The graph which shows why the Lib Dem policy of raising the personal allowance is the wrong priority

Here’s a graph which should make Lib Dems who continue to advocate increasing the personal allowance as an effective way to help low- and middle-income earners sit up and pay attention.

It’s from the Resolution Foundation’s report, Missing the target: tax cuts and low to middle income Britain, published yesterday.

What it shows is which households gain from the party’s policy to increase the threshold at which income tax is payable to £12,500 over the course of the next parliament. As you can see, those households which benefit most are at the wealthier end of the spectrum; the poorest 20% benefit least.

res fdn tax cuts lib dem graph 1

The Lib Dem policy is estimated to cost some £5 billion. Very little of this cash will actually benefit the least well-off. The Resolution Foundation calculates that, for every £1 spent on raising the personal allowance, just 25p will benefit the bottom 50%. The wealthiest 20% will do better: they’ll get the equivalent of 31p of each £1 spent.

As our modelling (Figure 3) shows, the cash gains from the Liberal Democrat proposal are concentrated in the top half of the income distribution (the biggest proportional gains come in the seventh decile). As we will see in relation to all the parties’ plans, those already below the personal allowance (including those taken out of income tax over the course of the current parliament) don’t gain at all.

Similarly, those set to be taken out of income tax over the course of the next parliament by the above inflation increases in the allowance only receive part of the tax cut. Again a common distributional issue faced by all the parties is that, at a household level, two earner families tend to be richer and gain twice over from income tax cuts, while single earners – regardless of family size – gain only once.

So what should we as Lib Dems be making a priority if we want to cut taxes in a way which is progressive?

Well, the answer is very straightforward. As I first wrote here in February 2013: Focus next on National Insurance Contributions (NICs) – NOT the income tax threshold.

An estimated 1.2 million workers will be paying employee NI from April 2015 (expected to start at just over £8,000) but will be earning too little to pay income tax. Before further increases to the personal allowance, we should be ensuring we take that group out of personal tax altogether.

To be fair, the Lib Dem leadership has partially recognised the issue. In the summer, Danny Alexander announced that, once the £12,500 personal allowance threshold was reached, the party would then look to raise the NI threshold too, and align them.

But there’s two problems with this approach.

First, it’s the wrong way around. As the Resolution Foundation neatly puts it, ‘The logic of this tax-cut sequencing can be questioned. It seems to be to reduce taxes for everyone in the country earning between £10,500 and £121,000 before, at some later date, turning to help those earning as little as £8,000.’

Secondly, it’s completely unaffordable. Raising the personal allowance (£5bn) is going to be challenging enough given the financial constraints that any government will face in the next parliament. To pretend we could then afford a further £9bn (the estimated cost of increasing the NI threshold) is either delusional or dishonest. Frankly, neither’s a good look.

PS: I spoke yesterday (alongside The Times’s Tim Montgomerie and The Guardian’s Polly Toynbee) at the Resolution Foundation event, Tax cuts in tough times, which launched their publication. You can read what I had to say over at my blog here.

* Stephen was Editor (and Co-Editor) of Liberal Democrat Voice from 2007 to 2015, and writes at The Collected Stephen Tall.

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  • Liberal Neil 2nd Dec '14 - 8:07am

    I happen to agree with you that raising NI thresholds should be the first priority. In fact I’d go further and merge Income Tax and NI with a higher basic allowance and more progressive banding.

    Saying that, I think you need to be a little cautious about this chart.

    1. The chart is in income deciles. The actual distribution of income is not in neat deciles. People are not, in the main, what would generally be considered ‘well off’ in the first 8 deciles. Then incomes rise with those in the 9th decile being generally well off and those in the top decile rich or very rich;

    2. As you point out, two earner households have higher incomes than single earner households. But they also are most likely to be bringing up children and have higher costs;

    3. At the higher end a lot depends on what you do with the higher rate threshold;

    4. This isn’t the only policy. Others have a lot of impact too, and other tax measures have generally, and rightly, hit the rich.

