Tax relief for the poor

Regular readers of this site will know that we hope that the Conservative Party might deliver a year-by-year increase in the income tax threshold so that the poorest Britons are progressively taken out of the tax system.  We believe that it can be paid for by reducing the growth rate of public spending and could underpin a process of wider political realignment that could detach 'the hard working classes' from a Labour Party that has failed them.  The story on page two of today's Express therefore provoked some interest from us (click on image to enlarge). 

Our contacts at The Express said that people very close to David Cameron were said to be sympathetic to the policy idea.  Cameron's advisers believe that public sector waste has led the the popular mood to swng violently against the idea that more money is needed to improve schools, hospitals and other public services.  We put the story to Team Osborne and were told (1) there were "no plans" to raise thresholds, (2) the story was "speculative", and (3) there was "no money" in the coffers*.  Interesting replies but the door wasn't quite shut in our face.

Matthew Elliott, Chief Executive of The TaxPayers' Alliance has welcomed the Express story:

“If David Cameron adopts a policy of tax cuts for the poor, by increasing the income tax threshold, it would be hugely popular with voters and could be paid for by restricting the growth in government spending. With rising food and fuel prices and the credit crunch, families are having to budget and voters now think the government should do likewise. This policy would emphasis that there is a moral dimension to tax cuts as well as an economic benefit.”

At the weekend the Institute for Fiscal Studies issued a warning that the next Government might have to increase taxes.  Increased taxation could be deadly for our economy.  We'd like to see spending growth reduced to 1.5%pa or even 1%pa so that money can be found to help poorer workers and for economy-boosting tax relief.

Comments

[brian]

Seems a sensible plan. While he's at it, scrap tax credits. There is no sense in paying bureaucrats to take money off you, pass it round and then give some of it back to you.

[bluepatriot]

Fraser Nelson fears that Labour will operate a scorched earth policy over the next two years. The public finances could be as bad as bad could be when we eventually get into the Treasury.

[Stewart Geddes]

The basic principle is how do we want to look after the poor?

Do we continue the situation where someone working 40 hours per week on the minimum wage pays £2000 per annum tax and NI? and then has to claim tax credits from the Government?

Surely, if we believe that work should work, no one who is on the minimum wage should have to pay tax. There must be an incentive to go to work.

Clearly there is an argument for a realignment of taxes. That may mean that headline tax rates may have to rise, but if this is offset by tax allowances from which everyone would benefit and which drops the poorest out of tax altogether yet is revenue neutral then surely this is worth doing.

As it happens I am one of those who believes that the inherent waste of the Labour model is so great that we could increase the allowances and reduce taxes by removing millions of pounds of administrative costs by scrapping all of the tax credit system.... Discuss.

[Andrew Lilico]

If true, this would be a good idea. But commenters should be under no doubt that it would mean a rise in income tax *rates* - to at least 25%. The concept goes back at least to Geoffrey Howe - it was an aspiration of ours at that time to take people out of income tax. I have long favoured increasing income tax rates and raising thresholds (indeed, I suggested doing in the runup to the 2001 General Election, drawing on the Howe tradition). Saatchi proposed using a £10,000 threshold a few years back.

The challenge to meet is the objection that Portillo raised to my 2000/2001 scheme. His view was that the income tax net should be wide, so that voters would feel a personal interest in keeping down expenditure. (This was one of the key arguments for the Poll Tax.) I agree with the need to keep voters involved, but I would prefer to do that through a series of payments - a state health insurance payment; a state unemployment insurance payment; a state sickness insurance payment - that one could top up.

Anyway, I'm getting sidetracked. The aspiration of taking the poor out of income tax is the right one. It's daft to tax them with the left hand and give them benefits with the right.

[BW]

I could not agree more, the Tax Credit system is the economics of the madhouse. Scrap them and instigate a large increase in the nil rate band by also cutting waste in other sectors.

[David_McD]

Increasing tax thresholds to a level so that the poor no longer have to pay tax has been official UKIP policy for some time. You can read about it and also the UKIP flat tax proposals, here:

http://www.ukip.org/ukip/index.php?option=com_content&task=view&id=32&Itemid=90

There is more rejoicing in heaven for the sinner who repenteth…..

But I am not sure that the Tories have got around to repenting yet. There is much to repent for (the 1972 European Communities Act, The Barber/Heath “Dash for Growth”, The Single European Act, Maastricht, the ERM, John Major’s “Dash for Gas” etc. etc.)

[RichardJ]

Excellent idea - it will benefit everybody who pays tax and therefore even the middle classes have something to gain by this.

[Yogi]

I also fear the scorched earth policy by Labour and I have expressed those in here in the past. We will see that in Browling's next budgets - tax cuts and increasing the thersholds and we will be hamstrung by that.

Our front bench will be damned if it opposes it and dammned if it votes for it. For that reason alone we should not discuss tax policy openly until the 2010 budget is out of the way.

[EML]

This would set the conference alight is announced in the same way as Osborne set out the inheritance tax proposals last. A sure-fire vote winner ... as long as it's fully costed.

[David Belchamber]

This is exactly what several of us have been advocating for a long time; I hope that it comes about and that Brown will not try to implement it first.

I doubt he can because the idea can only be introduced as savings are made where taxpayers' money is being wasted by this profligate government. As tax thresholds rise, there can of course be a commensurate cutting back on benefit, so that people can live off "their" earnings. This will also reduce the cost of bureaucracy, as millions are taken out of tax - and largely, if not wholly, benefit.

