There is no doubt that today is a very good day for the Liberal Democrats. The party has delivered a major pledge from its 2010 manifesto, as this infographic from Mark Pack shows:
This is not an idea that fell out of the Orange Book. It came from Elizabeth Jewkes, an ordinary member. I wonder how she feels today. It goes to show that being a member of this party can give you opportunities to make a real difference to people’s lives.
To deliver on such a pledge a year early in the Age of Austerity is pretty good.
When we were discussing it amongst ourselves in LDV Towers, I asked what would happen next year. Mark Valladares, being the resident tax expert said it would increase by CPI in 2015-16.
That set off a small alarm bell in my head. Were tax threshold rises not protected by the Rooker Wise Amendment as I pointed out last December? It has to rise by RPI, not CPI. I know that the Government had put most things on a par with CPI, but I wasn’t sure about this.
So, our tax expert looked a bit further and found this:
Section 57, Income Tax Act 2007 required that the personal allowance be increased annually by the RPI for September
It appears we might have an as yet unremarked on switch from RPI to CPI for the future. What’s the difference? Well, it means that the tax threshold will rise by around 1% less than it would have done under RPI, unless Osborne is persuaded by Liberal Democrats to deliver another inflation busting increase. We know that Danny Alexander wants to deliver a tax threshold equivalent to the National Minimum Wage. As a party we should be looking for significant progress towards this. If not that, then maybe we should be looking at addressing some of the concerns Tony Greaves pointed out in this post a few weeks ago and deliver something for those on very low incomes who have already been taken out of tax so don’t benefit from future rises in the tax threshold and don’t get the benefit of a stepped increase every year.
This is something I will definitely raise with Danny Alexander in the members’ webinar tomorrow.
UPDATE: I asked Danny about this at the webinar, and in fact they didn’t sneak it in and hope we wouldn’t notice this year. We just weren’t eagle eyed enough two years ago. From the Budget Red Book of 2011:
2.31 Indexation of direct taxes – From April 2012 the default indexation assumption for all direct taxes including income tax, NICs, inheritance tax, capital gains tax and ISAs will move from the RPI to the CPI. The change will apply for each year from 2012-13 except where there are specific policy commitments to increase these by a different amount. (23)
* Caron Lindsay is Editor of Liberal Democrat Voice and blogs at Caron's Musings
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13 Comments
Can you also raise why the anomaly that means incomes of 100-113K are taxed at 60% was not addressed, when it will be addressed and, if there are no plans to do so, obviously with some other *graduated* tax measure to compensate, why this distortion is considered acceptable by Danny?
The graphic’s not bad at all. neither is the message. But the horrible weak semi-pastel colours.
Who are the “ordinary people” who have received a £700 tax cut? Most people don’t think of themselves as extraordinary, so does this mean we’ve all received a tax cut? (I haven’t)
And since it does not refer to any particular tax, am I to assume that “ordinary people” are £700 better off after including VAT, council tax, etc.?
Or is this just the sort of very misleading “information” that once upon a time we would have condemned labour or the conservatives for passing off.
Another thought on tax reduction: do we only describe tuition fees repayment as a ‘graduate tax’ when it suits us to justify it but not when we’re telling people we’ve cut their taxes?
Any further money would be better spent increasing the National Insurance thresholds, which people start paying at £7000-8000 (or even £5,725).
Peter, the ordinary people are those who earn below about £40,000 a year. From next April we’ll pay £700 less in income tax than we did in 2010.
@ Peter Watson
I’ve done more research. Had the personal allowance increased by RPI as envisaged by Section 57, Income Tax Act 2007, it would have been £7,285 for 2013/14 and, assuming that the RPI for September 2014 would be 2.5%, £7,475 for 2014/15.
Accordingly, the tax benefit for basic rate taxpayers would be £2,525 at 20%, or £505.
Interestingly, Alastair Darling effectively revoked the RPI linked by failing to increase the personal allowance in his 2010 budget. On that basis, the personal allowances enhanced for RPI in later years would have been £7,195 for 2013/14 and £7,375 for 2014/15.
On that basis, the tax benefit for basic rate taxpayers would be £2,625 at 20%, or £525.
To get a benefit of £700, you would have to assume that the personal allowance would not have been increased from its 2010/11 level, i.e. £6,475 (£3,525 at 20% is £705). So I wouldn’t claim the £700 figure myself, even if it is accurately calculated.
However, looking at the cumulative benefit, the total income tax saving for 2011/12 to 2014/15 for a basic rate taxpayer would be £1,348 (£790 at 20% in 2011/12, £1,080 at 20% in 2012/13, £2,245 at 20% in 2013/14 and £2,625 at 20% in 2014/15), which is pretty impressive, I would suggest.
So, in answer to your question, people aren’t really £700 per annum better off in terms of their income tax bill. And in terms of overall tax take, increased VAT does have an impact, although certainly not as much as the personal allowance increase does. Council tax is a bit of a red herring though, as rises have been at or below the rate of inflation (RPI or CPI) throughout.
The impact of benefit changes doesn’t apply until 2013/14, as they were linked to inflation until then, but that will have an effect on some taxpayers too. I’m not a welfare expert though, so somebody else is going to have to calculate the actual impact of those changes.
I would like to add that RPI actually overstates inflation because it uses the arithmetic mean rather than the geometric mean like the CPI. This may sound like jargon but being used to working with means I can tell you that the geometric one is the one we should be using for inflation.
I have just checked what the government has said about this and apparently they have introduced a new index this month called RPIJ, based on the geometric mean because RPI didn’t meet international standards. Perhaps we should ask why we don’t start using RPIJ?
