Thoughts on politics and life from a liberal perspective

Tuesday, 22 June 2010

Raising the income tax threshold - great news!

According to reports, George Osborne is likely to raise the threshold at which people start to pay income by £1000 to £7,475. This is apparently to be paid for by clawing it back from top-rate taxpayers. I am am not clear on exactly how this second part will work but if this is correct then I think it is excellent news.

Firstly it is the beginning of an implementation of the Lib Dem policy to take everyone earning less than £10,000 per year out of income tax. It gets us over a quarter of the way to realising this aim. It is also something I think we can genuinely point at at say that it is unlikely to have happened had we not been in the government.

Secondly it will offset the likely rise in VAT to 20% for the poorest earning families. If a 2.5% hike in VAT is going to cost the average family £389 ((c) 2010 Lib Dem election campaign) then surely it will cost the average lower earning families proportionally less. I do not have the exact figures but I would expect it will be a net gain to those earning the lowest amounts.

Don't get me wrong, I still don't think raising VAT is the right move but at least its effect will be mitigated for some of the most vulnerable.

Of course we hit the problem of what happens to those who do not earn anything at all but I await to see what is in the budget overall before passing comment on that.


Sunder Katwala said...

There is no proposal to "claw it back" from top rate taxpayers. They won't make a similar gain, but that contributes nothing at all to the cost of the threshold increase: it simply prevents it being more expensive.

So the gain of this modified tax cut will be less regressive than the initial LibDem general threshold increase, as it would go to those earning above the full income tax threshold until they hit the top rate, at which point the gain will be nullified or tapered off.

However, those earning under the new threshold will gain less and those earning under the old threshold (25% of households) will gain nothing from this £3.7 billion tax cut, though they do pay a very high proportion of their income in indirect taxes.

Perhaps rumours of a VAT increase must be wrong, or that would be a sharply regressive shift against those who pay the highest taxes.

As the IFS says "In 2009-10, only 62% of the adult population had a high enough income to pay income tax ... in any given year around one in four families contains no income tax-payer. These figures are a reminder that income tax cuts are not well targetted to help the poorest in society".

Sunder Katwala said...

Your contrast between "poorest earning families" and "those who earn nothing" misses out entirely who the actual poorest earning families are.

For example, both a single earner making just under the current threshold, or a household with two earners on just over £6000 each would gain nothing at all from the change. (This would be avoided by following the Fabian proposal of converting a (regressive) threshold into a flat tax rebate or credit).

Mark Reckons said...


As usual with this argument, you are focusing on those who do not pay any tax at all and I already said that we will need to wait and see what happens for them. It is self-evident that people who do not earn cannot benefit from tax threshold increases.

One of the responses to your post on LC this morning is instructive. Someone who appears to be from your side of the political fence expresses how uncomfortable they are with seeing arguments from the left against raising income tax thresholds. So am I frankly.

The problems of poverty can and should be dealt with separately but it does not make taking more people out of tax wrong.

Tom said...

"The problems of poverty can and should be dealt with separately but it does not make taking more people out of tax wrong."

It does when it will increase the gap between the poorest and the rest. And particularly when the Budget also involves slashing spending on welfare and public services and perhaps increasing the most regressive major tax. Those all hit the poorest the most. That £3.5bn could do an awful lot of good helping people get back to work, or supporting projects that keep people unemployed.

As you say, it's self-evident that people who do not earn cannot benefit from tax threshold increases - and this Budget looks set to make a lot more people fall into that category.

Sunder Katwala said...

Sorry Mark, you are missing the point, and not responding to the comment I actually made.

1. Your "claw it back" was a misunderstanding about the funding of the £3.7 billion, citing a way to reduce the cost of the tax cut as if it helped to fund it.

2. No - I am telling you about people, many of whom *do earn* (they are the "lowest earning households) and who *do pay tax*, as the IFS quote notes. (And when the LibDems refer to as paying the highest proportion of all taxes, you are not referring to the income taxes, yet your remedy is focused very heavily on income tax, which is the lowest proportion of the taxes they pay. Why?)

Moreover, if you look at the "this extract" PDF link, giving detailed modelling of different threshold and rebate changes, you will see how the progressive aim which you want to pursue could be pursued.