It's time to be honest about who gains from tax cuts

Raising the personal allowance won’t give anything to the lowest-earning five million workers.

The news that George Osborne is likely to match the flagship Liberal Democrat commitment to raise the personal tax allowance to £12.5k in the next parliament is further proof of what became apparent during the conference season: the government’s economic message is jerking awkwardly between painting a bleak account of the years of austerity still to come and sunny promises of major tax cuts just around the corner.

It also clarifies that raising the personal tax allowance (PTA) will remain the tax cut of choice for both sides of the coalition. Which means that it is worth going back over some of the claims made in support of it – not least as some of them are a bit wide of the mark. This is not to say there is no case to be made for having a higher PTA: a tax-free stretch of income has always been an important part of our tax system and raising it clearly has beneficial effects (for instance, it simplifies, improves work incentives for some, and encourages dual-earning). It’s just that sometimes the key arguments made in support of it are often unbalanced or misleading, or both.

It is regularly, for instance, billed as a tax cut targeted at the lowest earners. And, to state the obvious, someone on say £12k – who would benefit - is clearly on a low wage. Yet it’s important to realise that the proposed hike in the PTA from £10k to £12.5k won’t give anything to the lowest-earning 5 million workers in the UK, all of whom will earn less than the £10k threshold come 2015.

More specifically, it’s said that the specific rationale for a further hike in the PTA is to help those on the minimum wage which has fallen sharply in real terms over recent years. Trouble is, more than 60% of those paid the minimum wage – predominantly women - work part-time. Again, they don’t gain. So rooting the whole argument for going to £12.5k in terms of those toiling on the minimum wage is a bit of a stretch.

Another, related, claim is that the point of a larger personal allowance is that it ‘lifts people out of tax’. And self-evidently this is right – in relation to income tax (several million people will have been lifted out of income tax by 2015 due to coalition policy choices). But that’s only part of the story. The coalition has not raised the threshold for National Insurance in the same way (it’s been uprated with inflation for the last 3 three years). It seems to be acceptable that someone on £8k should pay NICs but unacceptable that someone on £12k pays income tax. It’s hard to think of a sensible rationale for this. If tax cuts are the order of the day then raising the NICs threshold would be a far better priority.

At other moments it is argued that the whole point of the tax cut is to help low-income households or families. Again, this is shaky ground. The bulk of the gains from increasing the PTA flow to the top half of the household income distribution. This observation sometimes raises eyebrows but there is no great mystery about it – it simply reflects the fact that there are large numbers in the bottom half of the distribution who don’t work, and there are large numbers who do work but pay no or little income tax. Meanwhile, in the top half of the income distribution there is a much greater preponderance of dual-earning households who gain twice-over from tax cuts.

Indeed, to understand how households, particularly families with children, will benefit from a higher PTA in the next Parliament we need to consider how it will interact with Universal Credit (due to start in 2017). At the moment a tax cut would benefit someone by the same amount regardless of whether or not they are eligible for tax credits. It doesn’t affect their claim. Under Universal Credit this changes. The gains from the tax cut will in large part be offset by a reduction in entitlement to Universal Credit. And this is no small point: millions of families with dependent age children will be on UC. Tax cuts are going to lose much of their potency for a large swath of low to middle income families, it’s just no one has told them. It would be possible to amend Universal Credit to deal with this problem but so far no party has said they will – it costs money.

So raising the tax allowance is not a policy for the very lowest earners. Nor is it a policy for a far smaller number of very highest earners (people on more than roughly £120k, about 0.5 million, get any gains taxed away). But it is a tax cut for the overwhelming majority in between. Some of these will be on low (but not the very lowest) earnings, some in the middle and some near the top: it spreads the gains around which, depending on your point of view, could be a good thing or a bad thing. To put it another way, only a small part of the cost involved in the proposed increase in the PTA – around 10% - comes from lifting those on between £10k and £12.5k out of income tax: it’s expensive mostly because it also gives a tax cut to everyone earning from £12.5k to roughly £120k.

It’s also important to emphasise that how big the gains will really be, and how much it costs the exchequer, will depend crucially on the detail. A policy to raise the personal tax allowance ‘during the next Parliament’ – meaning by 2020 - to the level of the salary of a full-time minimum wage worker in 2015 (c. £12.5k), is a very different thing to committing to move straight to a £12.5k allowance in 2015. And it’s also very different to committing to raise the allowance by 2020 to whatever a minimum wage salary will be at that time.

