This morning, Nick Clegg was doing the media rounds peddling his message of bringing the increase in the personal allowance forward, so that the desired allowance of £10,000 would be brought in sooner than 2015.
The Treasury has alreadyannounced for it to come in at 2015 and bringing it forward to upset a lot of people, especially George Osborne. However, desperate times call for bold measures.
The increase to £10,000 will reportedly cost the Treasury £11.5bn, most of which, one would assume, would be recouped through indirect taxes – such as VAT.
But, because the increase in the allowance is uncosted, and has been since it was announced, taxes at the top would need to increase. Increase in the personal allowance is not cost neutral, nor cost positive. For a Chancellor who likes to balance budgets, this measure is one which will grate for Osborne.
Is this increase in the allowance progressive? It’s not, according to Tim Horton and Howard Reed:
• the measure would do nothing to help the very poorest, who don’t have income large enough to pay tax;
• only around £1 billion of the £17 billion cost (6 per cent) actually goes toward the stated aim of lifting low-income households out of tax;
• households in the second richest decile would gain on average four times the amount than those in the poorest decile; and
• the policy would increase socially damaging inequalities between the bottom and middle.
The increase in the allowance would help the “Squeezed Middle”. But tax is always going to harm those at the bottom, whether it is income tax, council tax or VAT. They simply don’t have the income to support taxation.
UKIP have an interesting (unofficial?) policy of not administrating income tax to those on National Minimum Wage. Commendable, but not practical given the complexity of tax law.
It would be the equivalent of a tax free personal allowance of £15,000 for someone working 48 hours a week (maximum weekly working hours under EU time directive which UKIP oppose), or £11,000 for someone working an average employment hours of 37 hours per week. In large, an empty gesture that sounds grand.
What would be more practical, and introduce a degree of progressiveness back into the tax system, would be the re-introduction of the 10p tax rate. It wouldn’t help the lowest earners but it would help the low-mid earners.
Or, conversely, a flat tax rate introduced after a particular threshold alongside the abolition of all indirect taxes. Very fair but not exactly a revenue earner.
Tinkering with a tax system will never produce the desired effects, but scrapping it and starting again just might.