Excellent point about inflation – it’s unlikely that the Tories will agree to our new minimum wage target, so lifting it at least with the higher level of inflation sounds like our main priority for this time next year.
Out of interest, I’ve heard several times that this policy was down to Elizabeth Jewkes, but I’ve never heard any explanation of why or in what way. Is this an example of an ordinary member’s motion winning through at Conference, or a Lib Dem urban myth? I’d be fascinated to hear if anyone has the truth. It’s certainly the truth that someone completely different is entirely to thank for making it the big Lib Dem priority (and sorry to disappoint you, but that someone wrote for The Orange Book. And The Green Book. And whatever the Social Liberal one in between was called).
Raising thresholds was briefly party policy in the 1990s, shortly after the 1992 election when the Lib Dems were first looking seriously at green taxes, then abandoned because it cost too much. As far as I know, it hadn’t been policy before, so if Elizabeth Jewkes had anything to do with it, that must have been when she moved a motion to persuade Conference to take it up? Or did she invent the idea for a thinktank? Or is this just someone with an idea that was already in wide circulation in the party trying to claim credit for it much later? I don’t know the source of the original policy, as it was a bit before my time.
Years later, I spent several years in the early 2000s on the Federal Policy Committee trying to persuade my fellow FPC members to go back to it, though with no success. So I can claim credit only for raising the issue and failing! FPC and different Lib Dem Shadow Chancellors constantly wrangled over NICs cuts, or VAT cuts, or income tax cuts (all less progressive than thresholds), and never actually made up our minds on what green taxes would be used to cut, which meant we actually went into the 2005 election with what I thought was a very dim Green Switch policy of clear tax rises and, er, we’ll get back to you on the tax cuts.
I realise he’s now an unperson, but as I wrote recently (http://loveandliberty.blogspot.co.uk/2013/02/eastleigh-memories-time-to-go-there-and.html), whoever came up with the policy in the mid-90s, the Liberal Democrats and the 26 million+ people who’ve had tax cuts as a result of our 2010 Manifesto have one man to thank.
It was Chris Huhne who made the issue his own in his first Leadership bid. I wasn’t a supporter, but strongly supported that policy of his at the time (http://loveandliberty.blogspot.co.uk/2006/02/chris-fill-in-person-not-policy.html), and it’s entirely thanks to him pushing this issue that it became party policy again after a decade’s lapse and became our flagship. Without Chris, none of that would have happened, so credit where it’s due.
For some reason, my links don’t appear clickable, so here’s another go at getting my html right:
My crediting Chris in historical context)
(Chris making this his main issue in 2006
The £10k policy has a rather convoluted provenance, even if we confine ourselves to policies put forward in the last Parliament.
The first of (at least) 3 different Lib Dem tax reform packages in the 2005-10 Parliament involved raising the personal allowance, as advocated in a consultation paper produced by the Federal Policy Committee in August 2005 (ie before the leadership contest in which Chris Huhne stood).
As the FPC working group chaired by Mike Williams argued in that consultation paper, ‘the simplest proposal to cut taxes would be to remove the lower 10p rate band, effectively reducing it to zero…’ It added that ‘a much more ambitious proposal could be to lift the tax threshold to the minimum wage level’ but pointed out that this would be extremely expensive in terms of the Exchequer cost.
So the policy that emerged was the first of the 2 options floated, ie raising the personal allowance to the upper limit of the 10p tax band, in the process scrapping the starting rate of tax by reducing it to zero. This involved lifting the PA from £5035 to £7185. In a policy that was more coherent and progressive than current Lib Dem policy, it also entailed a corresponding increase in the NI stating level to keep the thresholds aligned and deliver the maximum gains to low earners.
As it happens, the ‘economic competitiveness’ report produced by the Tories shortly afterwards also proposed lifting the personal allowance in the same manner, although it wasn’t adopted by their party leadership on the grounds that they weren’t keen to make commitments so early in opposition.
Curiously, the next iteration of Lib Dem tax policy just one year later dropped the plan to raise the personal allowance, on the rather odd grounds that Brown’s 2007 budget had moved the goalposts since he had scrapped the 10p tax rate anyway. He had indeed done so, but by doubling the tax liability of those in that band rather than cancelling it! The Lib Dem policy then became a 4p cut in the basic rate of income tax with no change to the personal allowance.
By the third tax reform package the original policy was back again, this time in it’s now-familiar guise of a £10,000 personal allowance; but with no NI element to it. It is this lacuna which the party should now turn it’s attention to, in my view.
Not for the first time, I despair of auto-correct/predictive text and its bloomin’ grocer’s apostrophes… (The two instances in my last para above)
@Mark Valladares Thanks for doing the calculations.
@Colin Green and thanks for the simplification.
So to check my understanding, …
“Ordinary people” are those who have an income which puts them solidly in the 20% band, benefiting from the raising of the personal tax allowance but not moved into the 40% band by the narrowing of the 20% band. Their income tax bill will be £700 less than it was in 2010, all other things being equal. Extraordinary people who earn less than £10000 have a smaller tax cut and those who earn less than £7000 have received no tax cut at all (because they had no tax to cut). Extraordinary people in the 40% band receive no tax cut unless they are extraordinary enough to benefit from the reduction of the 50% rate and get much more than £700. Meanwhile we all pay a bit more VAT on a few more things and university graduates will see bigger deductions from their pay, but that doesn’t count against a “tax cut”.
It begs the question, why don’t we all feel much better off?