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  1. Politics
9 March 2012

A Lib Dem tax cut for the rich

Higher-earners gain the most from an increase in the personal allowance.

By George Eaton

Nick Clegg has always presented his party’s plan to raise the personal tax allowance to £10,000 (since adopted by the coalition) as a “progressive” policy. In other words, one that benefits the poor more than the rich. But unfortunately for the Lib Dem leader, the data tells a different story.

Today’s IFS analysis reminds us that the biggest winners are those at the top of the income distribution. As the graph below shows, those in the second-richest decile gain the most in cash terms, followed by the richest tenth, who gain marginally less due to the gradual removal of the personal allowance after £100,000 (a brilliant stealth tax introduced by Alistair Darling). As a percentage of income, it is middle-earners who gain the most, with those at the bottom gaining by far less.

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In addition, the policy does nothing to help those who don’t earn enough to pay income tax (a third of the adult population) such as pensioners and part-time workers. These groups would, of course, gain from a temporary VAT cut (as advocated by Labour), which the IFS also argues would be a more effective fiscal stimulus than a rise in the personal allowance.

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None of this means that Clegg can’t argue that the policy has some merits. As the IFS notes, “it will strengthen work incentives, especially for low earners.” But it does mean that he can’t call it “progressive”. The rich, not the poor, are the big winners.