  • Tony Dawson 2nd Dec '14 - 8:13am

    Merging the now completely fraudulent NI with Income Tax would help us all by getting rid of bureaucratic duplication. But the basis of this graph is very silly.

    Poorest people gain least in cash terms from a process which raises a tax threshold because they are the poorest people. Show the same graph with ‘percentage increase over mean income in decile’ instead of ‘cash gain’ and you will get a very different story.

    If you want to squeeze differentials, then say so. It’s difficult to do effectively other than by a form of ‘negative income tax’.

  • Alisdair Calder McGregor 2nd Dec '14 - 8:16am

    This is not an either/or choice – we can & should do both.

    In fact, we should go further than this, and not only eliminate all income tax & employees national insurance contributions up to the level of the full-time national minimum wage, but we should also eliminate the employers national insurance contributions on NMW as well, and raise the NMW to the point where the cost to the employer is the same.

    The reason for this, as I have pointed out before on this website (, is that by removing all tax on what the employer pays & the employee receives, you can achieve the same takehome pay as the “living wage”, simply by having the government intervene LESS rather than more.

    This can only be considered a good thing. Employers have the same outgoings (thus, not risking job creation or retention), employees get the same takehome pay as the living wage (thus addressing poverty).

    The downside? The Exchequer gets less tax. But you know what? I’m fine with that, because there’s no moral justification for the government taking money from the poor in tax. Government needs to get used to having less money anyway.

    It doesn’t matter if it’s titled national insurance or income tax, we as Liberals should stand up & SHOUT that we believe the government can best serve the working poor by taking less money off them.

  • Tony Dawson 2nd Dec '14 - 8:36am

    Whoops! I commented without looking at the blue line.

    The ONS figures say that the top decile’s disposable income is on average roughly nine times that of the bottom decile (many might doubt that this ‘gap’ is really so small) and the annual cash gain as a result of raising the basic tax threshold (from the yellow graph) for the top decile is eleven times higher than that for the lowest decile. On these figures, the percentage gain of the top decile to be roughly 50 per cent more than it is for the bottom decile, This can only happen if the ‘cut-in’ levels of higher tax bands are also raised, which is a deliberate choice.

  • Denis Mollison 2nd Dec '14 - 8:46am

    The elephant in the room is that no-one’s prepared to discuss putting up the basic rate of income tax. I can remember when it was well over 30% (1980s?), but it’s been all reductions since then, and it’s a long time since any party advocated increasing it significantly. [I know there have been several suggestions of adding 1% but even they haven’t been implemented.]

    Raising the allowance from 10 to 12.5 K could be paid for by raising the basic rate to around 24 % by my calculations, still modest compared with the rate in the 1980s. With that tradeoff, those on less than 25 K would pay less income tax, those above would pay more.

    But I would also agree that integrating income tax and National Insurance is a higher priority. The problem there seems to be that politicians don’t want to admit that the real basic rate of income tax for workers is 32 % not 20 %.
    On the plus side, once your realise that, it doesn’t seem so unreasonable to have a top rate of 50 %.

    If we think these reforms – i.e. raising income tax and NI thresholds to (ideally) the living wage – imply an unacceptably high standard rate, we need to discuss what other taxes we could raise. There is considerable support for higher property taxes, or a land tax; I would go for high carbon and/or energy taxes – given the problems of climate change I find i bizarre that the main parties have a consensus position of subsidising energy consumption.

  • Simon McGrath 2nd Dec '14 - 8:47am

    @Geoffrey – you wanting to increase tax and the size of the state is just as ideological and political as those who want to do the opposite.

  • Malcolm Todd 2nd Dec '14 - 9:16am

    “the state should be whatever size it needs to be to reduce and eliminate poverty”

    That right there is an ideological statement. It happens to be one I’d support (though of course it’s not the only valid purpose of the state, in my view at least), but it’s none the less ideological for that.

  • I find myself totally disagreeing with Stephen because of the evidence he himself presents!

