It has become increasingly clear that the Conservative Party intends to fight the next election on a promise of a substantial increase in the threshold above which income tax becomes payable – possibly matching the Liberal Democrat pledge of £12,500. This will be presented as taking many of the lowest-paid in society out of tax altogether. But look at the proposal more closely and it doesn’t stand up. While a number of bloggers – like Duncan Weldon at the Touchstone blog and Gavin Kelly at the New Statesman – have written pieces pointing out why this proposal does nothing like what is claimed for it, it’s probably worth summarising the main issues briefly:
- It won’t make any difference to the lowest-paid 5 million workers in the UK, who fall below the existing tax threshold;
- No mention has been made of the threshold for National Insurance, which is £8000 and the coalition has only uprated with inflation;
- The cost of uprating will be £8bn; the vast majority of this will accrue to those on higher incomes, partly because there are far more households at the upper end of the income scale with two taxable incomes.
- It’s not often mentioned, but those on lower incomes pay a higher proportion of their incomes in indirect rather than direct taxes – for the third quintile (i.e. those in the middle – squeezed or otherwise) it’s still 17.3% of income in indirect taxation, 15.9% in direct taxation). But we know that increasing VAT is the Tories’ revenue-raiser of choice, especially if they are in a position to implement their fiscal plans for the next Parliament.
- For those on or near the tax threshold, many of the benefits of raising the threshold will be clawed back by the Universal Credit rules due to come into effect in 2017
In other words, the real beneficiaries of raising tax thresholds is not those on the lowest incomes, but households with incomes significantly above average; it’s a bung to the middle classes, which presumably is why the Tories and Liberal Democrats are so keen on it as a policy.
And it’s important to see this proposal in the context of Osborne’s commitment that a Conservative Government will have generated a surplus by the end of the next Parliament. That annual £8bn will have to be found from additional cuts – and given the way in which the multiplier works – and the removal of stabilising factors inherent in making the kind of cuts that meeting the surplus target will require – that could mean the equivalent of taking twice that out of the economy. The effects of trying to achieve a surplus already look devastating – as this excellent piece by blogger Flip Chart Rick argues persuasively – and this propsal will only make them far worse.
As Duncan Weldon reminds us in the Touchstone blog I mentioned above, the heart of the current cost-of-living crisis, and a fundamental cause of the weakness in the UK economy – is the problem of low and falling real pay. Increasing tax thresholds will do absolutely nothing to deal with that, and benefits the better-off. The need is for economic policy that addresses low pay – for example by increasing the minimum wage to the point where it becomes a living wage. It is dealing with low pay, not tinkering with the tax system, that will really benefit those on low incomes.
And on low pay, the Tory Party has absolutely nothing to offer (except more of it).