Why all taxes must rise by 16%!

For the UK to balance its books, all taxes would need to rise by 16%. Which would you raise?

Have you ever wondered where the UK Government gets its money from and where this huge sum is spent?

Well, wonder no more, because here are the projected figures for the 2012/13 tax year, as forecast by the independent Office for Budget Responsibility (OBR).

Let's start with taxes...

Your £12,000-a-year tax bill!

As you can see, taxes on earnings -- income tax and National Insurance contributions (NICs) -- are the biggest contributors to HM Treasury's coffers. Together, these will raise £261 billion in 2012/13, which is nearly half (44%) of the total of £592 billion.

The Government's third-biggest revenue-raiser is Value Added Tax (VAT), a tax on spending which should raise £102 billion this tax year.After VAT come excise duties: the 'sin taxes' the Government levies on alcohol, tobacco, gambling and the like, accounting for £48 billion.

The overall total is £592 billion, which averages out at more than £12,000 for each of the UK's 49 million adults. Ouch!

£91 billion short

Next, here's how various Government departments splash our cash:

The number one bill we Brits pay is £207 billion for 'social protection', which includes welfare benefits, tax credits, State Pensions and so on. Welfare spending alone accounts for more than £3 in every £10 (30%) of Government spending.

After social welfare, our second-biggest bill is for the National Health Service (NHS) and other healthcare, with health spending expected to be £130 billion in 2012/13. After this comes education (£91 billion) and then interest on our national debt (more than £1 trillion and growing), expected to cost £46 billion this year.

In total, Government spending this year will be £683 billion, versus total income of £592 billion. In other words, the UK will go a further £91 billion into the red this year, because it is spending £1.16 for every £1 it collects in taxes.

Deeper into the red

Although our Government's financial 'black hole' will be £91 billion this year, this is still a great improvement on 2011/12, when we went £126 billion into the red. Even so, the Government has no plans to balance the UK's books in the immediate financial future.

Indeed, the OBR reckons that the UK's public sector net borrowing will be over £21 billion in 2016/17. This means that our national debt will continue to rise every year for at least the next four years. In effect, our national overdraft will keep climbing, though at a slower rate than during the depression of 2008/09.

As our national debt heads from £1 trillion towards £1.2 trillion, this extra £200 billion of borrowing is going to jack up our interest bill. This year, debt interest will be £46 billion. As our debt relentlessly rises, the UK's creditworthiness declines and interest rates climb, this bill will continue to mount up for many years to come.

Raise all taxes by 16%

One way to solve this deficit would be to increase all taxes by 16%, thus balancing our nation's books at a stroke. Alas, this would be disastrous, because the extra tax burden would force our economy to its knees.

Of course, adding £91 billion to an already-rising tax bill would put enormous pressure on British households. In fact, this works out an extra £3,500 a year for each of the UK's 26 million households.

Faced with nearly £300 a month of extra taxes per household, millions of us would rein in our spending. Thanks to the 'Paradox of Thrift', this would cause a deep slump in consumer spending.

In effect, by cutting back, we would collectively make our economy even weaker. This reduced spending would depress tax revenues and therefore inhibit our recovery.

Which taxes would you put up?

So, with the UK's national finances facing at least four more years of decline, what would you do to stop the rot? What steps would you take to balance the books faster?

Would you merge income tax and NICs into a single tax on earned income, to be raised gradually over time? Would you lift VAT, so that big spenders would contribute more to the tax take? Would you leave personal taxes alone and, instead, place a heavier burden on British businesses? Would you drive up taxes on alcohol and tobacco, to help pay for NHS spending?

Personally, I would like to see our entire tax system overhauled, so as to simplify the taxes levied on income from working. Also, the taxes on earned income are much higher than those on unearned income and gains (from interest, share dividends, property rent, capital gains, and so on). 

But one thing is for sure. With years or weak growth and a rising national debt ahead, British taxes are sure to rise. The only question is which ones?

More on tax:

Tax amnesty for eBay traders and electricians

Save our Savouries: ‘pasty tax’ protestors take to Westminster

Ten ways to avoid Capital Gains Tax

New PAYE system to ensure you ALWAYS pay the right tax

Organise your paperwork for the new tax year

Finally, these figures make one thing very obvious: faced with years of weak growth and a rising national debt, British taxes are sure to rise.

That's why I urge all savers and investors to make full use of tax shelters to maximise the returns from their spare cash. Start with a tax-free ISA (Individual Savings Account), which is used by 20 million Brits to (legally) dodge tax!