Tax is in the news again thanks to Deputy Prime Minister Nick Clegg's comments on the Andrew Marr Show about raising the personal allowance to match the minimum wage. And others at the Liberal Democrats' party conference have made less welcome suggestions, too, on a so-called 'mansion tax' and raising income tax rates back up to 50p while the party's leaked lines-to-take document revealed that the party wants to empty more money (known as "a further contribution" in politician speak) from the pockets of taxpayers earning £50,000 a year.
But Nick Clegg's comments on raising the tax-free personal allowance are the most significant:
We are committed as a party - and I am committed to this - to raising the allowance further such that... everybody on the minimum wage pays no income tax.
Good. Politicians shouldn't dip their fingers into the pockets of those who do not earn enough to cover the barest essentials. Raising those on the minimum wage out of tax will do two things.
First, it will secure the promise in the Liberal Democrat manifesto to raise the personal allowance to £10,000 in April 2011. It should never be forgotten that £10,000 this year, next year or any other year is not the same as in 2011-12, because inflation has reduced its value since then. If that £10,000 figure in April 2011 were increased to take account of inflation so that it would have the same value, it would be equivalent £11,204 by April 2014. So while the rise in the personal allowance to £10,000 next year is welcome, their manifesto commitment can only be said to have been met if it assumed that it would be frozen until now so that inflation would eat away £1,204 of it.
Secondly, it would have much of the effect on the after tax income of people earning the minimum wage as it would if their wages were to increase to match the so-called 'living wage'. But while raising the minimum wage to a more generous level has the unfortunate side effect of increasing unemployment, cutting tax on low earners would have the opposite effect. It would encourage more people in to work and cut unemployment. The rhetoric of raising the minimum wage sounds benign. After all, who could object to the idea of anyone (and especially low earners) enjoying a higher income? But minimum wages simply prohibit employment below a set price. For workers who cannot convince an employer that their labour is worth more than the minimum wage, the reality of the policy is that it condemns them to unemployment, which will only compound their difficulty in finding well-paid employment later on. On the other hand, cutting tax on low earners won't just leave them better off by letting them keep more or even all of the money they have earned. That extra money will strengthen the incentive for people to be employed putting downward pressure on unemployment rates.
Nick Clegg should ignore the calls for a mansion tax, which are unfair, arbitrary and will end up hitting ever more of us. And he should dismiss talk of tightening the tax grip on the squeezed middle. It's great that Lib Dem activists voted against tightening the tax grip by hiking the 45p tax rate back up to 50p, which instead should be abolished. But Clegg should press ahead with his policy of taking more of the poorest out of not just Income Tax but National Insurance too. At £11,400, this level is roughly the same as that proposed by the TaxPayers' Alliance last year when our Single Income Tax plan for a 30 per cent rate above £10,000 (in 2010-11 prices). And as the Centre for Policy Studies' Ryan Bourne writes in this morning's City AM, the other parties would do well to learn a lesson from Clegg on tax for low earners, too.
And raising the personal allowance to the level proposed by the Single Income Tax isn't the only thing that's on the cards, either. As Andrew Marr said in his question to Nick Clegg yesterday
If David Cameron says we're going to cut the rate of Income Tax to 30p, again, we understand that, we know it's a particularly plausible outcome