    The evidence he presents shows that raising the personal tax threshold effectively did nothing for the poorest 20%, who as others have pointed out on previous LDV articles often don’t earn more than the personal allowance. So given that NI is effectively an income tax , for those earning below it’s upper threshold – the majority of tax payers, I see no evidence that raising it’s threshold will have any different effect to that seen with income tax.

    No if we really want to get more money into the pockets of the lowest 20%, I suggest the best approach is to reform the Tax Credit system so that it actually works for tax payers ie. it actually becomes integrated into the tax system rather than be treated as welfare, unlike the current welfare-based system and all it’s capricious rules.

  • Robin Bennett 2nd Dec '14 - 10:03am

    This useful article is of particular interest at this time as the Smith Commission has proposed that the power to set Income Tax rates and thresholds be devolved for non-savings and non-dividend income , but (without reason given) the personal allowance is to remain reserved to Westminster. The SNP have already highlighted this, and the reservation of National Insurance.

  • Steve Comer 2nd Dec '14 - 10:45am

    Who are the ‘Resolution Foundation?’ Is it another in the crowded field of Labour-ish think tanks?

    I agree with Geoff Payne, we need to look at what we need to do to eliminate poverty as well as repairing the budget deficit. The problem with Tory ‘Osborneomics’ is the assumption that you can fix the deficit by putting all the burden on those of working age at the very time we have an ageing population living longer, and with more expensive long-term care needs!

    And why is it when people talk of ‘tax’ they really mean ‘income tax & NHI?’
    Have we taken a serious look at the recent history of VAT? Labour reduced it temporarily from 17.5% to 15% as a ‘stimulus measure.’ How much did that benefit the economy? Not much I think. The Coalition then pulled the classic trick of increasing VAT during a recession (to 20%), and as predicted the effect of the increase was dampened as retailers cut margins.

    And what about the scope of VAT?
    Does it make any sense that The Sun and the Daily Mail are zero rated, but the works of Shakespeare or Tolstoy in ebook or talking book format are liable to VAT?
    Does it make sense that food and drink in a pub or cafe carries 20% VAT, but bargain booze in a Supermarket can in effect be loss leaders cross subsidised by revenue from zero rated food sales? Much of what is currently zero rated for VAT (except perhaps food) could be moved onto the 5% lower rate. Mildly inflationary in the short term of course, but in the long term there would be revenue benefits.
    The Accountancy minefield that is exemption and partial exemption (eg insurance or commercial rents) is also in need of a complete overhaul.

    Property Tax is another area. Labour seem to have stolen Vince Cable’s Mansion Tax idea, but the whole area needs a look. A Council Tax system based on 1991 valuations is increasingly ridiculous. We need to look at the balance between land taxes and taxation as a whole, but I’ll leave that to those in ALTER who understand this better than I do.

    Most of all we need a grown up conversation with the electorate about the balance between the need to fund public services and infrastructure, the cost of that, and the balance of taxation needed to achieve it. My experience tells me that ordinary people understand this fundamental issue far better than most MPs.

  • There needs to be some political honesty here. We have a public deficit of £100bn. All the parties are committed to eliminating it fairly quickly, say 3-4 years. We have had 5 years of austerity in which all the low hanging fruit has been picked away. So we face a choice. Either we raise taxes or we eviscerate public services. Te Lib Dems should be clear about this and what side they are on.

  • David Allen 2nd Dec '14 - 11:12am

    “Who are the ‘Resolution Foundation?’ Is it another in the crowded field of Labour-ish think tanks?”

    Well, a quick look at their publication shows that they criticise all the parties. All the parties are offering tax cuts toward the bottom end of the income range. All these proposals are actually shown to provide most benefit to higher income earners. For what it’s worth, RF think that Labour’s and the Lib Dems’ plans are not quite as appallingly regressive than the Tories’ and UKIP’s.

    However, all the parties seem to know which side their bread is buttered on. You get your votes from the old and you get your dosh from rich business. So if you’re in politics, those are the people to pander to. And if you can do that in a disguised way, which purports to be helping the poor even though it isn’t, that’s even better!

