?

-What about football players?

-There are not many, are there?

We're the lucky ones, then, aren't we? LAUGHTER

-Mind you, we blooming well work for it.

-Yeah.

So our perspective is all wrong.

'Having the wrong perspective has real political impact.

'When we tell politicians to tax the rich,

'we mean other people, never us,

'and we overestimate how many there really are.'

There aren't enough rich

to fund the sorts of expenditures that need to be funded.

I mean, I... I'm not poor, but I don't regard myself as rich.

I regard Russian oligarchs as rich.

Everybody has their own idea of who the rich are

and they're always someone else.

-And it's them that should pay rather than us?

-It's them that should pay.

'At Westminster, politicians are tempted

'to pander to voters' perceptions of who can afford to pay more tax,

'whilst also having to confront reality.

'Let's take a look at who pays what when it comes to income tax.'

This is the total amount raised in income tax last year.

So how much do those on the lowest 10% of incomes contribute to that?

That's people whose incomes are up to about £10,000 a year.

That will include part-time workers, some pensioners and students.

That group contributes just 0.5% of the income-tax total.

In fact, the first 90% of income-tax earners

contribute less than half of all the income tax collected.

This means all of the rest is paid for by the top 10% of earners alone.

That's those earning more than £48,000 a year.

People like police inspectors and some senior teachers and the like.

What about the richest 1%?

Now, if you include not just salary,

but income from savings and shares and other assets,

we're talking of people earning more than £153,000 a year,

and that top 1%, just over 300,000 people,

pays around 27% of all the income tax.

That is a consequence of growing inequality.

As the rich earn more and more,

they pay a greater and greater share of income tax.

More than enough, they may think, but others say not nearly enough.

'After 30 years in which income tax rates only went down,

'it's not been easy for politicians, whatever their instincts,

'to put it back up. It wasn't until the global financial crisis of 2008

'that raising the top rate of tax got back on the agenda.'

Even when the banks were crashing round our ears,

when the taxpayer was shelling out for them,

when anger about bankers' bonuses was at its height,

a Labour Government, led by Gordon Brown,

two decades after Nigel Lawson's budget,

still agonised about whether it could get away with increasing the top rate of tax.

But the crash had blown a vast hole in public finances,

which had to be plugged with tax rises and spending cuts.

Anyone earning over £150,000 a year

would pay the new top rate of income tax.

In order to help pay for additional support for people now,

and to invest in the future, I've decided that the new rate will be 50%

and will come in from April next year, a year earlier.

'The Chancellor considered promising that it was a temporary tax rise,

'but that's what they'd said when income tax began.

'Ever since, there have been loud calls to scrap the 50p rate.'

The debate about how much to tax the incomes of the rich

is now not really focused on how much money can be raised,

but what it says about Britain.

Those who want to keep the top rate of tax at 50p argue,

"It's a symbol of fairness, of shared pain in difficult times."

Those who want to see it gone say that the rate acts

as a kind of warning sign over Britain, over London,

saying to the wealthy, "You're not welcome here."

That's a fear shared even by the man who introduced that new top rate

and he fears something else too -

that it suggests that Labour is still a high-tax party.

-Was it crossing a Rubicon?

-Yes, it was. I felt it was crossing a Rubicon, because it was changing...

Our whole philosophy, as New Labour, was a different economic approach,

that we were to encourage people, encourage aspiration.

That meant a competitive tax rate, something realistic, to encourage people to get on.

It was sending a broader political signal, if you like. Now, this was changing it.

If putting it up was difficult for Labour,

cutting it now is a headache for the coalition.

Liberal Democrat David Laws

was George Osborne's deputy at the Treasury.

The politics now makes keeping the top rate much easier than scrapping it.

I think that 50% is too high.

Half of somebody's income is a hell of a lot for we in government,

for the state, to take, however rich they are.

But I'm absolutely clear that, while we are in the middle of this, er,

necessary process of Government austerity,

while we're imposing huge burdens on people across society,

it would be absolutely nuts to be seen to be a government

that was prioritising the richest 1% of the population.

