The Middle Class Needs Relief Too

Too many people paying too much.
Too many people paying too much.

 

David Skelton, director of the campaign group Renewal, has penned a provocative article for The Telegraph in which he dares to suggest that the 40% rate of income tax should be scrapped because it punishes the hard-working middle class rather than skimming off superfluous income almost unnoticed from the ultra-rich.

This is a bold move given that most of the political focus is currently on helping the lowest-income earners by increasing the tax-free allowance again and again. And while the current approach certainly has merits, it is undeniable that the middle class has received far less support.

It may have been quite right to begin means-testing child benefit – this blog certainly thinks so, as the first step toward ending universal benefits which simply should not exist. But actions such as this, while correcting discrepancies, anomalies and moral wrongs in the tax code, were not accompanied by countervailing efforts to lower the overall tax burden. This is where Skelton’s proposal shows its value.

Skelton writes:

It is also important for the Government to help middle income earners who have played such a big role in making sacrifices during the recession and in reducing the budget deficit. George Osborne should take a major step to unwind the undesirable drift towards an ever higher proportion of the working population paying higher rate tax. In doing so he could relieve the pressure on the squeezed middle, so many of whom have borne the burden of paying for Labour’s profligacy.

His proposal would see more than two million people taken out of the higher rate tax band:

A number of Tory MPs have argued that the Chancellor should look to raise the higher rate threshold to £44,000. Our proposal at Renewal would go much further, taking many more people out of paying the 40p rate while simplifying the tax system. We believe he should scrap the 40p rate and start the 45p rate at a much higher level of income. 

Potentially, this could take more than two million people out of higher rate tax, giving a significant tax cut to the squeezed middle.

The retention of the punitively high 45% top rate of income tax is the only unwelcome part of the proposal, but was clearly included to keep the break-even point at what was considered a politically palatable level. But aside from this regrettable acceptance of Gordon Brown’ final act of economic vandalism before being kicked out of office, Skelton’s proposal is very strong.

It is long past time to address the fact that the 40% tax band now includes a very different sort of person to the type envisaged when the rate was set by chancellor Nigel Lawson. As Skelton rightly notes:

More and more people on middle incomes have been dragged into paying the 40 per cent rate of tax over the past decade. That includes teachers, nurses, bricklayers, police officers and Tube drivers. These are not people who should be in the higher rate tax bracket but are because the threshold at which it is paid has been repeatedly frozen. 

The number of people paying 40p tax has risen steadily from just over 1.7 million in 1993/4 to 4.4 million in the current tax year. That is a staggering one in six of taxpayers, up from one in 20 when Nigel Lawson was Chancellor.

Quite right. A person on around £40,000 a year in the early 1980s was far more affluent than someone on that same salary today. But cowardly government after cowardly government have deliberately chosen not to increase the tax rate threshold in line with inflation, bringing this whole new cast of characters into a tax realm originally intended for those who were genuinely, comparatively rich.

The chances of this proposal becoming concrete policy remain slim, however. As James Kirkup notes in the Telegraph, the increasingly boisterous and assertive Liberal Democrats are intent on defending the laser-like focus on raising the minimum tax threshold above all other ideas:

Increasing the basic threshold has been driven by the Liberal Democrats and the party’s Danny Alexander, the Chief Secretary to the Treasury, defended the focus on lower-paid workers. 

He said he “understood the argument” around 40 per cent tax, but insisted that lower-paid workers had to come first. “I think it’s right that we have a policy that is focused particularly at that part of the population.”

More worryingly still, the Conservative leadership also appears slow to embrace the idea – perhaps because it is a good piece of economic policy that originated somewhere other than Number 11 Downing Street. The Daily Mail reports:

In a major speech on the economy, the Prime Minister promised that further savings from public spending would be used to fund tax cuts.

But Mr Cameron, who confirmed the Government would accept a rise in the minimum wage to £6.50 an hour, appeared to indicate that any future tax cuts would be targeted at the low-paid.

He made no reference to raising the starting point for paying 40p tax, which is emerging as a key Budget demand among Conservative MPs.

Whether the Conservatives have any fire left in their belly to enact a genuinely useful tax cut in the face of this opposition and distraction remains to be seen, and go some way toward showing whether there really is any conservatism left in this coalition government at all.

If they do find the courage, it will be a major victory for middle class earners and for common sense.

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3 thoughts on “The Middle Class Needs Relief Too

  1. thelyniezian March 10, 2014 / 6:19 PM

    I frankly had no idea before today there even was a 40p rate, so close to the top 45p rate. It seems certainly wrong.

    I would question the “punatively” high 45p rate though. One must think that only income tax, NI etc. is affected by earnings, not many other forms of tax (VAT etc.) which probably disproportionately affect lower earners to higher earners in terms of proportion of income they get.

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    • Semi-Partisan Sam March 10, 2014 / 11:14 PM

      The 40p rate was the top rate from Thatcher’s day until the end of the Gordon Brown terror when he hiked the top rate to 50%, not to raise any revenue but to be seen to be punishing the wealthy in some perverse left-wing PR stunt. George Osborne then managed to compound the foolishness by cutting the new 50% top rate to 45% rather than abolishing it entirely, making it much harder to eliminate altogether (two tax cuts “for the rich” being much harder to sell politically than one).

      The point you make about other indirect taxes such as VAT being deeply regressive is extremely valid, and it is certainly true that low earners have a much higher marginal propensity to spend and will consequently pay a larger proportion of their income in these taxes. Unfortunately, I don’t see many ways around this – it would be impossible and highly undesirable to enact a progressive sales tax – it would be akin to price discrimination by the government. So while the impact of VAT etc. on low earners is a problem deserving of discussion in its own right, I don’t think it should detract from the equally important argument about cutting taxes for middle classes and modest-income professionals who have been unfairly dragged into this higher rate of tax.

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      • thelyniezian March 11, 2014 / 12:18 AM

        In terms of VAT being regressive- well, yes it is true that progressive VAT might be difficult to achieve (perhaps it could depend on the value of goods). I was thinking of this more with regards to the 45p top rate of tax for high earners, than the 40p rate which affects those on middle incomes. I have an issue with the 40p rate myself, as it seems unfair that those who (at least by the standards of places like London if not my native North-East) are on modest means, that is so close to the rate for the very highest earners. But, at the same time it seems wrong to focus on the alleged unfairness and need for cutting the very top rate of tax, when other taxes are at historically high levels which affect those on lower incomes. The very high earners are not going to have their ability to survive threatened by maintaining the 45p rate. Would it not perhaps be best to consider whether maintaining VAT at 20% could not be reconsidered- a cut which everyone could benefit from?

        Like

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