  • Mark Seaman 2nd Dec '14 - 11:45am

    The report does not seem to make any allowance for the possibility that the higher rate tax bracket would be lowered to ensure that all/some of the increase in the basic tax allowance was not received by higher rate tax payers.
    This was done with some of the increases in the Personal tax allowance during this government, and so could be done again. If so, then the benefits of any increase would not follow the chart shown.
    Increases in the NI threshold are the better way forward however.

  • Cara Jenkinson 2nd Dec '14 - 11:50am

    Stephen, I’ve had my doubts about this policy too. For the low paid, gains from the raising of the tax threshold get offset in large part by reductions in in-work benefits.

  • Alex Sabine 2nd Dec '14 - 12:06pm

    I agree with Stephen: raising the National Insurance thresholds would be a better policy priority at this time. One reason is that it would do more to help those with modest incomes; indeed it is clearly the most effective way the direct tax system can help the low-to-middle part of the household income distribution and individuals with low or irregular income.

    Another point in its favour is that, since it applies specifically to earnings rather than other sources of income, it does more to improve work incentives and more to help workers specifically compared to an increase in the income tax personal allowance. Or, to put it another way, it reduces the extent to which earnings are taxed more heavily than other forms of income, and in a way which incentivises the former rather than penalises the latter.

    If the NI thresholds were raised to the same level as the income tax personal allowance, these could then be realigned which would simplify the tax system and make for a clearer and more logical marginal rate structure through the income scale. Along with changes to the tax base for NI, it could be the precursor to a proper integration of the two separate systems and the eventual abolition of NI as a separate tax.

    The big problem for this and other broad-based tax cuts (like raising the personal allowance, cutting the rate of income tax or NI or cutting the rate of VAT) is that it they are very ‘expensive’ in terms of revenue at a time when tax receipts are anyway falling short of projections. By contrast, the likes of the mansion tax (whatever its merits or demerits, and I am unpersuaded) are expected to make only a marginal contribution to replenishing the coffers (and a highly uncertain one at that, given the likely ripple effects on the housing market and other associated revenue streams).

    But if you must have one big-ticket tax-cutting policy to offer at the next election, higher NI thresholds would be a much better bet. I certainly don’t buy this idea that the Lib Dems would raise the PA and then find the spare change (!) to hike the NI thresholds for good measure.

  • On this issue it all depends on the starting point. If the given premise is a reduction in income tax, then there is no doubt that an increase in the starting threshold is better than reducing the tax rate or raising the threshold for the higher bands.

    Of course, we do not have to accept the premise: in effect the National Insurance is also an income tax, those who say this will not agree that the threshold has been entirely raised; they have a point. If the objective is simply how to give out money, there are simple answers, which may however, have unacceptable economic and political consequences.

  • The only thing I would say is that if significant numbers of people in work are no longer paying NI, what is the point of it? Presumably that won’t affect their entitlements, so it might as well be moulded with income tax.

  • Peter Andrews 2nd Dec '14 - 12:25pm

    I completely agree that increasing the NI threshold should be the priority I would also be happy for the basic rate of income tax to rise in order to pay for this as i don;t believe we are in a position to offer unfunded tax cuts if we are to continue to reduce the structural deficit.

  • I don’t think there’s been a single comment in favour of the party’s flagship tax policy so far. And quite right too. We’re playing our 2010 Greatest Hits album in the hope that it’ll top the charts in 2015. But the world has moved on.

    It’s been a good policy so far – but increasing to £12,500 is barely affordable, and is a great middle-class tax break. How many of the people at the top of the party really understand how tax credits top up the incomes of people on low wages? NI is clearly more fertile territory.

    But talking about tax cuts is a bit of a joke given the tax rises and spending cuts needed. Sooner or later, probably next June, the Prime Minister will be preparing to tell the scrounging 65-75 year olds that we can’t afford their perks, the London intellegensia that their mansions will be tax, and the middle classes all about new tax rises. All our leaders have shown cowardice (in Ed Miliband’s case vs. Myleene Klass, with a generous dose of incompetence) in squaring this with the public. So all hell will break loose when they have to.

