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.

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.

Cameron's 'full employment' pledge isn't very convincing

Earlier today in Ipswich, Prime Minister David Cameron pledged to turn Britain into a nation of “full employment”, aiming to overtake Germany for the top percentage of people in work. From the BBC:

The PM is aiming for Britain to have the highest percentage of people in work of any developed nation.

Labour said the Conservatives' promises would sound like "empty words" to the unemployed or those on low pay.

Mr Cameron's goal of "full employment" would involve the UK, currently 72%, overtaking Germany's 74% in terms of the percentage of people in work, said BBC assistant political editor Norman Smith.

There is no timescale, but it is an "aspiration which he wants to achieve", he added.

It’s a nice ‘aspiration’ sure, but Labour’s not the only group to think these are ‘empty words’ coming from the PM.

Why?

His pledge to bring full employment to Britons includes measures to increase the number of start-up loans provided by the government, as well as plans to invest in infrastructure, which he hopes will attract business and support new apprenticeships. But no word about changes to the minimum wage. Not a word about the personal allowance or National Insurance tax.

Research that my colleague Ben recently highlighted shows what a negative effect the minimum wage can have on unemployment – it's estimated that “minimum wage increases reduced the national employment-to-population ratio by 0.7 percentage point(s)” in the United States during the late 2000’s.

What’s more, a job is significantly less valuable to the newly employed if she is still unable to provide for herself and her family. At the same time the PM scraps the minimum wage, he should raise the tax-free personal allowance to the Living Wage, taking the poor out of tax completely. National Insurance tax should also be scrapped for low-earners, as it works as just another form of income tax.

A backtrack on minimum wage increases combined with pegging the personal allowance and NI to a Living Wage would be a serious indication of Cameron’s commitment to ‘full employment.’ But while he continues to spout plans for increased government spending and building, I remain unconvinced.

Well, isn't this an early Christmas present?

We here at the ASI have been arguing for many years now that the most absurd part of our income tax system is that people working part time on the minimum wage are inside the income tax system. We've been arguing it so loudly that something is about to happen:

None of the four main UK parties are proposing a tax cut package that would predominantly benefit low earners, the Resolution Foundation thinktank said on Monday.

A report analysing the impact of the main tax cuts being proposed by the Conservatives, Labour, the Liberal Democrats and the UK Independence party (Ukip) said they would not benefit nearly 5m low-paid employees who do not pay income tax.

Although it found the Labour and Lib Dem proposals were less regressive than the Conservative and Ukip ones, it said that the poorest 50% of households would only get a quarter of the overall benefits even under the fairer plans. The foundation said a more progressive approach would be to raise the national insurance threshold and to lift the work allowance within universal credit. Even though the government is running a deficit of nearly £100bn, all the main parties will be proposing tax cuts in their election manifestoes.

The Conservaties and the Lib Dems both want to raise the basic rate income tax threshold to £12,500. The Conservatives also want to lift the higher rate threshold to £50,000. Labour wants to introduce a 10p tax band. And Ukip wants to raise the basic rate threshold to £13,500, and to introduce a new 35p tax band for those earning between £47,000 and £61,000.

Three of those four proposals to raise that personal allowance come from us here. No, not directly (in one case, yes directly) necessarily but we can point to the Lib Dem we convinced and the path of the proposal through that party. And of course the Tories are just following on. Hurrah! etc.

That the idea, that if we want the working poor to have more money we should simply stop taxing them so much, has caught on is lovely. That it annoys the Resolution Foundation so much is just icing on the cake.

However, they do make one good point:

Kelly also said it would be fairer to prioritise raising the national insurance threshold, because this would benefit the 1.2m people who earn enough to pay national insurance but not enough to pay income tax (for which the threshold is higher).

Yep, raise that NI limit (including the employers' part) to again that full time, full year, minimum wage. Sure, it would be "expensive" if you take that horribly statist attitude that all money really belongs to the State and thus that not taxing it off people is a cost. But out here in the real world most people do get the basic idea. If there is some minimum amount that it is righteous and just (an idea we're not sure about ourselves) that the State insists people are paid then it is equally righteous and just that the State doesn't dip its fingers into those wallets getting that righteous and just minimum amount.

Or, as we've been saying for these long years now. If you want the working poor to have more money then stop taxing them so bloody much.

UKIP is on the right track to beat low pay

Certain policies proposed by UKIP this morning remind us how far away the party platform is from a classically liberal agenda. However.

In the kick-off to their party conference, UKIP has also announced that its general election manifesto will raise the personal allowance threshold by £3,500 pounds:

At its party conference, which has begun, UKIP will also promise to raise to £13,500 the amount people can earn before paying any income tax.

In a plan to win the "blue-collar vote", Nigel Farage's party will pledge to fund the changes by leaving the EU and cutting UK foreign aid by 85%.”

(At present, the) 40p rate is payable on income from £41,866 to £150,000, with the "additional rate" of 45% paid on anything over £150,000.

“Under UKIP's plans, everyone earning between about £44,000 and £55,000 would pay income tax at 35p. Those earning more will pay 40p, with the additional rate scrapped. “

Despite other policy failings, UKIP's commitment to raising personal allowance surpasses the coalition's and should be heavily applauded.

This is the first policy of 'party conference season’ that properly addresses the root of the cost-of-living crisis and provides a simple, effective solution to relieve the tax burden on low-income earners.

For years, the Adam Smith Institute has illustrated the pointlessness in taxing workers out of a living wage, to then compensate their low income with government handouts and benefits. The Labour party’s recent pledge to raise the minimum wage to £8 an hour threatens to put more young, unskilled workers out of jobs, while still taking away a substantial potion of income from anyone who happens to benefit from the small pay raise.

A hike in minimum wage is a symbolic gesture at best, that continues to tax away - or destroy - low-earner incomes. A raise in the personal allowance threshold, however, gets more money into the pockets of those earners, creating no dangerous side effects in the jobs market.

With both the Liberal-Democrat and Conservative Party Conferences ahead of us, we can only hope both party leaders will continue to embrace an increase in personal allowance and match UKIP’s threshold; or maybe even one-up them. (National Insurance cuts, anyone?)