56% of Lib Dem members say: let’s now ensure no-one on minimum wage pays any income tax

Lib Dem Voice polled our members-only forum recently to discover what Lib Dem members think of various political issues, the Coalition, and the performance of key party figures. Some 650 party members have responded, and we’re publishing the full results.

56% say: no income tax for anyone paid less than the minimum wage

In 2010, the Lib Dems pledged to increase the personal income tax allowance to £10,000, cutting the tax bills of low- and middle-income earners. Which of the following personal taxation policies, if any, would you most like to see the party campaigning on at the next election?

    6% – Re-introduce a 10p tax band for taxpayers above the current income tax threshold (due to rise to £10k by the end of this parliament)

    56% – Extend the income tax threshold so that no-one paid less than the minimum wage (currently £12.5k a year) pays income tax

    26% – Increase the point at which employees pay National Insurance Contributions (currently £7,748) so the lowest paid pay no personal taxes

    7% – No further tax cuts: it is more important to reduce the cuts to public spending

    4% – Other

The strong preference of Lib Dem members is for the party — now it has secured the Coalition’s commitment to raising the income tax threshold to £10,000 — to go further still, ensuring no-one on the minimum wage pays any income tax: a majority (56%) backs what is current party policy. Just over one-quarter (26%) of party members, however, favour turning our attention next to the rate at which another direct personal tax, national insurance, is levied on the low-paid and lifting that threshold to help the lowest-paid. A small minority of party members (6%) back Labour’s new policy of introducing a new 10p tax rate for those earning more than £10k. And a small minority too (7%) reject any further tax-cuts, preferring instead to focus on reducing the current cuts to public spending.

I’ve made my own view clear before: if our liberal view of taxes is guided by fairness, we need to focus on the lowest-paid. To raise the income tax threshold further may be savvy politics, helping entrench in the public’s mind the Lib Dem identity with the progressive tax-cuts we’ve achieved to date, but it makes little sense in delivering social justice. It’s clear from the budget that the lowest income groups have suffered most from the cumulative tax-and-benefit changes brought in this parliament. (You can read my verdict on this here.). That’s sadly unsurprising in a recession. What’s important is that we as liberals re-double our efforts to help redress the impact that the economic downturn is having on the poorest in society.

Here’s a sample of your views…

I object to paying taxes on my near minimum wage income so that big business can be subsidised by the government who have to pay out benefits to some of my colleagues to enable them to pay for their housing costs and to buy food for their family.

What’s the point of trumpeting the £600 tax saving measures to low income earners when the threshold is really around £7,500 pa because of N.I. contributions?

WE should be seen as the low tax party. Future growth in the economy should go towards tax cuts not increasing public spending

Need to integrate tax and means-tested benefits to ensure that marginal rates are less than 50% for all taxpayers.

Whilst NI and IT remain separate, I’m relaxed about lower threshold for NI – on basis not perceived as a tax, has other associated benefits, and means those outside IT still make a small social contribution.

to be fair we must find ways of taxing the wealthy more effectively as they do not generally get income through PAYEE employment.

Despite choosing the income tax threshold, we should look at NI as well. However, that is more complicated since it involves reassessing the role of the contributory principle in our welfare system, which is a far broader issue – though one which also deserves attention.

You should only consider raising the tax thresholds if you are not cutting benefits.

0p tax rate infinitely better than 10p. However National Insurance needs addressing too.

I would prefer no-one should pay tax until they are earning at least a living wage. The minimum wage is not enough to live on in most areas.

NICs are a less visible tax than income tax so it is less easily noticed if the threshold is raised.

As imperfect as it now is, I think it is healthy that even low earners feel that they make a contribution to the safety net which they, like eveurone else, can benefit from. I don’t think it is obviously desirable to create an “underclass” who pay no direct taxes at all. I would rather keep NI as the baseline contribution, and continue raising the IT allowance.

I would like to see assets not income taxed. Too many overseas property investors getting away with speculation and inflating house prices.

Though I support raising the threshold to the minimum wages, this is very expensive. I also think because NI is seen as paying for pensions and benefits, it helps people for a sense of social engagement so should a) be retained as a separate tax and b) the threshold for paying NI should not be raised.

I expect to lose 60 per cent of my income in the next few months so any changes to thresholds will do nothing for me then. This really does nothing for the very lowest earners.