Finally, it’s worth noting that, as with many policy commitments, there are likely to be unintended consequences. This is because the government has decided to make earning more than the tax allowance an eligibility criteria for some crucial policies – such as to access more generous childcare support, or auto-enrolment into employer pension schemes. This linkage is a truly asinine bit of policy-making. Raise the threshold while sticking to this approach and ever more low-paid part-timers will miss out on vital forms of economic security.

So, yes, let’s debate tax cuts. Given the squeeze on incomes there will inevitably be pressure on all parties to help ease the pressure on households through the tax system. But let’s discuss this in the knowledge of the fiscal hole that still needs to be filled (which will most likely mean tax rises too). And, crucially, let’s be candid about who really gains from these proposals.

Gavin Kelly is chief executive of The Resolution Foundation

George Osborne arrives at Number 10 Downing Street with his special adviser Rupert Harrison on 7 October 2013. Photograph: Getty Images.

Gavin Kelly is a former adviser to Downing Street and the Treasury. He tweets @GavinJKelly1.

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Theresa May’s stage-managed election campaign keeps the public at bay

Jeremy Corbyn’s approach may be chaotic, but at least it’s more authentic.

The worst part about running an election campaign for a politician? Having to meet the general public. Those ordinary folk can be a tricky lot, with their lack of regard for being on-message, and their pesky real-life concerns.

But it looks like Theresa May has decided to avoid this inconvenience altogether during this snap general election campaign, as it turns out her visit to Leeds last night was so stage-managed that she barely had to face the public.

Accusations have been whizzing around online that at a campaign event at the Shine building in Leeds, the Prime Minister spoke to a room full of guests invited by the party, rather than local people or people who work in the building’s office space.

The Telegraph’s Chris Hope tweeted a picture of the room in which May was addressing her audience yesterday evening a little before 7pm. He pointed out that, being in Leeds, she was in “Labour territory”:

But a few locals who spied this picture online claimed that the audience did not look like who you’d expect to see congregated at Shine – a grade II-listed Victorian school that has been renovated into a community project housing office space and meeting rooms.

“Ask why she didn’t meet any of the people at the business who work in that beautiful building. Everyone there was an invite-only Tory,” tweeted Rik Kendell, a Leeds-based developer and designer who says he works in the Shine building. “She didn’t arrive until we’d all left for the day. Everyone in the building past 6pm was invite-only . . . They seemed to seek out the most clinical corner for their PR photos. Such a beautiful building to work in.”

Other tweeters also found the snapshot jarring:

Shine’s founders have pointed out that they didn’t host or invite Theresa May – rather the party hired out the space for a private event: “All visitors pay for meeting space in Shine and we do not seek out, bid for, or otherwise host any political parties,” wrote managing director Dawn O'Keefe. The guestlist was not down to Shine, but to the Tory party.

The audience consisted of journalists and around 150 Tory activists, according to the Guardian. This was instead of employees from the 16 offices housed in the building. I have asked the Conservative Party for clarification of who was in the audience and whether it was invite-only and am awaiting its response.

Jeremy Corbyn accused May of “hiding from the public”, and local Labour MP Richard Burgon commented that, “like a medieval monarch, she simply briefly relocated her travelling court of admirers to town and then moved on without so much as a nod to the people she considers to be her lowly subjects”.

But it doesn’t look like the Tories’ painstaking stage-management is a fool-proof plan. Having uniform audiences of the party faithful on the campaign trail seems to be confusing the Prime Minister somewhat. During a visit to a (rather sparsely populated) factory in Clay Cross, Derbyshire, yesterday, she appeared to forget where exactly on the campaign trail she was:

The management of Corbyn’s campaign has also resulted in gaffes – but for opposite reasons. A slightly more chaotic approach has led to him facing the wrong way, with his back to the cameras.

Corbyn’s blunder is born out of his instinct to address the crowd rather than the cameras – May’s problem is the other way round. Both, however, seem far more comfortable talking to the party faithful, even if they are venturing out of safe seat territory.

Anoosh Chakelian is senior writer at the New Statesman.

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