Tax cutting has to be as much about morality as about economics. Both are just as important, and neither are mutually exclusive. For Modern Conservatives, the task is clear: Any tax cut must be affordable, help the economy to grow and be justifiable on ethical grounds.
For any tax cut to be credible in times of austerity, it is necessary to show that it can be funded. It must also benefit the many, not the few. This is why Labour’s plans are the economics of the madhouse. Labour’s VAT cut would focus help on the better off, paid for by more Government borrowing. Only Ed Balls and Labour could dream up tax cuts for the few paid for by higher interest rates for the many.
For Modern Conservatives, tax cutting is in essence a moral creed – allowing people to keep more of their own money so they will have the choice on how, if and when to spend it. Starting with tax cuts for the poorest for who lower taxes would make the greatest difference. Unlike Ed Balls and Labour, Conservative tax cutting must be for the millions rather than millionaires.
So how do we square the circle? How do we help those most in need and boost the economy? Across the board income tax cuts meet the criteria of helping millions but are incredibly expensive. A basic rate income tax cut of just one pence would cost £3.85bn in 2012-13, so the 3p cut suggested by Ed Balls and Labour would cost a cool £12bn. Not only is it expensive, it is unprogressive, as the rich would benefit most (no wonder the country went bust!). For our part, we see lower taxes for the lower paid is a greater priority than the abolition of the 50p rate.
So how can lower taxes for lower earners be delivered? We believe that increasing the income tax personal allowance is the right way forward. It doesn’t just focus help on the most needy in our society it is also popular with some 67% supporting an increase (against just 22% who support getting rid of the 50% income tax trap left by Gordon Brown). It provides a more immediate economic stimulus as the least well off are more likely to spend any extra money that is to hand. The Chancellor was therefore right to increase the personal allowance to £7,475 for the current year and plan an increase to £8,105 for the next tax year.
The media would have you believe that this is a Lib Dem policy. For sure it was included in the Lib Dem manifesto. Yet it is in truth a very Conservative policy that many of us were pushing a decade ago when the Lib Dems were still arguing for another penny on income tax. So while the media would have you believe that this is something that Nick Clegg is fostering, we do not see that Modern Conservatives should cede any ground as being the true parents of this policy. This is a tax cut that doesn’t just help the lower paid, it incentivises the jobless from moving out of Labour’s toxic legacy of benefits dependency. Little wonder then that Labour are making the case for tax cuts for millionaires over tax cuts for the millions they would prefer to see dependent on the state.
How do the numbers stack when it comes to taking poor people out of income tax? HMRC figures indicate that every £100 the personal allowance is increased costs the Exchequer £490m. So on the face of it, a £1,000 increase would cost £4.9 bn. However, in Budget 2011 (see p42, line 22), the higher rate threshold was adjusted so that only basic rate taxpayers would see the benefit of the higher personal allowance. In other words the change was made to focus the tax cut on the least well off. Hence the cost of a £630 increase in the personal allowance was £1.05bn. An increase in the personal allowance by £1,000 on this basis would cost the Exchequer £1.7bn.
Now, bear in mind that the personal allowance will rise to £8,105 from April. If we want to see the first £10,000 of earnings taken out of income tax altogether from then, the cost to the Exchequer would be £3.2bn. Interestingly, this is the headroom the IFS is reported as saying the Chancellor has for the Budget. If there is the headroom available, as Modern Conservatives, we believe the Chancellor should indeed take the plunge and increase the income tax personal allowance to £10,000 with effect from this April.