  • Geoffrey Payne 2nd Dec '14 - 1:28pm

    Ok Malcomn Todd. To clarify further I am not ideological about what size the state should be, but I am on the need to reduce and eliminate poverty, since the ideology I have signed up for; Liberalism has that as a requirement. Or at least the British version of it as defined in the preamble of the Lib Dem constitution. That same preamble does not specify what size the state should be.

  • Geoffrey Payne 2nd Dec '14 - 1:29pm

    I think where ideology becomes a problem is where it relies on faith and ignores evidence that does not support that faith.

  • In his speech to the Resolution Foundation, Stephen Tall comes to this conclusion —
    “……After 2015 one of four things will have to happen. Either —
    (1) big, additional cuts to spending on public services;
    (2) big cuts to social security;
    (3) delaying deficit reduction to postpone the problem;
    or (4) raising taxes – and not just on the rich because there simply aren’t enough of them.
    Most likely it’ll be a pick ‘n mix of all four. ”

    So the next government when it is engaging in “pick’n’mix” does not have to make “big cuts in social security” – it could make other cuts instead.
    You do not have to be “thinking outside the box” to recognise that “(2) big cuts to social security” has been highlighted in Stephen’s lost rather than any other area of government expenditure.
    Why not for example “big cuts to nuclear weaponry” ?
    Or why not big cuts to “the Duchy of Cornwall and the Duchy of Lancaster” ? There are opportunities for sell offs, out-sourcing, privatisation of the millions ofmpounds of expenditure that make up Prince Charles’ pocket money. Does the royal family really need 28 palaces and country estates dotted around the UK?
    Or why not “big cuts to foreign military adventures” ? How have we been able to afford to allow Cameron and Hague to play Biggles over Libya, Iraq and Afghanistan during the last five years?

    My point is simply that this sort of discussion about cuts usually just scratches the surface. 70% of government expenditure is never even considered when it comes to cuts.
    Why cut things that the Westminster Bubble like when you can load all the cuts on the poor?
    After all, most of the poor live a long way from Westminster.

  • Alex Sabine 2nd Dec '14 - 2:13pm

    Geoffrey – That’s fair enough, although the empirical evidence for a causal relationship between the size of the state and the elimination of poverty is pretty scant. And if the means to eliminate poverty is a larger state, then presumably there is no upper limit on how large it should be? Roy Jenkins cited his rejection of this idea as one of his reasons for leaving the Labour Party in the early 1980s, claiming that too big a state threatened a plural society.

    Equally, those (like me) who instinctively favour a somewhat smaller state, and do not believe that to be inconsistent with reducing poverty, do not take an ‘ideological’ view on what precise size it should be. I also think that how the state spends the very large amounts it already has at its disposal (and indeed how it raises that money) is at least as important as how much it spends.

    One of the interesting things about the ‘austerity’ phase we are going through at the moment, for example, is the striking change in what the state is spending taxpayers’ money on – less on the traditional ‘core’ functions of defence and policing, ever growing chunks on healthcare and pensions.

    Of course this is not unique to the UK – it is partly a function of demographics – but it has been greatly amplified by the pensions ‘triple lock’ and the spending ‘ Likewise the tax burden has been shifted from income to expenditure through the large increase in the personal allowance alongside a hefty increase in VAT.

    Political (or, if you prefer, ideological) choices have made a big difference to the shape of the fiscal adjustment even if a large adjustment was always going to be necessary irrespective of party or ideology.

    In any case, to keep all this in perspective: the starting point here is that the state in the UK is currently spending around 45% of GDP, which is at the upper end of what any previous government has spent and still (lest we forget) outstripping tax revenues by a large margin.

  • Alex Sabine 2nd Dec '14 - 2:20pm

    I accidentally deleted a word in the above post – it should say that the pensions ‘triple lock’ and spending ‘ringfences’ were the big political decisions that have changed the pattern of spending. If the trend continues through the next Parliament, it will represent quite a big shift and yet one that is rarely debated.