The rich aren't exactly lining up

to offer to pay more tax on their income. To many,

having to hand over more than half what they earn to the Government

crosses a psychological pain barrier.

So politicians faced with the political and practical difficulties of getting more money that way

have turned increasingly, not to the rich,

but to the, well, comfortably off.

'I'm heading to the seaside town of Southport in Lancashire.

'I'm going to meet a family classified as comfortably off,

'wealthy enough to pay, not the top rate of tax,

'but the so-called higher rate of 40p in the pound,

'levied on earnings over 44,000 a year.'

'Kat Sumner earns nothing. She's a full-time mum, bringing up four children.

'Although her husband Neil earns about 49,000 a year,

'they feel far from comfortable. In fact, they feel stretched.'

-Some people will hear 49,000 and think, "That's a lot of money, a lot more than we earn."

-Yeah.

And I understand how people feel about that,

but, I mean, I don't think they really understand how,

you know, far that really goes, when you've got to think about six people,

paying for their food, paying for their clothes, housing them all.

I have to try quite hard to make ends meet.

'Instead of putting up tax rates, politicians have classified

'more and more people as higher-rate taxpayers,

'dragging more families into the net.

'The number of families like Kat's paying 40%

'has trebled in the past 30 years.'

-CHILD:

-I don't know now.

-You don't know?

The tax bandings have been very static compared to people's incomes.

As people's incomes rose and rose, the tax bandings stayed pretty much where they were

and therefore brought more people into paying 40p tax rate.

That whole situation is really unfair.

'With so many ordinary families now paying the higher rate of tax,

'it's become harder for politicians to increase their tax rate.

'Instead, the Government has to claw back cash from them in other ways.'

'We will withdraw child benefit from households'

with a higher-rate taxpayer. When the debts left by Labour

threaten our economy, when our welfare costs

are out of control, this measure makes sense.

APPLAUSE

It's my only income as a person, um, and it...

When it was taken away, it made me feel really, like, this is...

This is us saying, "There is no value in what you do,

"we don't value anything about you, who you are or what you do."

The plan to cut Kat's child benefit inspired her

to start a local campaign against the cuts.

I've got a few things here explaining about some of the cuts that are being made.

'She wants the better-off to pay more

'and certainly doesn't think of herself as belonging to that group.'

In terms of tax, you don't want to pay any more?

It's not that I don't WANT to pay any more,

I feel that people should be responsible and take pride

in paying their taxes, but I feel like we haven't got any more to give.

That feeling, which many people share,

is what tempts politicians to promise tax cuts,

even when there simply isn't the money to pay for them.

'There are now three million higher-rate taxpayers,

'but ten times that number pay the basic rate,

'so cutting that has long been the holy grail.'

The idea of cutting income tax has held politicians,

whether Conservative or Labour, in its spell for three decades.

When Gordon Brown delivered his last Budget just weeks before

moving next door on Downing Street to Number 10,

he was determined to prove that he too was a New Labour figure.

What better way of doing that

than cutting the basic rate of income tax?

And you know, for a while, it all seemed to go so well.

To reward work, to ensure working families are better off

and to make the tax system fairer,

I will from next April cut the basic rate of income tax

from 22 pence to 20 pence...

CHEERING

Everybody likes to sit down to a cheer,

but this is a case where if you are going to change the tax system

in a big way, for goodness' sake,

ask yourself...is this too good to be true?

I commend this Budget to the House.

Because the answer is it probably is too good to be true.

Problem for David Cameron to follow this, which he'll be doing in a moment?

Diary said that it was worse than changing nappies.

A Labour Chancellor who they've said is a tax increaser has suddenly,

with about 30 seconds' notice, said, "There, a 2p cut on income tax."

He doesn't know what we don't know -

who is paying for that 2p cut in the basic rate? We'll find out.

What we did find out is that that income-tax cut for some

was being paid for by an income-tax rise

for some of the poorest taxpayers in the country.

