Autumn Statement: How to lower taxes on the lowest-paid

“No main UK party proposes tax plan to benefit low earners” screamed headlines earlier this week yesterday as the Resolution Foundation released a report into the tax policies proposed by the main parties ahead of next year’s election.

This isn’t entirely fair. Rather, the analysis suggests that the various tax proposals would see benefits flow more to higher earners than low earners, so there is still some advantage to those on lower income. Furthermore, three of the four parties have pledged to increase the personal allowance, which clearly wouldn’t affect those already earning below it. The changes are technically regressive in a static analysis, then, but the criticism slightly disingenuous.

But nonetheless, the point remains. The big question for all political parties will be how to ensure that tax cuts help those on low- and middle-incomes without strangling the economy by placing economically damaging high taxes on either high-earners or on the employees and owners of businesses.

The Autumn Statement, to be delivered tomorrow, gives the Chancellor a chance not just to set out his economic stall for the next election but to actually help those people on low- and middle-incomes now. Though much has been made of the Coalition’s welcome hike in the threshold at which Income Tax is paid, there has been precious little action on National Insurance thresholds which kick in at a lower rate. 

National Insurance is a fraud; it goes into the same pot as Income Tax, as even the Treasury admitted in the Annual Tax Summaries produced last month.

So the Chancellor must do three things. He must align the thresholds of National Insurance and Income Tax, which would leave more money in the pockets of not just those on low-incomes but across the board. Not only that, but making work pay sharpens the incentives for those not currently employed to get back into the job market with all the benefits that that brings. The Chancellor must also finally produce the outcome of a Consultation announced in 2011 surrounding the eventual merger of National Insurance and Income Tax, and as an interim measure prior to that merger, he must be honest about the purpose of the former and rename it as Earnings Tax – for that is precisely what it is. These measures wouldn’t just be beneficial to the public but would put some much-needed honesty into a tax system sorely lacking in it.

The critics will, of course, bleat about the fact that raising thresholds on taxes amounts to an unfunded tax cut. Firstly, there is no such thing as a “cost” to a tax cut. What it means is that politicians have less taxpayers’ cash to spend, so these changes must be balanced against necessary savings right across government - the Departments of Culture and Business being high on the hit list. Secondly, dynamic impacts of threshold adjustments as the amount of disposable income moving around the economy and making work more financially rewarding suggest the Treasury could well benefit in the long-run. The Chancellor demonstrated last year that his Fuel Duty cut could lead to a 0.5 per cent GDP boost over 20 years; he should legislate to ensure such impact modelling is carried out for all future Treasury announcements regardless of whether he is looking for alternative employment on May 8th.

The Resolution Foundation report is not wrong, but they are focussed on a post-election world that could be very different from the one now. Rather than looking to May 2015, the Chancellor should take the chance to demonstrate he’s on the side of working people by leaving more of their money in their pockets.