FullFact look at who benefits the most from an increase in the personal allowance
Feb 2012 15

Recently the Online Journalism blog produced two graphs – one we produced for the Guido Fawkes blog and another produced by the IFS – with one suggesting that increasing the personal allowance was progressive – benefiting those on low incomes most – and another that it was regressive – benefiting those on high incomes most. That blog, based on a tweet by Guardian data editor James Ball, misunderstood the reasons for the difference between those two graphs.  Now the fact-checking website FullFact has looked at the issue and concluded that they have “little reason to doubt the calculations used by either side, and both seem to accurately present different sides of the argument” it is worth explaining why we feel the personal allowance is a good thing for taxpayers on low and middle incomes, and deserves to be called progressive.

The difference between the two graphs is nothing to do with whether the figures are given a percentage of income (gross or net). Relative to their income is the right standard despite what Mary Hamilton, another Guardian journalist quoted in the Online Journalism blog, says (and almost always used in distributional analysis). But regardless there is no way that in terms of individual earners it will be regressive for those who use their personal allowance.  It will benefit every earner who makes more than the new personal allowance to exactly the same extent: the increase in the allowance multiplied by the basic rate of income tax.  That just makes a bigger proportional difference for those on low incomes.  As Rory Meakin showed in an earlier blog, and here I’ll introduce a third way of looking at the issue, it will remove a larger share of their income tax liability:

The critical difference is whether you look at households or individual earners. There are two reasons why the IFS analysis finds increasing the personal allowance is regressive:

1. People who don’t pay income tax won’t benefit from an income tax cut, however it is structured.

2. They work on a household basis, and higher income households are less likely to include someone who doesn’t use all of a higher personal allowance.

It’s all about those who already don’t pay income tax or pay so little they won’t use the new allowance completely. Plenty of low income households will include someone – perhaps doing part time work – who earns under £10,000 whereas a higher income household is more likely to include two earners who both make well over the personal allowance.

Of course looking at these changes in per household terms is perfectly normal and legitimate. But in this case I think it muddies the water. If someone earns £12,000 they are still a low earner even if their spouse makes £50,000. Taxing them at a marginal rate, including both forms of NI, of 40 per cent probably isn’t a good idea – particularly as you are often talking about women who are relatively likely to drop out of the labour market if you tax them too much (there is an extensive economic literature on that issue).

I think the Guido Fawkes blog summarised the situation perfectly. Direct taxation isn’t an issue for the very poorest but the working poor will see the biggest cut in their income tax liabilities. That has to be both progressive and efficient (as it will improve their incentives). But if politicians want to cut taxes on the very poorest, then cuts cigarette or alcohol duties or a reversal of the rise in VAT (which both the TPA and Guido Fawkes campaigned against) would be great too.

Matthew was the Chief Executive of the TaxPayers' Alliance, author of Let Them Eat Carbon and editor of How to Cut Public Spending (and still win an election)

  • LordBlagger

    Whilst I think its a good idea, it doesn’t solve the fundamental problems in the UK.

    1. A fiscally incontinent government.
    2. Growth.

    To get growth you need investment not spending on things that are transitory. That don’t provide a lasting benefit. 

    For example, spending on a cinema ticket. Once spent, its gone. Rising the personal limit in this way, probably with a rise in the basic rate to claw it back from people who are above the threshold, give money to a section of society who won’t be investing the extra money. They will be spending it on transitory things.  There will be some growth from the areas where they spend their money, but that won’t generate the growth needed to get lots of people back to work. 

    What is needed is mandatory savings. Abolishment of the state pensions set ups for future accruals (you get the past accruals). That generates lots of money for saving. NI gets diverted into a savings set up. That generates lots of growth. 

    • Blarg1987

      Although I agree with some of your points, I think this would generate local growth long term, in the form of money being spent more locally encouraging people to set up buisnesses that improve an area that leads to investment.

      It is a good start though to try bottom up growth then top down as the last decade has shown, you give some people alot of money it doesn’t stay in the UK economy but goes to tax heavens and on foreign goods and services.

  • Orac54

    I’m struggling to see how a cut in income tax is unfair to someone who doesn’t already pay it. That is, someone who is paid benefits generated by taxation. That a fallacy.

    In the instance of the cinema ticket, if enough people spent their tax cut on cinema tickets, the cinema owner would build another cinema to meet demand. Which is growth. You stimulate demand by giving those who will do the demanding their taxes back.

  • foolsgold gordo

    Yep, people on benefits miss out on personal allowances.  that’s why those on £26k of benefits are as well off as workers on £38k.  What do we propose here then, tax on benefits?  That’s a reversal of the civil servants who are tax exempt and Wayne Rooney who pays less tax than I do.  Why do we have tax exiles like Mick Jagger when WR can get away with it.  Is it a new style of paying salaries?  That is something else that has to stop, paying footballers so much.  David James has had a reduction in income from £160k through £50k down to £17k per week at Bristol.  Feel sorry for him, well 17k a week is £884k per annum and probably no stoppages. Incredible!