Gordon Brown had scrapped the lowest level of income tax -

the 10p band - and he, like another Labour Chancellor, Denis Healey,

all those years ago, was greeted with howls of outrage.

The problem this time is they were coming from his own supporters.

I'm afraid the real problem for us was there was an awful lot of people

who bluntly were traditional Labour voters and had been with us

in support for the last ten years,

who suddenly found their income had dropped,

and they're the ones who said, "Hold on, what have you done to us?"

When Alistair Darling took over from Brown at the Treasury,

he also took over the daunting problem of compensating those

who'd paid the price for a good headline.

At a cost of £2.7 billion,

I will increase the individual personal tax allowances by £600...

The eventual bill was closer to £6 billion

and it was politically costly too.

Just eight days after Darling's attempted salvage job,

Labour lost a once-safe seat in a by-election in Crewe and Nantwich.

..20,541.

This was not well managed at all,

this was a political disaster, and it took a heavy toll.

The reality is that the biggest money-spinner of all,

income tax, has now become a dead cert political loser.

The political consensus that it was impossible to raise income tax

meant the Government simply couldn't raise enough money that way.

There was, of course, a simple solution -

tax people's incomes, but do it with a tax called something different.

National Insurance.

'The Government takes not only income tax from our pay packets

'but also National Insurance, which of course is paid by employers too.'

Is Wise Venture a wise venture?

'It's hard to keep track of how much we cough up,

'let alone where it goes.'

Thanks very much indeed.

'So, with some punters, I did a few sums.'

How much income tax do you think you pay?

2,000, 3,000?

SHE GASPS

-Oh, my God!

-How much do you think you pay in National Insurance?

-Two and a half?

-Two and a half thousand?

Wow.

I need a pay rise!

-Would you like to pay more tax, Kirsty?

-No, I wouldn't, actually.

-You wouldn't?

-No!

But if you had to have a tax rise,

would you rather it was income tax or National Insurance?

-I would prefer that it was National Insurance.

-Because?

Because I believe in the National Health system.

And I think it is far better to pay into that.

I think if they had to put one up,

I'd prefer it to be National Insurance.

Because?

Because I think that goes towards healthcare

and things that I will need in the future.

If they're going to put anything up,

-put up the National Insurance?

-National Insurance.

If I told you they're absolutely the same,

income tax and National Insurance,

they pay for exactly the same things...

-No. That is just like...wrong.

-They do.

Many of us may think that National Insurance is not just another tax,

but some kind of, well, insurance,

paying exclusively for health and pensions.

That was true once, now it's a fiction.

Yet it's one which serves politicians well to maintain.

At the top, Mr Brown, please!

In the budget of 2002, Gordon Brown,

the Chancellor who'd pledged not to raise income tax,

raised the tax on our incomes by putting up National Insurance.

The clever bit was the way he sold it to us.

We as a nation will have to spend more on health care.

I believe it is right that when everyone, employees and employers,

benefit from the insurance provided by

the National Health Service,

everyone who can should make a fair contribution.

Market researcher Deborah Mattinson had tested every key phrase in focus groups.

Her job was to find a way to sell Gordon Brown's tax rise.

First off it was about ring-fencing the money and saying

this will go on the NHS

and that the NHS needed more investment,

which people bought relatively easy and it resulted in a tax rise

that eight out of ten people supported and were in favour of,

which I think is quite an achievement.

Finally someone had done it, come up with a popular tax rise.

How did Gordon Brown do it?

Well, first and foremost by not calling it an income-tax rise.

Second, by making it seem to be for a very specific purpose.

And thirdly, by linking it with the national religion - the NHS.

But there's a sting in this tale.

If the Government thought it would get the credit for the spending

produced by that tax rise, it was to be mistaken.

What we found, very frustratingly,

was what we began to describe as, "I've been lucky syndrome."

People would say, "My local primary school is OK but I've been lucky."

Or, "I took my daughter to the A&E, we were seen in half an hour, but we were lucky."

