The limitations of raising tax thresholds
October 2, 2014
Taking the lowest paid out of income tax entirely was a policy brought uniquely to the table by the Liberal Democrats in 2010…or so the junior coalitionists would have the British public believe.
The truth is a little more nuanced. My own constituency election address as far back as 2005 asserted an aspiration that no one earning less than £10,000 a year should be caught in the income tax net. After all, £200 a week is scarcely a King’s ransom if you are working in central London. I know several other Tory candidates in the Capital and beyond who made similar pledges.
I should confess that when I sought to repeat this pledge in my 2010 election address, I received a discreet call from CCHQ as we were about to go to press, asking me to rehash the wording. At that time we hoped to expose the Liberal Democrats for having this as an uncosted promise in their manifesto. Four weeks later the coalition had been formed and, hey presto, taking the low paid out of income tax was now firm coalition government policy!
No one denies that at a time of extended austerity this policy has proved popular. Putting the squabbling as to which coalition party deserves most credit for its implementation to one side, the real question now is the extent to which this policy should be extended into the future. The Prime Minister made his own views clear on Wednesday as he brought Conservative Party Conference to a triumphant close, declaring that a majority Conservative government would extend the personal allowance to £12,500.
It is sensible and exciting politics and I know many Conservative activists will be only too delighted to have clear daylight between our own approach and that of the Labour Party. Meanwhile, I was pleased to see that the increase in the personal allowance would be delivered only once the structural budget deficit has been eliminated. It is this kind of ‘forward guidance’ that I had advocated earlier this year when I suggested (read here) we make clear that once progress on reducing the deficit breaks past a certain point, a series of tax cuts kicks in. That way, the electorate would know full well that while our priority is stability, our ultimate aim is a low tax, competitive economy.
But economically, how far can and should this policy be stretched?
What is crystal clear is that the raison d’être for creating the coalition, namely eliminating the deficit within the five year fixed term of this parliament, has not even come close to being achieved. Indeed we are only two-fifths of the way there and, as we know, substantial ongoing reductions in public spending will be necessary for several years to come if the UK’s public finances are to be brought under control.
This bleak backdrop will also require some serious action to ensure the tax take is boosted. All the initiatives to clamp down on tax avoidance (aggressive or otherwise) can only achieve so much. Essentially any future UK government will need to be mindful of the requirement to maintain as large a tax base as possible. Today there are more Britons in work than ever before. That is a positive first step, but Conservatives should be determined to encourage as many in the workplace as possible to favour low rates of taxation. To put it bluntly, those earning below the threshold at which income tax kicks in have little incentive to support lower rates for those paying it. The larger that group the more difficult it will be for us as Conservatives to make a convincing, credible, widely appealing case for lower taxes.
We should also bear in mind precisely how this pledge has been funded so far. While all taxpayers have benefited as the personal allowance has steadily risen to £10,000 (soon to be £10,500), the level of earnings above the personal allowance at which the 40% higher rate kicks in has decreased from £37,401 in 2010/11 to £31,866 in 2014/15. This has been creating a significant disincentive for lower to middle income earners to strive for higher salaries, and placing an ever greater tax burden on a group of people that is far less likely than a low earner to qualify for any state support. I am glad to see the Prime Minister acknowledge this by complementing his announcement on the personal allowance with a pledge to raise the threshold at which the 40% tax rate is paid to £50 000 by 2020. But it will be a tough deadline to meet, for all the reasons I have outlined.
As we shall see, ‘soak the rich’ is likely to be the watchword for all our political opponents at the forthcoming election. UKIP will seek to clobber non-UK nationals, whilst the Liberal Democrats are already lining up menacingly with Labour to push for a so-called Mansion Tax on homeowners as well as more punitive levies on banks and bankers.
Understandably Conservatives wish to take a fair share of the credit for taking the poorest out of income tax and trying to address the poverty trap. However, by releasing ever more employees from the burdens of paying any income tax, we risk legitimising the politics of envy. We also shrink the tax base substantially, making our income tax take (which makes up over a quarter of government revenues) ever more dependent on smaller groups of taxpayers. Let us not forget that the top one percent UK earners already pays nearly a third of all income taxes.
A full throttled pursuit of class war rhetoric cannot ever be a vote winner for our Party, especially at a time when we are widely (mis)characterised as being solely on the side of the rich and powerful.