  • Something which should be said in relation to the Resolution Foundation’s graphic is that it assumes that people’s behaviour does not change when taxes change. Raising the tax threshold may result in some working around 28 hours a week on a minimum wage to believe it would be worthwhile to take on a few more hours a week and thus result in a higher increase in income than the Resolution Foundation’s static model suggests.

  • Bill le Breton 2nd Dec '14 - 2:49pm

    What was interesting, at the meeting that Stephen addressed, was the reason given for why the Tories would not countenance combining NI with Income tax. “Voters thought NI was dedicated to funding the NHS and that ‘scraping it’ was attacking NHS funding”.

    There’s a lesson.

  • It seems bizarre, Stephen, that you’re arguing on the basis of evidence showing how a rise in the allowance fails to give money to the poor that we should instead raise a slightly different allowance which will ALSO fail to give money to the poor.

    Raising the allowance, like working tax credits, principally works to subsidise poor pay. I suggest that what we should be doing is raising benefits and taking measures to boost the wages at the bottom of society. Strengthening unions, raising the minimum wage and ending the outsourcing of low-skill public sector jobs to private providers are three good candidates for the dealing with the problem.

  • By the way, this is what the source for that graph says about raising the NI to the same level as the Income Tax allowance:

    “While we would maintain that this approach would produce a better outcome than proposals to
    raise the personal allowance, it is also clear that raising the NI threshold on its own will only do so
    much for either low earners or low to middle income households. [27] The distributional gains are
    better than for the personal allowance pledge or Labour’s 10p proposal – but only slightly so. Hence
    we would only want to combine a rising NI threshold with increased work allowances in UC. “

  • Alex Sabine 2nd Dec '14 - 4:00pm

    @ Bill – Perhaps voters should be let in on the secret then? That there is no such earmarked fund for the NHS, despite what Gordon Brown managed to convince them in 2002 when he increased NI ‘to fund the NHS’. That rise in all categories of NI made a sizeable contribution to financing his spending largesse in Lanbour’s second and third terms, but other more stealthy tax rises and – above all – borrowing £30-40 billion per year made a bigger contribution. (Borrowing which, as it happens, was pro-cyclical and anti-Keynesian but which drew little protest from Keynesian economists at the time.)

    While they were at it, straight-talking politicians could explain that an individual’s NI contributions don’t pay for his or her pension either, nor even do the NICs of a whole generation – rather, pensions are paid for by today’s workers and always have been from the start despite the pretensions of Dick Crossman and others in the 1960s.

    Perhaps then there might just be a greater appreciation of what intergenerational equity might look like, the need to pare back the entitlements that were handed out like confetti by Brown in the boom years, why the current state of the housing market is hindering the ability of younger workers to contribute sufficiently to the pot to keep the pension system afloat, and why immigration is a boon not a drain on the public finances.

  • Alex Sabine 2nd Dec '14 - 5:30pm

    Roland – What you are advocating in relation to tax credits (rolling them up into the tax system) is basically the ‘negative income tax’ scheme championed by Milton Friedman some decades ago. Others prefer a ‘citizen’s basic income’ or unconditional (but usually very low) uniform level of support that would enable means-testing to be scrapped. I believe this is the Green Party’s policy?

    Both of these ideas have theoretical attractions but I have yet to see a worked-up proposal that delivers a decent level of support at an acceptable cost.

    The basic income proposal runs the risk of being either extremely costly or delivering inadequate support to the most needy. And while I believe the current welfare system is horrendously over-complex, the beguiling simplicity of unconditional flat-rate schemes is liable to collide with the messy reality of people’s lives and their differing needs and circumstances. Yes you would save a lot of money through getting rid of bureaucracy and the associated payroll costs – but not nearly enough, I suspect, to cover the ‘deadweight cost’ of extending state support to people who don’t currently receive it.

    The negative income tax idea is more promising and in essence was implemented in the USA in the mid-1990s through Bill Clinton’s earned-income tax credit scheme, which was much less unwieldy than the Brown version. As I understand it, Universal Credit here in the UK is intended to have many of the same features, notably by greatly reducing the maze of benefits with separate tapers and withdrawal rates. But, as we have seen, UC is facing a number of teething difficulties on the technical front!

