Adam Smith Institute

In a new briefing paper, published today, I call on Alistair Darling to raise the personal income tax allowance to £12,000 in his pre-budget report (due to be delivered this afternoon).

A few points:

• Raising the personal allowance to £12,000 would take 7 million low-paid workers out of the income tax net altogether. People earning the minimum wage or less would pay no income tax at all.
• To the average worker, this would be like getting an extra £1,730 a year in gross pay, leaving them £100 per month better off and reversing the substantial falls in disposable income that have occurred over the last 12 months.
• If the Chancellor wanted to give this measure retrospective effect for the current tax year, it would mean a one-off £1,800 'Christmas rebate' for the typical dual-earner family, plus £200 per month thereafter.
• This tax cut would put almost £19bn per year back in people's pockets, allowing considerable additional spending and investment in the productive, private sector economy. This is the key to overcoming recession and restoring economic growth.
• As well as stimulating the economy by giving people more disposable income to spend and invest, raising the personal allowance to £12,000 would strengthen incentives to work, help to eliminate the 'benefits trap' and make low-paid jobs more economic – greatly increasing opportunities for the unemployed.
• If the higher rate threshold were kept at its current level, rather than raised in line with the personal allowance, this policy would cost the Exchequer just £18.9bn a year in lost revenue (it would cost £25bn if we raised the higher rate threshold too). Of course, this calculation is based on a static analysis, and because of the effects outlined above, the actual loss could turn out to be smaller.
• Either way, I argue strongly against the government financing this tax cut with increased borrowing, suggesting they balance it by reducing public sector waste and cutting spending on non-essential programmes instead. The taxpayer already spends more than £30bn a year on servicing government debt, and we shouldn't add to that burden when there is so much fat to be trimmed elsewhere.

You can download a PDF of the briefing here. 

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