Boris Johnson is suggesting that he should mark his ascension to the throne by having a large and lovely tax cut. Yes, good idea, why not? However, he’s rather aiming his fiscal power at the wrong part of the income distribution. We do indeed want lower marginal tax rates because of that Laffer Curve stuff. And yes, it is a bit steep that the middle classes hand over 50% and more – when including NI – of their marginal income to the diversity advisers.
But, you know, resources are limited, there’s a better way to use this financing room:
Boris Johnson has promised to cut taxes for around 3 million higher earners by raising the 40p threshold from £50,000 to £80,000 if he becomes prime minister, in a move condemned by senior Labour figures. The Tory leadership hopeful used the Telegraph to make the case for the cut, saying, “We should be raising thresholds of income tax – so that we help the huge numbers that have been captured in the higher rate by fiscal drag.” The move would cost around £9.6bn a year, which would be paid for partly from savings in Brexit no-deal preparations, he said.
Fiscal drag is a real thing and yes, we do need revolutions every few decades to return to that previous state of play. But even so that higher rate isn’t the correct target.
It’s the personal allowance that should be raised. For who is it that faces the largest marginal rates in the system? That would be those on the margins of the tax and benefits systems. Whose income is just rising so that their incomes enter the tax system itself, while also beginning their exit from the benefits one. Such marginal rates are currently sometimes over 100%, millions are on over 60%. This is a certain disincentive to getting off arse and going to work. Even Universal Credit is only hoping to reduce this taper to 60% or so.
A better way therefore of spending such fiscal room is to raise that personal allowance. An old rule of thumb which may or may not be valid now is that a £1,000 rise in the personal allowance “costs” the Treasury £3 billion. So, for this cash Boris could raise that allowance £3,000 and a bit. To, say, £16,000. This would aid everyone and would significantly address the biggest problem of the current system. The excessively high marginal rates for the poor.
Oh, and it would make the Living Wage people shut up as the post tax minimum wage would now be that post tax living one.
Myself I’d argue that this is also where we should keep funnelling any available fiscal headroom. Until the personal allowance is the same as the median wage, about £22,000 a year. After all, why not have a properly progressive income tax system? One where only those better off than average pay income tax at all?
There’s even a political gloss to this. No one ever would be able to reduce that personal allowance in nominal terms – and it would take a few decades for fiscal drag to lower it again.