It is morally right to start rebuilding our broken society from the bottom upwards and, indeed, though the wealthy will not notice it, everyone would benefit from above inflation increases in the basic tax threshold.

[Steve Garner]

Now that this is out, it's more likely to be the Labour conference that is set alight by such an announcement!

[Richard Calhoun]

The Tories need to put pressure on themselves to cut public spending by committing to take out all earners under £15000 p.a. out of income tax.

Radical policies like this will be the only way to revive the economy and give those in work the opportunity to spend their own hard earned money.

[David_McD]

The poor pay too much tax and thus, by implication, the wealthy too little. In fact, the very poor should pay no tax at all but benefits should be restricted to those who truly need them.

This proposal, so similar to that advocated by UKIP, is greatly to be welcomed.

[Richard Calhoun]

Labour are culturally unable to cut public spending, it is against their core beliefs.

Besides they are bankrupt financially, as well as morally, and the Trade Unions would not allow them to cut public spending and reduce the huge numbers in the civil service back to around the 650,000 they inherited from the last Conservative administration.

This is precisely why it is imperative that the Tories present this policy at the latest at the Tory Party Conference.

[Norm Brainer]

The poor pay too much tax and thus, by implication, the wealthy too little.

That's a very dangerous, and I would say erroneous, implication.

[Adam in London]

Why do I get the feeling that in a couple of weeks time we'll be screaming for massive increases in Defence spending - and not seeing the contradiction.

Osborne's team are right - there is no money in the coffers. The Government is currently spending £45bn more than it raises in taxes. And we haven't even hit the worst of downturn yet.

[Editor]

Adam in London:

It's all about sharing the proceeds of growth/ pain of slowdown.

If there is no money in the bank then George Osborne's 2% growth in spending is unaffordable.

If +2% spending is afforable then so is 1.5% growth in public spending AND a 0.5% cut in taxes or thereabouts and other similar combinations.

[passing leftie]

Besides they are bankrupt financially, as well as morally, and the Trade Unions would not allow them to cut public spending and reduce the huge numbers in the civil service back to around the 650,000 they inherited from the last Conservative administration.

There were 523000 civil service employees in 2008 first quarter. The headcount in 1991 was 593000. Remind me who was in government then?

[Tanuki]

The underlying problem with any policy which takes 'the poor' out of income-tax is that it then gives 'the poor' an ongoing and pervasive incentive to vote for parties which offer the poor lots of benefits funded by taxes levied on the middle/upper classes.

I would argue that flat taxes with *no* 'allowance' is probably the more-equitable policy. Make everyone share in the 'pain' of taxation and they are more likely to vote for parties offering across-the-board low taxation.

[Are you thinking...at all?]

To choose two of the worst comments on this thread (and there is lots of competition):

Matthew Elliott: “If David Cameron adopts a policy of tax cuts for the poor, by increasing the income tax threshold, it would be hugely popular with voters and... would emphasis [sic] that there is a moral dimension to tax cuts as well as an economic benefit.”

What is your definition of a "tax cut for the poor"? Is it enough that some poor people would gain some money from it? You know perfectly well that most of the money would go to people higher up the income scale and that (unless you adjusted the basic rate limit at the same time) the biggest cash gains would go to higher rate taxpayers. There's nothing wrong with that per se, but don't ask the party to insult people's intelligence by pretending that the policy targets money at poor people.

Incidentally, if you define morality as being about using scarce resources to help the poor (an odd definition for the TPA to adopt), doesn't that mean the IHT cut which you campaigned for is immoral?

Stewart Geddes: "As it happens I am one of those who believes that the inherent waste of the Labour model is so great that we could increase the allowances and reduce taxes by removing millions of pounds of administrative costs by scrapping all of the tax credit system.... Discuss."

You won't get very big tax cuts for millions of pounds (or even for the much larger sums which you could plausibly attribute to tax credit administration).

Being comfortably ahead in the polls means it's time to grow up and stop pretending there are easy solutions. Tax credits go to about 6 million families (including about 9.5 million adults, though not all of these pay income tax). There are about 30 million people paying income tax - all of whom would gain from a higher personal allowance. It should be blindingly obvious that spreading the same amount of money more thinly would leave most of the present recipients worse off.

Just in case it isn't, about one quarter of the money spent on tax credits cancels out the tax paid by recipients. Most of the money is additional to what people would get if their tax bills were simply reduced to zero - the best that a higher personal allowance can do.

No one thinks that 70% marginal deduction rates are a good thing. But if you want to advocate abolishing tax credits and using the money to cut taxes, at least be honest enough to admit that there would be significant losers towards the bottom of the income distribution.

[Alex Swanson]

There were 523000 civil service employees in 2008 first quarter. The headcount in 1991 was 593000. Remind me who was in government then?

Don't forget that many jobs which were done by directly-employed staff then are now done by outsourced companies, eg the notorious privatised hospital cleaners, and hence no longer show up in such figures.

[comstock]

"Surely, if we believe that work should work, no one who is on the minimum wage should have to pay tax. There must be an incentive to go to work."

Oh no disagreement there. Thing is, would a Tory government be prepared to raise taxes on the rich to fund this. If so, then we have a sea change on our hands.

I'm not holding me breath, mind!

[passing leftie]

It's simple really. Up the minimum wage to a level where the goverment doesn't subsidize businesses paying an indecent wage. It was the introduction of the minimum wage under Labour which took many people out of poverty. I applaud the living wage campaign.

Upping the personal allowance at the bottom, and scraping it off around the 40% threshold, as well as limiting pension tax relief to a maxiumum value, or to the basic rate could pay for a much higher personal allowance.