ONE of the best ways to ease the tax burden on low earners is to increase the personal allowance, the amount you can earn before you start paying income tax. Letting people keep more of their own money is far better than taking it away in tax and giving it back in benefits. Fiscal churn is only good for the bureaucrats paid to manage the system, and the politicians who can pretend they are doing people a favour by robbing Peter to pay Paul.
But some advocates of lower taxes are uncomfortable with the idea of increasing the personal allowance. They can even be worried enough to support pointless complications in the tax code like a new 10p rate.
There is, of course, a moral argument that everyone should earn a stake in society by paying tax. But those on low incomes still pay consumption taxes like VAT and excise duties. There is nothing magical about income tax that connects us all as citizens. Were we less of a nation before it was introduced to fight Napoleon? When it was abolished after the Battle of Waterloo, did that rend the country asunder? Are those with incomes too modest to make them liable for income tax somehow lesser citizens than the rest of us?
The more credible argument is political: it will be too easy for low earners to vote for higher and higher income tax on everyone else if they don’t pay it themselves. That argument makes some sense. But it doesn’t seem to fit the evidence.
Margaret Thatcher was elected in 1979 on a simple promise: “we shall cut income tax at all levels.” When she made that pledge, the personal allowance was £1,165. That is around the same level it is today: 31 per cent of average earnings. By the time of her last victory in 1987, it had risen to £2,425, but fallen slightly as a share of average earnings to 30 per cent.
When Tony Blair was elected in 1997, the personal allowance had fallen to 28 per cent of average earnings. And it continued to drop. By the 2001 election, it was 26 per cent and when Labour was re-elected for a third term in 2005 it was just 24 per cent of average earnings.
If the Thatcher government that cut income tax was elected with a relatively high personal allowance, and the Labour governments that ultimately gave us the 50p rate were elected with a low personal allowance, the allowance isn’t the problem.
Ramesh Ponnuru, senior editor of the US magazine National Review, has made the same point about America: “The US that began the Democrats’ 40-year reign in the House of Representatives in 1954 had roughly the same percentage of non-payers of income tax (24.9) as the U.S. that ended it in 1994 (24.4).”
Of course, economic interests affect political choices. But the final decision is the result of a more complicated calculation than whether or not you pay income tax. There are no fundamental political obstacles to the right answer: let people earn enough to pay for the basics without the tax system getting in the way, then charge a simple proportionate rate so that, if you earn twice as much, you pay twice as much.
Matthew Sinclair is chief executive of the TaxPayers’ Alliance and a member of the 2020 Tax Commission.