In other words, when they started to see that change in their own lives,

they didn't assume that this was happening all over the country.

Does that have an impact of undermining

the ability of politicians to ask for more money to spend?

It completely undermined the ability,

because basically people didn't feel that things had improved.

What had happened to them, their experience,

what they'd seen was an isolated lucky fluke. "I've been lucky."

'And this could be one of the biggest problems of all

'for politicians trying to raise more tax on our incomes.

'Whatever the evidence, we never seem to think we're getting a bargain.'

How much do we get back in return for the taxes that we give to the Government?

That depends, of course, on where we are on the income scale.

Let's put all the households in the UK into ten equal groups,

starting with the poorest and moving up to the richest.

This shows what households on average get from government.

The higher the bar, the more the group gets

in things like healthcare, education, pensions and benefits,

pretty much everything the Government spends its money on.

As we go down the income scale, towards the poorest, we see that,

on average, poorer households get slightly more from the Government.

No surprise there, because, of course, they get more

in terms of benefits.

But now let's add something.

Let's see what happens when you add in how much people pay in tax.

Above the line is what you're getting from the Government,

below the line is what you're paying to them in taxes.

For the first six groups, that's for 60% of all households,

on average they are getting more back than they're paying in.

But then look at the top 40% of households.

On average they are getting less than they pay

and this last one, the top, the richest 10%, they contribute

on average about five times in tax more than they are getting back.

There is a further twist though,

which makes life even harder for politicians.

Opinion polls show that even people in those groups that do receive the most

don't see it that way.

They tell pollsters they simply don't believe that

they're getting more back than they've paid in.

'If taxing people's incomes is hard to sell,

'what about taxing the things we buy instead?

'Leicester is home to one of the biggest markets in Europe.

'Plenty here, you might think, for a Chancellor to take a bite of.

'If only it were that simple.'

There is a tax that we all pay almost every day

and yet often barely notice it.

It is a tax that generates a vast amount of revenue

and can generate a vast amount of political controversy.

It operates in a pretty bizarre way

and yet any politician who tries to sort that out

ends up with a bloody nose.

It is nearly 40 years since the Chancellor of the Exchequer

introduced VAT - value added tax.

You paid 10% on everything except the essentials -

food and children's clothes.

He called it "a simple tax". How times change.

Take pet food.

-I'll take those if I may, please?

-Oh, yes, sir.

Has that got VAT with it?

-Yes, it has.

-We pay VAT on these?!

-Yes.

-Really?

-Terrible, isn't it?

If it was a bag of rabbit food, then there's no VAT on it

because we eat rabbits, but our dogs are pets, so you're charged.

-So there's no VAT on rabbit food?

-On rabbit food.

-But there is on dog food?

-Yes.

If you buy some biscuits in a supermarket for YOU, there's no VAT on it,

but dog biscuits you're charged for, 20%.

-So if I gave my dog chocolate chip cookies...

-No VAT.

-No VAT.

But if I gave my dog these? What hasn't got VAT?

-What can I feed my dog that hasn't got VAT?

-Rabbit food.

-Where is it?

-There's no VAT on that.

-Do you think the dog would eat that?

-There's no VAT on wild birds.

No VAT on those. OK.

But if you have the cockatiel seed, because it's got some seed in

and some of them, then that's VATable because it's for a specific animal.

-Are you a tax accountant?

-No, I have to split it all for my accounts.

-Does it make any sense?

-No. No.

'Clearly time for me to do some homework.

'The once simple rules on what is and is not VATable

'now run to almost 3,500 pages.

'Even the stallholders seem confused.'

-What about tea?

-Yes, I think.

-No, you don't pay VAT on that.

But if I go and buy a cup of tea over there, I do pay VAT on that.

Jaffa Cakes.

-VAT, no VAT?

-No.

What about popcorn? VAT or not VAT?

-And the right answer is... No.

-I said that in the first place!

-That one doesn't pay. That one does pay VAT.

-Why?

Don't ask me, I'm not the Chancellor.

