PEOPLE earning less than £50,000 a year should not pay the 40p higher rate income tax, according to a report out today by prominent backbench Conservative MPs.
The proposal comes from Kwasi Kwarteng and Priti Patel, who both belong to the Free Enterprise Group of 36 MPs who seek to promote economically liberal causes.
At the moment any earnings above £42,476 are taxed at the higher rate. According to the independent Institute For Fiscal Studies, the number of higher rate taxpayers will increase from 3.7m in 2011 to 5m by 2014.
Kwarteng told City A.M. that this was holding back growth and trapping ambitious workers, particularly in London and the South East.
“You want to be motivating your middle income earners because that’s the engine of growth, particularly in the corporate sector. You get more and more people paying the 40 per cent rate and it was never meant for the aspirational classes,” he said.
“A former Treasury minister told me that it wasn’t designed for the number of people that pay it but if you keep the threshold low it makes money for the exchequer so there’s no real incentive to change.”
“In the long run if you have a disincentivised middle layer it’s going to impede growth.”
Kwarteng insisted that it was “realistic” to move to a £50,000 threshold over a five year period, before linking future increases to growth in average earnings.
The report also proposes increasing the threshold for the small companies rate of corporation tax from £300,000 to £500,000. This has not been increased since 1994.
The report estimates the reduction in revenues to the Treasury of such measures would be £4bn, which could be saved by freezing working-age benefits for two years, cutting middle class benefits by 10 per cent, or reducing VAT exemptions.
In the longer term it proposes aligning the basic rate of income tax, the small profits rate and main rate of corporation tax at 20 per cent, although the authors admit this will have to wait until the recovery.
The report concludes: “If we wish to create a more dynamic economy, we need to motivate the middle and increase the returns to work.”