Raising the NI threshold would have cross-party support

In Wednesday’s Budget we saw the personal allowance threshold rise again; starting April 2016, earnings up to £10,800 will be tax-exempt.

The coalition knows that raising the personal allowance is a politically popular idea (not to mention good public policy). It’s great to see them inch slightly closer to taking minimum wage earners out of income tax all together.

But given how in-tune they are with the tax relief this policy provides to low earners, it’s hard to make sense of their decision to ignore the National Insurance threshold, which currently sits well below the personal allowance threshold at £7,956/year. 

Especially when it would be politically popular to address it.

A pre-Budget poll from YouGov asked Conservative, Labour, Lib Dem and UKIP respondents which policies they would support or oppose if the Chancellor were to announce them on Wednesday. The policy that received the most support (83%) was raising the personal allowance threshold to £11,000, followed by “raising the National Insurance threshold, so it is no longer paid by the lowest earners”, which received 71% support.

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It gets even more interesting if you break it down by party. On NI, both Conservatives and Lib Dems supported the policy with a 75% majority, followed closely by Labour at 72%. UKIP brought the average down slightly, but with a significant majority still favouring the policy at 68%.

Getting the poor out of tax has strong cross-party support and the Chancellor should, in theory, be able to implement changes to the NI threshold without extreme push back from any opposition parties. Yes, the coalition should be credited for their reforms to the personal allowance, but now is hardly the time to go soft on a bad tax that continues to hit the poor hard.

One tax hike I’ll be hoping for in the Budget (and some cuts as well)

Back home in Ireland, it’s said that asking for directions will often get you the reply, “I wouldn’t start from here.” We might say the same thing about the UK’s tax code. Nobody drawing up a tax system for the country would create anything like what we have right now, and when it comes to reform – well, I wouldn’t start from here.

One example, which I talked about on the Today Programme this morning, is VAT. VAT is usually considered to be one of the least bad taxes around: in theory, it doesn’t discourage production, it isn’t very regressive, and it doesn’t distort the economy.

I say “in theory” because in practice the UK’s VAT system is a mess. It is riddled with exemptions (I am including zero-rated and reduced-rated goods in this) that distort people’s spending, which means that resources are being wasted, because people are buying relatively more of the untaxed goods and less of the taxed ones than they would be if the playing field was level.

The usual argument for these exemptions is that they are needed to reduce the burden on the poor. This is a powerful argument but it is wrong.

Many of the exempted items are unlikely to benefit the poor anyway – financial services, the construction of new dwellings, domestic passenger transport – but even for things like children’s clothes and food the argument is wrong. Although poor people spend a greater fraction of their budgets on exempted items like these, total spending on these goods rises with income, so most of the forgone revenue is actually from the rich.

The extra money raised could easily offset the extra cost to the poor by reducing income taxes on them (including national insurance contributions) or by raising the Universal Credit payment level. We could actually offset the extra cost to almost everyone, but except for people on low pay I think there are better taxes we could cut with the money left over.

The IFS estimated in 2010 that scrapping all VAT exemptions would raise an extra £26-28bn, based on 2010-11 numbers. Conservatively, rounding that up to £30bn to account for the larger economy, and spending half on boosting the incomes of the poor, we have £15bn left to play with. We’ve suggested scrapping capital gains tax to boost investment and using the rest to reduce the deficit.

In simplifying VAT we can make one important tax much less destructive without hurting the poor and use the money left over to cut taxes that are even worse.

Politically, this might not deliver good headlines, but if it was done at the start of the next Parliament the boost to people’s living standards by the next election could, improbably, make raising taxes on food and children’s clothes a real winner.

We might not want to start from here to get our sensible tax system, but this is one reform that could be a good step in the right direction.

Ed Miliband proposes double taxation of incomes

This is a woefully bad policy proposal from Ed Miliband:

The Labour leader pledged to cut tuition fees from £9,000 a year to £6,000 from September 2016.

It will apply to students mid-way through their courses, meaning a student in their first year of university today will pay less in their third and fourth years.

The programme will be funded by a £2.9 billion raid on middle class pensioners, and by making graduates earning over £42,000 pay a higher rate of interest on their loans.

We’ve struggled for a number of decades to encourage people to save for their own old age. The current debates are surrounded by plaintive cries of how we’re going to pay for all of that care that the elderly are going to need in the future. So then someone proposes to reduce the amount people save for the future by taxing it more?

Come along now, it’s not April 1st yet.

Pensions experts have criticised proposals from the Labour leader Ed Miliband to cut the tax-free amount Britons can contribute to their pensions in order to fund a reduction in tuition fees to £6,000 a year.