This is clear as mud, isn't it(?) It really, really is.

'With all this confusion and complexity, it might seem

'straightforward, sensible even, for politicians to simplify things

'and add VAT to more goods, raising a few quid as they do.

'Well, not quite.'

Takeaways used to be tax-free until, back in 1984,

the then Tory government decided to extend VAT to cover them.

Logical, painless - or so they thought.

Restaurant meals were subject to VAT,

but takeaway food was not subject to VAT.

If you sat down and had a meal, you were paying VAT.

If you took the thing away, the takeaway, you weren't.

I said, "That's ridiculous."

I said, "Well, we'll put VAT on takeaway meals as well."

But some political heavyweights found that hard to swallow.

It's diabolical. This is a tax on the customer, a tax on the consumer.

It is 15% on the price of food for a lot of pensioners,

a lot of students, a lot of school children, a lot of unemployed

and a lot of people with large families who go out to work

and rely on hot takeaways such as fish and chips and so on.

As well as that battering,

there was a problem with the men at the Revenue.

Then Customs and Excise said to me,

"Look, it's very difficult to draw a line,"

because some takeaway foods, for example,

a salad is very much like going to the grocers and getting it there,

and you don't have to pay VAT there.

And how do we draw the line between groceries and takeaway food?

I came to the absurd conclusion, but it has stuck ever since

and it is the law, that I would say if it was hot, you paid VAT,

and if it's cold, you don't.

For 30 years it has been Tory Chancellors

who've extended VAT and hiked the rate,

whilst Labour politicians have condemned them for taxing the poor.

But under Gordon Brown a battle waged not between the parties

but within his government.

He was desperate not to put VAT up,

but his Chancellor living next door was desperate to do just that.

Desperate because boom had turned to bust.

The City of London and the housing market, which had provided

so much of the cash which the Treasury had depended on,

had crashed.

The man responsible for balancing the books had already raised

the top rate of income tax.

Now he wanted to do precisely what his party had spent decades

attacking the Tories for doing.

What I wanted to do was to gradually increase VAT up to 19% or 20%.

That would've allowed me to have cut personal taxes,

taken more people out of tax and, critically, not only could

I have compensated people on fixed incomes who would lose out with VAT

I could also make a sizeable inroad into cutting our borrowing.

Nick Pearce worked at the time as a senior aide to Gordon Brown.

He recalls how the Prime Minister and his team thought a VAT rise

would be seen as penalising the poor and a massive political U-turn.

People in Number 10 thought, "Look, that's not a fair tax.

"It's a regressive tax, it will split the Labour Party potentially

"and it blunts the sense that Labour has responded

"to the crisis with fairness,"

because it's quite hard to argue that VAT is a fair tax.

Alistair Darling was told

that a VAT rise would hand the election to the Tories.

He was ordered to increase National Insurance instead.

This time, though, the policy backfired.

You can make a case for National Insurance, yes, you can.

But inevitably, it was going to be portrayed as a tax on jobs.

Surprise, surprise, that's exactly what happened

the first week of the election campaign in 2010.

How frustrating was this argument?

It was frustrating, but I am not the first Chancellor to clash

or to find it frustrating with my next-door neighbour.

In fact, most chancellors sooner or later,

it's one of these things, it's a doomed relationship when you move in together.

Even more frustrating must have been the sight of his Tory successor George Osborne

doing exactly what Darling had wanted to do - raising VAT to 20%.

The years of debt and spending make this unavoidable.

'Unavoidable he says, but before the election, it had been unmentionable.'

The Conservatives hadn't gone to the electorate to say that they were thinking about putting up VAT.

There again, Labour ministers had not told voters

that they were thinking of doing precisely the same thing.

It all goes to show that politicians find it very, very difficult

to be upfront with the public about putting up tax.

For government after government, raising enough tax to cover their spending

has been a political nightmare.

But people who take to the streets have no such worries.

Their answer is to get more tax from those who are avoiding it,

especially the banks and big business.

The people who caused the crisis are getting away without paying for it.