  • “The government should collect more tax.”

    Fair enough Geoffrey, you are entitled to your view, expressed refreshingly trenchantly.

    Nothing is stopping you paying more to HMRC than you currently do, is it? Why don’y you set an example and write a cheque to the Government over and above your requirement?

    Or perhaps, feeling so strongly on this subject you already do this?

  • @Simon: “Nothing is stopping you paying more to HMRC than you currently do, is it? Why don’y you set an example and write a cheque to the Government over and above your requirement?”

    This cute, but it’s also a nonsense argument. The difference that any individual makes to tax revenue is a rounding error. Taxation works because it is levelled across all people. An argument for raising taxes is not an argument for voluntary giving by the individual making the argument.

  • Alex Sabine 2nd Dec '14 - 8:22pm

    Jack – Of course you are right about the scale of difference an additional voluntary contribution to HMRC would make. But Simon’s point hints at an important fact about the politics of taxation: People sometimes indicate that they would support increases in particular taxes, but when pressed – or in the privacy of the ballot box – tend to resist the invitation to pay more themselves. The higher taxes they are in favour of are those which they imagine will be paid by other people.

    If the lengths that they will go to avoid tax (legally) is anything to go by, this observation is as true of the high-minded well-heeled left-wing intellegentsia and celebrities as it is of the humblest Joe Bloggs.

    Also, while people might indicate support for a tax rise or new tax that they don’t think will ever affect them (the mansion tax, say), they are far from sanguine about tax rises that they imagine might do – hence why Labour’s 1992 platform of higher taxes cutting in at the upper-middle part of the income distribution (abolishing the upper earnings limit on National Insurance contributions) backfired so badly, and why inheritance tax is surprisingly unpopular despite affecting only a small proportion of estates at any given time.

  • Alex – Interestingly, in your response you expose the crux of our problem: do we really want to help the low paid or do we only want to help those who are prepared to jump through all the arbitrary hoops intended to discourage people from claiming?

    Personally, I would rather help more of the low paid, even if that means we only help the bottom 10% say rather than some of the bottom 20%, because it is more honest than the current scheme which purports to help people but
    actually would rather that didn’t claim. Hence my motivation in the first instance for moving tax credits out of DWP into HMRC is to simply administration and permit the scheme to work for everyone.

    An example of the sort of savings to be made are in the annual Tax Credit return, there is no real reason why this shouldn’t be another schedule on the standard tax return thereby removing the need for DWP mailings and also very simply bringing the tax credits year into full alignment with the tax year – makes sense given it’s called “tax credits”!

    I do agree with you and am also not fully convinced that a full blown ‘citizens basic income’ is “the solution” and have reservations about the effects it might have in the real world…

  • David Evershed 3rd Dec '14 - 1:37am

    The early increase in personal allowance was offset by a reduction in the point at which 40% tax was payable so that those in the 40% income tax bracket did not benefit. The same could be done again and would change the shape of the chart with no benefit for those in the 40% tax band and above.

    Of course the result of not indexing the 40% tax band and reducing it to compensate for the higher personal allowance has brought many more people into the higher tax bracket. Somebody has to pay for Labour’s vote gaining pay increases for public sector workers.

  • @Jack

    “@Simon: “Nothing is stopping you paying more to HMRC than you currently do, is it? Why don’y you set an example and write a cheque to the Government over and above your requirement?”

    This cute, but it’s also a nonsense argument. The difference that any individual makes to tax revenue is a rounding error. Taxation works because it is levelled across all people. An argument for raising taxes is not an argument for voluntary giving by the individual making the argument”.

    Is this so cute? We are discussing what the platform of the Liberal Democrats should be going into to the next election. If there was a majority in the electorate who supported a policy of increasing tax revenue and they all were prepared to ‘be the change that they wished to see in the world’ to quote Gandhi then the extra sums raised would be far more than a rounding error and a very powerful message to Government that they could indeed raise the level of compulsory taxation without an electoral backlash.

