The spiralling personal income tax allowance is a regressive blunt instrument, says Jack May. It’s time to roll it back.
Britain needs to find some more money.
Whether the next government has blue or red as its predominant political colouring, the demands on the public purse will stretch the current tax base to a ever greater extent over the coming decades.
Getting national finances out of a position of recurrent deficits on capital spending will require permanent tax increases equivalent to two per cent of gross domestic product each decade for many decades to come, according to official calculations. As the Economist notes, big tax hikes are politically tricky and vastly unpopular, particularly in an age of round-the-clock coverage. ‘In the Healey budget of 1975, there were eight big tax measures,’ it wrote last month. ‘In George Osborne’s budget in 2016 there were 86 crafty little ones, including higher taxes on landfills.’
For the first time in nearly 15 years, polls show that half of the population believes taxes should go up. But increasing revenue is not easy. Though there is leeway on certain measures – corporation tax could still go up without losing competitiveness compared to other G7 countries – the two biggest earners, National Insurance and income tax, are hard to shift – no matter what the polls might say. Nobody wants to be the one to propose a wide-ranging hike in income tax, with the Liberal Democrats’ effort in 2017 honourable but widely ignored. Meanwhile, the evidence sadly shows that a 50p rate at the top end does nothing to raise revenues other than increasing the feel-good factor of the hard left’s ideological coffers. We need to find an alternative.
Some of Jeremy Corbyn and John McDonnell’s tax proposals in the 2017 general election manifesto make a lot of sense – such as leaving space to lower the additional rate threshold to as low as £80,000 from its current £150,000 – but in news that will shock very few, they missed the chance to row back on a regressive Conservative led fiscal policy.
The personal allowance – the amount of income that is tax-free for nearly all taxpayers – stood at £3,005 in 1990, equivalent to 21.8 per cent of the average annual salary of £13,760. Whether or not the existence of the thing in the first place goes against the contributory principle that left-wing politics holds so dear – the idea that you put in what you can according to your income and receive what you need from the system – the threshold remained relatively low for a long time.
Throughout the John Major and Tony Blair years, the personal allowance increased at a pace not vastly faster than inflation. By 2007-2008, the personal allowance had increased by 74 per cent, while consumer prices (according to the consumer price index) had increased by 46 per cent since 1990.
Gordon Brown’s decision to scrap the 10p rate of income tax to be able to cut the then 22p rate to 20p changed all that. Labour members of parliament were faced with such a deluge from constituents suddenly finding their take-home pay packets docked that his premiership was almost routed mere months after it had begun. Abolishing the 10p tax rate hit the poorest hardest in order to woo so-called ‘aspirational’ voters in the middle brackets. It was naive and devastated Labour’s base.
As a result, 2008 saw the biggest jump in the personal allowance yet to try to offset this damage, rising from £5,225 to £6,035, an increase of 15.5 per cent.
As Brown left office, the coalition spotted an opportunity for wily political devilry. They would build on Brown’s initial hikes, of 15.5 per cent in 2008-09 and 7.3 per cent in 2009-10, and sell it to voters as a helping hand to keep more money in people’s pockets.
From 2010-11 to 2017-18, the personal allowance has increased from £6,475 to £11,500 – where it now stands at 42.1 per cent of the average United Kingdom income. Hiking the personal allowance so intensely is vastly regressive, as it puts that money out of state hands almost indiscriminately. Other than those earning over £123,000 (earners between £100,000 and £123,000 are subject to a fiddly gradation of their personal allowance), everyone gets it. That means that a higher-rate payer on £80,000 gets £11,500 tax-free just as someone on a roughly annualised minimum wage, say £14,000, only pays income tax at 20 per cent on £2,500 of that.
The personal allowance shrinks Treasury revenues by giving money back to people who do not need it. To add insult to injury, this is done in the name of the poorest.
Labour must put a halt to this regressive policy. If crusading against New Labour is something this Labour leadership enjoys so much, it should jump at the chance to reverse one of that government’s greatest mistakes.
Cutting the personal allowance back, or even merely freezing it for the long-term, would bring thousands of pounds of income earned by those with far higher salaries back into taxation. Simultaneously, the point at which the personal allowance tapers off should come down from the astronomical sum of £100,000 to a more sensible sum, as in Labour’s 2017 manifesto, of £70,000, if not down to the higher rate threshold. The 10p rate can then be restored for those with the lowest incomes, which may – as criticisms after it was abolished went – make for a more complicated tax system, but will end the regressive free-for-all of a spiralling personal allowance.
Jack May is a Progress columnist. He tweets at @JackO_May
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