The problem is for those paid below the tax allowance level and are those who suffering from the removal of benefits, the bedroom tax, cost of living and indirect tax rises.

Reducing cuts to benefits and public services, then NI (ideally supporting merging of NI and income tax and removing the insurance model)

No further tax cuts (as the main priority) when there is vital capital investment needed -in social housing for example. The low end tax cuts are not enough to allow the low paid to buy/rent in the over priced private housing sector.

Balance tax cuts with more taxes on immovable wealth, e.g. Land Value Tax

I would like to see the income tax threshold increase to 12.5K a year AND increase the threshold for employee NI. In fact I’d like us to propose unifying them and making the bands more progressive.

I want to combine NI and income tax and abolish both for those working on the minimum wage. Spending cuts are vital though.

Merge NIC and tax, a meaningless and costly distinction that no longer serves a purpose, creates extra work for business, extra govt admin.

You could merge both which would be an honest and distinctive policy and we wouldn’t have this reduce tax increase NIC malarkey, it would also save a fortune in collection and administration

It’s one of the easiest policies to understand and enjoys a lot of support.

I would also like to see the NI threshold raised in conjunction with a raised IT threshold – Perhaps aspirationally over the next parliament £12.5k IT / £10k NI

Restore the differential in personal allowance for the over 65′s. we have the lowest pension in the developed world, and it is still taxable!

A minimum wage should be exactly that – the minimum the state believes it is necessary to earn each hour in order to be self-supporting as a working citizen. Changing the tax allowance to reflect this will, of course, mean that the minimum wage itself may be adjusted to meet this definition.

Announce a long term commitment to introducing LVT, increasing taxes on wealth in the form of property in the interim, and raising the thresholds for NIC and income tax to the minimum wage over an affordable period. The latter to be partly paid for by the introduction of a 30% tax rate which could ease the step from 20% to 40% for middle earners.

Personally I’d like to see the 50% tax returned, but unlikely under coalition (and Wish Labour wouldn’t be so opportunistic seeing how 50% was a VERY late policy change for them

Income tax cuts & threshold increases do not benefit those whose income is insufficient to reach these levels We must also see that those unable to work for whatever reason and those working part-time in low paid jobs do not continue to fall behind even the lowest paid full time workers.

Any of the first three are interesting. What’s important is that tax continues from the bottom up. Also work on reducing tax relief for pensions amongst the highly paid. If they’re not going to help us spend our way out of trouble take it off them.

While it is tempting to lift the NI threshold, IMHO it’s important to retain a contributory principle – avoids a ‘free ride’ but brings with it an ‘entitlement’ mind set.

Ideally NI should be the target for cuts, but bringing the income tax allowance up to full time minimum wage level is fine and politically more expedient.

Focus should now be on VAT and getting that down within a policy of continuing to cut the deficit.

Merge income tax and NI – be honest!

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  • * Stephen Tall is Co-Editor of Liberal Democrat Voice, and editor of the 2013 publication, The Coalition and Beyond: Liberal Reforms for the Decade Ahead. He is also a Research Associate for the liberal think-tank CentreForum and writes at his own site, The Collected Stephen Tall.

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    7 Comments

    • Merging NI and Income Tax seems to be a fairly popular option that wasn’t offered from the comments shown. Personally I feel it adds an unnecessary complication to the tax system, but what are the arguments for keeping it separated?

    • robert sayer 21st Mar '13 - 1:45pm

      in answer to James question, I would agree that comment from unknown contributor that it is necessary to have NI because it enables people to connect with a pension contribution. and if tax threshold is raised to 12.5k then that appears best way forward

    • Adam Corlett 21st Mar '13 - 2:29pm

      We need to be very careful about the personal allowance policy (now that we’ve done what our last manifesto promised). No doubt members like it, it polls well, taxing the minimum wage seems silly, and it’s a good thing for those affected. But it’s an amazingly ineffective way of directing money at those on low incomes. We talk about low or middle income earners, but really it means giving every worker (not every person) in the country the same tax cut. Raising it further does not benefit those already below the threshold and disproportionately benefits richer households as they are more likely to have two people in work. What’s more, tax cuts will be withdrawn from households on Universal Credit at a rate of 65%, and the new childcare proposals may exclude those earning below the personal allowance. 75% of yesterday’s announced increase to £10,000 goes to the top half of households. Around half the money spent on this policy so far has gone to the top 30%. If we move to the minimum wage, it looks like 80% or more of the cost would go to the top half of society.

