Devils, details and the tax threshold beyond 2014

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:

Mark Pack graphic on tax pledge

 

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?

  • Tony Dawson 20th Mar '13 - 3:20pm

    The graphic’s not bad at all. neither is the message. But the horrible weak semi-pastel colours.

  • Peter Watson 20th Mar '13 - 3:35pm

    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.

  • Peter Watson 20th Mar '13 - 3:37pm

    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?

  • Adam Corlett 20th Mar '13 - 3:51pm

    Any further money would be better spent increasing the National Insurance thresholds, which people start paying at £7000-8000 (or even £5,725).

  • Eddie Sammon 20th Mar '13 - 5:04pm

    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?

  • Alex Sabine 20th Mar '13 - 8:57pm

    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.

  • Alex Sabine 21st Mar '13 - 1:40am

    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)

  • Peter Watson 21st Mar '13 - 11:58am

    @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?

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