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4 February 2011

Will the coalition keep squeezing the middle?

Nick Clegg hints at further middle-class tax rises to fund income-tax pledge.

By George Eaton

At the end of another week that’s seen the coalition accused of “squeezing the middle”, Nick Clegg attempted to mount a defence of the government’s tax plans on the Today programme this morning.

As the Institute for Fiscal Studies noted on Monday, roughly 750,000 people will become higher-rate taxpayers as a result of the coalition’s decision to reduce the threshold for the 40 per cent band from £37,401 to £35,001. In response, Clegg rightly pointed out that many will pay a higher rate of tax on a “very, very small proportion of their earnings”. But this ignores the fact that they will now also fall victim to George Osborne’s child benefit raid.

The plan to abolish the benefit for all higher-rate taxpayers means a loss of £1,055 a year for one-child families and almost £2,500 for those with three children. This move, combined with the VAT increase and cuts to tax credits, will result in a particularly sharp fall in living standards for some.

Clegg was adamant that the coalition would fund its £4.3bn pledge to raise the personal allowance to £10,000 through tax rises elsewhere. “We’re not going to borrow,” he said. But that prompts the question: tax rises on whom? If the coalition continues to meet the promise by reducing the 40p threshold, it will create another 850,000 higher-rate taxpayers.

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But an alternative option was brought to mind by Clegg. He noted that the coalition’s tax changes meant that businessmen no longer paid “less tax on their capital gains than their cleaners do on their wages”. However, as you’ll remember, the original Lib Dem plan to equalise capital gains tax and income-tax rates was blocked by Tory MPs. To my mind, this would be a much fairer way of funding the pledge.

In his recent essay for the NS on reclaiming Keynes, Vince Cable spoke of his desire to shift taxation away from productive investment and towards unproductive assets such as land and property. Increasing capital gains, rather than raising income tax, would be a perfect example of this.

The Tories will be reluctant to make what would be characterised as another “concession” to the Lib Dems but this change would be in their interests, too.