      The key question is how it’s funded. If it’s funded by cuts to tax credits, for example, it’s a staggeringly regressive and misleading move. If it’s funded through an increase in rates, or clamping down on tax avoidance, it can be targeted at those on low incomes. And of course even if we have an overall progressive package in our manifesto, we don’t end up doing the tax cut without the equitable measures to fund it.

      The timing is also strange. This big tax cut might be something you’d want to do in the boom years, but it is odd to be banging on about a £10bn tax cut – that goes mostly to richer households – at the same time as proclaiming the urgency of tackling our £120bn deficit and the inevitability of welfare cuts.

    • Adam Corlett 21st Mar '13 - 3:12pm

      Increasing the National Insurance thresholds is definitely a better policy choice than further increasing the Personal Allowance, as the IFS and everyone else have said. It suffers the same problems I describe above but is a little more progressive. There are plenty of people earning between £7,605 and £10,000 (over a million) who we’d be unnecessarily ignoring by choosing the PA.

      It needs to be stressed that increasing these NI thresholds doesn’t affect eligibility for the state pension or other benefits. They are dealt with by a different threshold!

      We risk hypocrisy. We can’t attack the 10p policy if we’re implying that it’s a good idea to keep the 12p rate we have (employee NI, ignoring employer for now).

      As a liberal party, we should also care about not deceiving citizens. We shouldn’t tax people at 13.8% on the employer side and 12% on the employee side and then try to assure them they’re not paying any tax. Shifting the burden from “income tax” to “National Insurance” over the years has simply made the system less progressive but much harder to see.

      To that end, raising the National Insurance thresholds to £10,000 too would make the tax system much more sensible and easier to understand.

      —-

      It would also be a big help if we wanted to merge NICs and income tax (as we should). To address James’s question, arguments against a proper merger are:
      1) pensioners, the self-employed, landlords, investors etc. would have to start paying NI on those incomes <- But they wouldn't – we could still have lower rates for pensioners, for example.
      2) we'd need a slightly different way to determine state pension etc. eligibility. <- Fortunately we have a perfectly-good income tax system that can do that (again, even if you earn below the allowance).
      3) it would mean higher headline tax rates, which might affect behaviour. <- But the actual rates would be unchanged – it would just be far more transparent.
      4) the switch would, like any change, be a little disruptive <- But I'm sure the UK's businesses want a simpler tax system and so would be very supportive
      4) it would mean higher headline tax rates, which might allow the political opposition to stoke confusion and make unjustified attacks, especially given public perception of what NI does. <-This is probably true (though the retort would be that the opposition are deliberately trying to deceive).
      5) there's no political gain to be made. <- Possibly true.

      In short, the barrier is political timidity.

    • Stephen Donnelly 21st Mar '13 - 9:34pm

      Stephen Tall : “I’ve made my own view clear before: if our liberal view of taxes is guided by fairness, we need to focus on the lowest-paid.”

      Yes, I agree, but this does not mean that we should not increase the tax threshold. Increasing the tax threshold (and looking at the NI threshold) should be part of a balanced strategy.

    • Liberal Neil 22nd Mar '13 - 4:09pm

      @Adam Corlett – while it is true that a large proportion of the income tax cuts goes to households on above average incomes, it is also true that a household with two people each earning £15K a year is an ‘above average household’. In reality about 85% of households are actually on fairly modest incomes for whom a few hundred more quid a year makes quite a difference.

      @robert sayer – it is true that NI used to connect you with a contribution to your state pension. now that the Government is moving towards a flat rate pension that isn’t really relevant any more.

    • “I’ve made my own view clear before: if our liberal view of taxes is guided by fairness, we need to focus on the lowest-paid. To raise the income tax threshold further may be savvy politics, helping entrench in the public’s mind the Lib Dem identity with the progressive tax-cuts we’ve achieved to date, but it makes little sense in delivering social justice.”

      Absolutely. But that makes it even stranger that this question should have been asked in such a tendentious way – giving the impression that the benefit would go to the low-paid. In fact, those earning under £10,000 wouldn’t benefit at all, and those earning under £12,500 would benefit – in cash terms – less than those on higher incomes.

      It would be interesting to see how many supported this option if it was phrased as:
      “Take those on less than £12,500 a year out of income tax, and give a £500 tax reduction to all basic-rate taxpayers on more than £12,500 a year.”

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