Mr Miliband said that he would cut the lifetime limit on tax-free pension savings from £1.25m to £1m, and reduce the tax-free sum saved per year from £40,000 to £30,000 a year, if he wins the general election.

For savers earning more than £150,000 a year, Mr Miliband proposed cutting the pension tax relief from 45pc, the same rate they would pay on earnings, down to the basic income tax rate of 20pc. The Labour leader said these measures would raise £2.7bn to fund the pledge on tuition fees.

But the real problem is not that it’s a deeply stupid idea. It’s that it’s a deeply unfair one.

There is in fact no such thing as “tax relief” upon pensions savings. What there is is “tax deferral”. Your pension contributions come from your gross income, before tax. Your investment gains within the pensions wrapper are tax free at the time they are made. But the income you derive from your pension pot pays income tax just like any other income. You do not therefore get “relief” from the taxation, you get deferral of it.

Which is, of course, why that tax “relief” has to be at whatever the marginal income tax rate on income is. Because, and yes this is obviously so, those who do manage to save up to that limit are going to be enjoying pensions that pay one or other of the higher rates of tax. But they will have had that “relief” only at the standard rate.

They are, therefore, paying income tax twice on that same income, once when earned and saved for a pension and again when drawn down as a pension.

It’s deeply stupid to dissuade people from saving for their own old ages. But it’s grossly unfair to insist that the same income pays income tax twice.

All of us here have our own ideas about party politics but as an organisation we are not, and resolutely so, party political. But of the ideas thought up to gain support at this coming election for one or other political party we’d award this our coveted “worst we’ve seen yet” prize. Admittedly, we’ve not yet read the Green Manifesto but seriously, double income tax for those who save for their own pensions?

Absurd.

Today’s crazed loon idea

So, we know very well that the government is spending very much more than it is raking in in taxes. There should be some solution to this at some point. At least we hope there will be. But perhaps not this solution:

What might be fairer would be to treat capital gains in houses just like any other financial asset and tax it at 28pc.

Given the turnover of the UK housing market and the gains built into it, it isn’t fanciful to think that, in a good year, the Government could raise £20bn to £30bn a year alone from this source.

For those inflamed by the inequities of the North-South divide, they will be pleased to know that the bulk of anything raised in this way would hit the south east of England hardest.

How wonderful: increase the taxation of the most successful part of the economy. And it’s worth pointing out that the SE already pays much more tax: because the higher salaries earned there are taxed under national income tax rates, not regional ones. but then this is just mad:

As far as pension funds go, a simple 1pc levy on the value of schemes would be easy to administer and collect. This would raise an additional £20bn each year and given that pension fund contributions are subject to income tax relief, it doesn’t seem unreasonable to pay some of those investment gains back to the nation.

We specifically grant income tax relief because we want people to save for their old age. So now we’re going to charge a wealth levy on people who save for their old age? Even knowing that wealth taxes have much larger deadweight costs than income taxes (or consumption ones)? Meaning that if you think pensions savings are undertaxed then it would be more economically efficient to simply reduce the income tax benefits of doing so rather than instituting a wealth tax.

Of course what’s really interesting about the proposals is that no one at all believes that government could ever just curt back its spending to the amount of tax revenue that it has available. Sadly.

What we need to do is obvious

This piece could equally well be titled “Interesting things we learn in The Guardian”. For we find out that Britain has the longest tax code in the world:

The question is: why does the UK have the longest tax code in the world? The Hong Kong tax code, widely held by tax lawyers to be the most admirably efficient in the world, is 276 pages long. The British tax code, rapidly beginning to look like the most disingenuous in the world, is currently in excess of 17,000 pages. It has more than trebled in size since 1997.

And what was it that happened in 1997? Ah, yes, Gordon Brown.

We also find out something else very interesting:

A couple of tax lawyers eventually told me that a 276-page tax code could generate the same if not more revenue in the UK….

So, umm, given that a 276 page code would both reduce the amount wasted on dodging around the systemn and also provide the same or more revenue (in itself the primary purpose of a tax system), why don’t we have a nice bonfire and get ourselves a 276 page tax system? One that might actually be comprehensible to some mere mortal? We can’t really see any argument against it.

And if we were to take the Hong Kong example seriously we might want to take two more things from them. One being that there’s no with holding in their system. In order to pay your taxes you’ve actually got to go and pay your taxes, there’s no salami slicing of that wedge from each and every paycheque. This physical act of having to hand over the money obviously puts a certain pressure downwards on tax rates as people actually see how much government is costing them. And while we’d never actually reach the second defining feature of the Hong Kong system, their low rates, we would obviously get closer if that pressure were to exist.