The most obvious or high-profile Liberal Democrat contribution to the coalition’s programme for government is the commitment to raise the personal allowance to £10,000 over the course of this parliament. John Rentoul is not impressed by it. He says it is a “sop” that “sounds great” but fails to survive “contact with the reality-based community”. He explains his argument thus:
Raising the income-tax threshold is the only policy that can definitely be attributed to the Lib Dems, and it’s an inefficient way to make the tax system fairer. Raising the threshold benefits higher-rate taxpayers more than the rest, which means that other taxes on the rich have to go up to compensate*.
Add the impact of the VAT increase and the impact of raising the threshold above which one pays income tax is reduced still further. This is a point David Willetts made as long ago as 2005. Like Mr Rentoul, Mr Willetts is half-right and half-mistaken. These changes to the tax bands do not benefit the poor as much as the headlines might suggest. Nor do they do much for what Mr Rentoul terms “social justice” (whatever that is and however it may – or should? – be addressed by the tax code).It is a counter-intuitive point, which is why I should have explained it at greater length: putting up the income tax threshold benefits those on higher incomes more than those lower down the scale. For someone paying 50p in the pound top rate, putting the point at which one starts to pay tax up £1,000 saves £500. For someone paying only the 20p basic rate, it saves only £200.
But that is far from the point of it. It is both a symbolic or aspirational policy and a moral judgement. If, in this latter respect, the gains are wiped out by VAT rises there is still value in letting taxpayers spend more of their money as they see fit, rather than have that money confiscated by the government to spend as it prefers.
Secondly and in terms of the policy’s symbolism it might be considered the opposite of Labour’s 50p tax band. Just as raising the threshold may not benefit low-paid taxpayers by as much as we might wish, so the 50p band won’t raise as much money as the previous government might have desired. It too was a symbol, albeit one that’s less encouraging than the new government’s preferred flagship symbol. The aspiration is creditable even if the delivery – lower taxes – lags behind.
*Hence Mr Osborne’s jiggery-pokery with the top rate band. Like maintaining the 50p band – for now – this is unsatisfactory and, one trusts, a short-term measure to be abandoned once the government finances are restored to some kind of health.
UPDATE: All that said, the Lawsonian view that rates should be low and so should thresholds has a logic and virtue to it too.
Comments