Tuesday, 14 April 2015

Getting your priorities right on tax

Warning: post contains lots of numbers
Whenever politicians start talking about the details of tax policy, I suspect the eyes of most of the electorate glaze over. Understandably. All they want to know is what it means for them and that it instinctively feels fair.

But the politics of tax is open to a lot of misrepresentation. Parties can use subtle ways of raising or cutting taxes that are not immediately obvious. The classic example of this was when Labour abolished the 10p lower rate of tax for low earners, effectively doubling their tax liability overnight as they were dragged into the 20p rate. They did this at the same time as cutting the then 22p rate of income tax to 20p, disguising a tax hike for the poorest behind a modest cut in tax for those on middle incomes.

It is sneaky tactics like this that give people a false impression as to which parties are standing up for those who need tax relief the most. In this election campaign the Tories have sought to steal and build-upon one of the biggest Liberal Democrat successes in this government. Our policy of raising the personal allowance meant that almost all full time workers have seen their income tax bill cut by over £800 in this Parliament. It has also completely taken the lowest earners out of paying income tax. This was a policy that David Cameron said in the Leaders Debate in 2010 was unaffordable.

Let's leave to one side the fact that Cameron's manifesto also included tax give-aways to some pretty affluent people, including a proposal to raise the inheritance tax threshold so that people with net worth of rather a lot more than the vast majority of people could be passed on less expensively to their children. Let's also leave aside that the Lib Dems managed to block that proposal.

What the Tories are now doing is to try to deceive people again, but this time by stealing our policy, with an important caveat. Like the Liberal Democrats, they want to raise the personal allowance up to about £12,500 and keep it roughly in range of a full-time minimum wage income. Raising the personal allowance to £12,500 would save most full-time workers about £400 in tax over the next Parliament each year. The Lib Dems propose to do it slightly faster.

The important caveat, though, is that the Tories also want to raise the threshold at which the 40p rate kicks in. Their argument is that if we don't raise the threshold from when people earn about £42k up to about £50k, the effect of inflation will be to erode the incomes of middle earners: people like senior teachers.

On the face of it, this might seem instinctively a good idea. Most people don't consider someone who earns under £50k to be extremely rich or part of "the 1%". Most people probably aspire to get a job that pays around that to provide a good quality of life for their family.

But here are a number of reasons we should not do this. First, we should observe that this policy benefits people who, nationally speaking, are actually earning quite a lot. The median household income, according to the ONS, is between £23k and £24k. That means that half of all households earn less than this before tax. For the non-retired it is still only slightly above £25k.

So that's a reality check: people who earn more than £42k are earning almost twice as much as most households. This isn't to say that they are rich, but they are not poor by any definition either. If you earn £40k you are in the top 20% of earners in the UK and if you earn £60k you are in the top 10%, according to the Treasury's tax return figures. The top 20% of earners in this country are not poor.

Secondly, these people on salaries of £42-100k are still going to be benefitting from the rise in the personal allowance. They're going to be getting £400 back. What the Tories are proposing is to raise the 40p threshold to £50k. That means that, in addition to getting the tax cut that all the low earners get, the Tories want to give them another tax cut. They are potentially giving earners of £50k or more a tax cut of over £800. That's not protecting middle income earners; it's pandering to them.

When incomes are growing as slowly as they have been in the aftermath of the recession, you really have to ask who most needs that extra money in their pocket. They could have used that money to give a National Insurance cut to low-paid workers. They could have raised the personal allowance faster, or higher, or both, benefitting the bricklayer at least as much as if not more than the banker.

No one is suggesting that we should soak the rich just because we can. There are genuine arguments that can be made about the efficacy of high tax rates on tax revenue: that's why the IFS is sceptical that Labour's plan to reintroduce the 50p tax rate will actually raise any money. When we tax the super wealthy we should be looking at what is most effective at making them bear a fair share of the burden. Moral grandstanding that harms tax receipts just makes it harder to protect the vulnerable from welfare cuts, as Osborne's £13 billion cuts plan proves.

But there is no evidence that "fiscal drag" is particularly harming the top 20% of earners in our country. There is also no evidence to suggest that keeping the 40p threshold roughly where it is will cause a reduction in tax receipts by discouraging enterprise or making people leave the country. When times are tough, we should concentrate gains, where possible, towards those who most need that support. To do that, your tax policies should focus on the personal allowance and the threshold at which NI kicks in. It should not focus on providing a double tax-break to the richest 10% of households.

If this seems like a complex piece full of numbers, I don't apologise. We need the detail to be open and honest about the choices we face in this election. If you want a tax-cutting party that focuses on the many rather than the few, your choice is not the Tories. It is the Liberal Democrats.

This post was published and promoted by Graeme Cowie (Scottish Liberal Democrats) at Burnfield House, Burnfield Avenue, Giffnock, East Renfrewshire, G46 7LT. The views expressed are Graeme's and his alone and do not necessarily represent those of the Scottish Liberal Democrats.

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