The people in my community, living in the shadow of these banks,

we're suffering, we're having our services cut.

We've really got to challenge this idea that businesses, somehow, are constrained by paying tax.

The idea that they can get away from their tax means other people have to pay that tax for them.

'A growing number believe that bankers and those they see as greedy businessmen

'are getting away with avoiding what they really owe.

'And the taxman is seen as being a mere amateur

'compared with the professional tax avoiders of the corporate world.'

Big companies have one advantage over all the rest of us.

They can make their affairs really, really complicated.

And because they can, they become really difficult to understand

and that means the job of collecting tax from them is quite hard

because no-one quite knows the truth.

As a consequence, they pay less tax than you do,

I do and most people watching this programme will pay.

Cowardly politicians have put us into this situation

and we now need some courageous ones to get us out of it.

-Of both parties?

-Of both parties. Of all parties.

For many centuries,

the authorities have come up with more and more ingenious ways to get their hands on our money

and taxpayers have found ways to avoid paying it.

If you don't give the revenue what you owe them,

that's illegal, that's tax evasion.

But if you do your best to give them as little as possible,

that's perfectly legal. That's called tax avoidance.

'These days, tax-avoiding wheezes are often hidden deep in company accounts.

'But our past efforts are everywhere to be seen.'

This building in Westminster was built just a few years after the imposition of the hated windows tax.

In the early 1700s, the idea of taxing our incomes was unthinkable. The way it worked was simple.

If you had a building and it had windows, you owed the Government 2 shillings a year.

If you had more than 10 windows, it was 4 shillings.

More than 20, 8 shillings.

Which is why buildings were often built with the windows bricked up.

The only way to avoid what we call these days daylight robbery.

MUSIC: Theme from "Coronation Street"

Down Coronation Street,

avoiding tax is what you do when you pay the plumber in cash.

But the programme vividly shows how politicians themselves

can make avoidance easier by making the tax system too complex.

A classic example is the mess

that Gordon Brown got into when he was Chancellor a few years ago

when he introduced a very well-meaning new tax relief

designed to encourage filmmakers to come to the United Kingdom and make all their films over here.

We suddenly had, allegedly, Coronation Street

and all sorts of comedy programmes made by independent producers

being classified as films and enjoying the value of this tax relief.

What the hell's going on?

By the time the Treasury had figured out what was going on,

a tax relief that was supposed to be costing the Exchequer £20 or £30 million a year

was beginning to cost £200, £300, £400 million.

A massive, massive loss to the taxpayer.

So tax avoidance created by a well-meaning Chancellor?

This was tax avoidance on an industrial scale

created by the Government

not thinking through the consequences of the measures it was taking

and not putting in place the protection necessary to make sure

this tax allowance didn't grow out of control.

'Both businesses and individuals exploit the complexity of our tax system.

'Billionaire John Caudwell was branded a tax avoider a few years back.

'He was paying himself and his executives via a tax-free trust in Jersey

'and had to refund the Exchequer millions of pounds.'

Those words tax avoider, how do you feel when you hear them?

Well, avoidance still doesn't sound great, does it?

But all it really means is somebody legally minimising their tax liability. You tell me

what grown up in the UK is paying tax wouldn't like to minimise the tax through whatever means they can.

'John Caudwell has now paid a fortune in taxes,

'but he says avoidance is simple for people like him.'

There's so many of my friends

that have done tax planning by leaving the country

and the country is so much the poorer for it.

Some people say that taxes are, for the very rich, effectively voluntarily.

I think taxes are totally voluntary for the very rich.

We all have the freedom of choice to leave the country,

to go to a tax-free state and end up selling your business

or generating income and doing it in a virtually tax-free environment.

If you are rich and you want to avoid paying tax,

you can move yourself or your business abroad.

There is one thing, of course, that is very hard to move abroad.

Your house.

'Which is why there's now growing pressure

'for a so-called mansions tax on expensive property.

'Here in London's Mayfair, there should be scope for quite a haul for the Chancellor.