  • @ Alex

    “If the lengths that they will go to avoid tax (legally) is anything to go by, this observation is as true of the high-minded well-heeled left-wing intellegentsia”

    You totally “got” my point. It was in my mind because I was arguing about this the other day with my brother in law, a very well heeled barrister who is evangelically socialist.

    He looked at me with contempt when I argued (as a Kipper) for a control of expenditure because of the continuance of the deficit and said “Don’t you BELIEVE in taxation?”

    I laughed and said that no I didn’t “BELIEVE” in it although I accepted, of course, that it is a necessary evil.

    Neither did he, I said. Otherwise, why did he agree to be the Trustee to his father’s complicated arrangement to, (quite legally) escape death duties?

    I still await Geoffrey’s reply, but I suspect I know the answer. He believes strongly in other people paying more tax, rather than him.

    If he tells me he pays more than his due I’ll withdraw the charge of hypocrisy willingly. Otherwise it stands.

  • Matthew Huntbach 3rd Dec '14 - 11:30am

    Alex Sabine

    But Simon’s point hints at an important fact about the politics of taxation: People sometimes indicate that they would support increases in particular taxes, but when pressed – or in the privacy of the ballot box – tend to resist the invitation to pay more themselves. The higher taxes they are in favour of are those which they imagine will be paid by other people.

    Indeed, which is why we need a political debate which talks HONESTLY about the options. If people want the services, they have to be paid for.

    This is why I ended up getting so p**d off by the people protesting about student tuition fees. I take their point, but how many of them were willing to say how THEY would like full subsidy to be paid for? Vague “tax the rich” doesn’t work. Sure, it would be good to do more about tax evasion, but there is not a switch that can just be pulled to stop it. What is needed is a firm plan that would actually raise the money AND would be acceptable for the bulk of the population. So, sure, “scrap Trident” would pay for a lot of things, but would the people of this country be willing to support it? My preference would be much more in the way of inheritance tax, but that seem to be very unpopular. I don’t recall the (mostly upper middle class and so looking forward to great big dollops of inheritance cash, or maybe already getting it from grandparents) tuition fee protestors showing any support for funding university tuition THAT way …

    Well, I think we needed to have said much more clearly than we did – with many more people going to university, quite obviously that has to mean higher taxes if it’s still going to be subsidised as it was when only about 10% of the population went on to higher education. Similarly, it needs to be said NOW that there are big demographic and technological reasons pushing health care spending up, so if people want an NHS, it MUST mean higher taxes – so, ok, which do you prefer?

    If people in the privacy of the ballot box vote for tax-cutting parties, then they are going to have to put up with what that leads to. Voting Tory now cannot mean anything but ending the NHS. The NHS cannot be kept in existence as the universal service it is supposed to be with the Tories and their tax-cutting plans in charge. If that’s what people secretly want, fine – only they’re going to have to pay big private health care bills to make up for it.

  • SIMON BANKS 3rd Dec '14 - 11:47am

    The poorest people are affected mainly by benefits cuts.

  • Tom Frostick 3rd Dec '14 - 4:44pm

    Good stuff from the Resolution Foundation. I’d like to be cheeky and highlight CentreForum’s report on tax thresholds too:

  • Alex Sabine 4th Dec '14 - 1:23am

    @ Ian Sanderson
    ‘Incidentally NI is not an income tax – it is an earnings tax. It is not paid on unearned income or on the earnings of those over pensionable age.’

    Indeed, it is a tax specifically on earned income for those under pensionable age. This is among the reasons why raising the NI threshold would be a better targeted tax cut than a rise in the income tax personal allowance, given the profile of those who have borne most of the austerity so far and those who have been protected.

    We have gone from over-taxing capital income relative to labour income in most of the postwar period – well actually over-taxing both, but applying ridiculous surcharges to ‘unearned’ income on top of already very high earned-income tax rates – to the present situation where earnings are quite heavily taxed compared to other sources of income.

    The more we can reduce the tax premium that NI represents the better, I say (within the bounds of fiscal prudence, obviously, so unfortunately that rules out doing nearly as much as I’d like for a good while).

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