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21 November 2016

No, John McDonnell, people earning over £42,000 have not been “hit hard“ by the Conservatives

The shadow chancellor's decision to support this tax cut is as disappointing as it is innumerate. 

By Stephen Bush

John McDonnell has backed Conservative plans to raise the point at which you start paying the 40p rate (that’s 40p of every pound earned after you hit the threshold) to above £45,000 by April 2017 (part of the Conservative manifesto pledge to raise the 40p rate so that it only covers people earning above £50,000 by 2020).

Speaking to the BBC, the shadow chancellor said that those affected “need a tax giveaway at the moment because the mismanagement of the economy by the Conservatives is hitting them hard”.

Is he right? Well, let’s crunch some numbers. Let’s say I earn £42,000, my partner doesn’t work and we have two children. That puts our household in the upper 30 per cent of all British earners, and, thanks to changes to tax and benefits, we are 1.6 per cent worse off than an equivalent household in 2010. Have we been “hit hard”? Well, no, actually, in point of fact, we have been the least affected of any household with children of the coalition.

The pattern holds for every type of household that will feel the benefit of the 40p rate hike. Those with children have seen smaller decreases (1.0-2.3 per cent) in their living standards that those in the bottom three-quarters of the income distribution. The beneficiaries of this change without children have actually seen increases in their tax-home incomes already under David Cameron. There is no case that they need a bigger one under Theresa May.

But, nonetheless, they’re getting one, and it’s the biggest bung to higher earners since Margaret Thatcher was in office.  For context: a single parent family earning £42,000 is in the top 15 per cent of earners. A family in which one person is earning above £42,000 and the other is working minimum wage for 16 hours to look after their two children is in the top 13 per cent. A single person earning £42,000 is in the top 6 per cent of earners.  

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That’s before you get into the big winners from this policy, because higher earners tend to marry other higher earners. A couple with one person earning £45,000 and the other earning £35,000 is in the top three per cent of earners. A couple in which both are earning £45,000 with one child are in the top four per cent.  (Childless couples earning above average income are, incidentally, the only working age demographic to do better since 2010 than under New Labour.)

And these are not cheap tax cuts, either. To meet the Conservative proposal to raise the 40p rate to £50,000 by 2020 will cost £9bn over the course of the parliament, and giving a tax cut to “hard-pressed” earners on £42,000 will cost around £1.7bn.

The political argument for giving up on taxing this group is fairly weak, too. Hostilty to tax rises among swing voters extends all the way up to the super-rich, so Labour’s commitment to the top rate of tax has already hurt them among voters. To win support even for that measure, the party is going to have to persuade voters of the merits of tax-and-spend – it makes no sense to eschew the revenue from people in the top five per cent of earners while still taking the political pian.

Which isn’t to say that people earning above £42,000 should be tarred and feathered, but it is to say that any claim that this group has been “hit hard” by the government or that they should be the target for further tax relief, rather than clawing back some of the losses to the Exchequer of the threshold raise and the planned hike in the higher rate to £50,000, should be given extremely short shrift.