Why tax the poorest?

There is a strong case for proposing that those living on the basic UK State Pension or the National Minimum Wage should be exempt from income tax and National Insurance contributions (NICs).

Taxing people on the bare minimum needed to survive is viewed by many as unjust. If the government itself sets the State Pension or the Minimum Wage as the baseline for an acceptable standard of living, taking back some of that income contradicts the principle of a minimum living standard.

Pensioners and low-wage earners are often among the most financially vulnerable. Removing tax burdens would help to reduce their poverty and increase financial security without requiring these groups to seek additional state support.

Taxing the minimum wage or the basic pension reduces disposable income, which in turn suppresses consumer spending in the lower-income households that are more likely to spend than to save additional income. Lifting this burden can stimulate local economies.

Reducing taxes on low income people could help to avoid the Poverty Trap.

Taxing low-income workers contributes to a situation where earning more leads to only a small real increase in take-home pay after taxes and benefit withdrawal. Removing taxes and NICs at this level would improve work incentives.

Exempting low-income individuals from tax and NICs can simplify the tax system, reduce administrative costs, and avoid burdensome paperwork for both HMRC and individuals with very modest incomes. The revenue gained from taxing very low incomes is modest relative to the administrative cost and social harm.

The Minimum Income Standard (MIS), developed by researchers like those at the Joseph Rowntree Foundation, consistently finds that both the basic State Pension and the National Minimum Wage fall below what they believe is required for a decent standard of living. Taxing these incomes worsens the shortfall.

Most people believe that tax policy should be fair and transparent. There is broad public support for the idea that people on the lowest incomes should not be taxed. Such a proposal aligns with progressive taxation principles, where those with the broadest shoulders bear the heavier burden.

There is an argument that everyone should contribute something to feel part of the country and its economy. But contribution can take many forms, including indirect taxes such as VAT, tobacco and alcohol duty. Forcing people into hardship for the sake of nominal contributions is socially regressive.

The notion that NICs fund the NHS and pensions is spurious. The overall tax take funds public services, and the fairness of the system matters more than maintaining a symbolic and mythical link between work and contributions.

The core argument is this: It is neither morally justifiable nor economically sensible to tax those who are only just getting by. If the minimum wage and the basic state pension are truly the floor of acceptable living standards, then taxing those incomes only undermines the very purpose of those thresholds. A more humane and effective tax system would start taxing only those above a true wage or pension adequacy line.

Madsen Pirie