'Even a rather modest looking place down this street has been on the market for £20 million.'

'That's right, 20 million.'

-Here we go.

-It looks very different inside.

-It does.

'Estate agent Liam Bailey gave me a tour.'

Open plan, ready to move into.

This market, the buyers for this sort of property, what they are looking for

is a property which is absolutely finished before they move in.

-Almost like having a hotel room. You come in and you can use it.

-Exactly.

'Some say that a tax on expensive property

'offers a way of getting the very rich to stump up more.

'And there's another argument too.

'It turns out that the people who can afford places like this can pay

'a lot less tax on their purchases than most ordinary mortals.'

If I was buying this, stamp duty would be a bit of a worry. If I even had the money.

Well, it would be 5%, so you would be paying £1 million in stamp duty.

-Can I avoid that?

-You could buy

an offshore company structure and, effectively,

-you would be paying half a percent.

-So I'm saving...?

-£900,000.

'Rich foreign buyers can also escape

'having to pay capital gains tax when they sell up.

'And council tax isn't much of a worry either.'

This would be banded band H, top band,

so you would be paying the maximum council tax in the area.

Which is the same for this 20 million or more house

-as it is for some £500,000 flat down the road?

-Could be.

'For politicians who see pitfalls in other taxes,

'raising money from expensive property may sound a sure-fire winner.

'But hold on, have you forgotten the fuss created by other property taxes? Like the rates.'

Would a property tax be an easy

and politically pain-free way of raising a large sum of money?

There is an economic rationale for a property tax beyond doubt.

In my view, it would be political suicide

for anybody to do it. The British are attached to housing,

they see housing as a source of wealth.

A lot of it is inflation and is due to the scarcity of housing,

it's not productive wealth in that sense,

but I think a property tax would be political madness.

I think wealth and land taxes tend to be very popular with economists

and they tend to be less popular with politicians.

-Because...?

-Because people often don't like the idea of being taxed

on things that they have already purchased out of income which has been taxed.

And people don't like new taxes in general.

The tighter the squeeze gets on us all,

the more pressure government will be under to raise taxes

on the sorts of people who can afford houses like this.

If they say, "We are ready to move abroad,"

there will be plenty of people who say either good riddance, or it's just an idle threat.

But the dilemma that politicians will face is the same as we have seen before.

If you want to really raise money on the rich,

you'll end up hitting people who regard themselves as not rich at all.

Which of course takes us back, precisely, to where we started.

'In this series, we have seen how politicians, urged on by us,

'have been spending more and more and more for decades.

'Now that the economic clouds have become darker,

'the sums no longer add up.

'We voters have begrudged giving the politicians the extra tax

'needed to pay for it all.'

Do you resent your taxes going from you to someone else?

I've resented it all my life.

'The rich don't want to pay more.'

So many of my friends

and acquaintances have done tax planning by leaving the country.

'And the rest of us seem to think we pay quite enough already.'

I have to try quite hard to make ends meet.

'And when politicians try other wheezes to raise tax,

'they get into trouble.'

It's as clear as mud, isn't it? It really is.

'They say they simply can't win.'

If someone can think of a popular tax,

they should phone up and let us know,

because it isn't obvious there is one.

'But curiously, the current economic crisis may force us

'to confront head on our troubles with tax.'

Governments keep on changing and tweaking the existing system,

creating things that are more and more complex and irrational.

Perhaps once, twice, three times in every century,

there's a fundamental opportunity to do something more radical, clear away

the debris built up from decades of incremental government policy.

But if we don't make some big changes now, the opportunity to do so again may not come for another 20-30 years.

For years, any politician living on this street

who has dared to admit they might need to tax us a bit more

and spend a little bit less has found themselves punished.

No wonder, then, that whether they're Labour or Conservative,

they've tended to pretend that they can spend more and more and yet tax less and less.

If there's one advantage of the current economic crisis, perhaps it's this -

that we can have a more grown-up debate about your money and how they spend it.

Subtitles by Red Bee Media Ltd

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