Tom Clougherty is Head of Tax at the Centre for Policy Studies.
We often hear that the political tide has turned since the financial crisis, and that the British public are in the mood for higher taxes and bigger government. Yet a new YouGov poll for the Centre for Policy Studies (CPS) paints a rather different picture. We find that only 17 per cent think people in the UK pay too little tax. What’s more, only 21 percent think that the official top rate of tax – 45p on incomes over £150,000 – is too low.
Another striking finding came from asking people to choose between different aims for the tax system. Twenty-three per cent said the goal should be to raise as much money as possible for public services; a quarter said redistribution from rich to poor was the key. But the most popular option by a clear margin, with 35 per cent support, was “to provide people with the strongest incentives to work”.
None of this suggests much of a mandate for hard-left government. On the other hand, it does suggest that the central theme of my new report for the Centre for Policy Studies – Make Work Pay: A New Agenda for Fairer Taxes – is one that resonates with the public.
Here’s the context: we all know that Britain is experiencing a “jobs miracle”; that employment is at a record high, while unemployment is at an historic low. We’re also all aware that wage growth has been sluggish (at best) since the financial crisis, while the cost of living has rocketed up people’s list of concerns.
The goal of my research for the CPS was therefore to come up with ways of putting more money in people’s pockets – but not by going down the usual route of government handouts or heavy-handed market intervention. Instead, the focus would be on making work pay – first by ensuring that everyone could earn a basic minimum before they had to pay any tax at all; and then by ensuring that they always got to keep at least 51p of every additional £1 they earned.
Clearly, the Government has already made great strides on that first point with its policy of raising the personal allowance. But we too often forget that millions of those supposedly “taken out of tax” are still paying National Insurance – a second income tax in everything but name. I suggest it’s time to right that wrong by establishing a new “universal working income” – a combined £12,000 threshold for income tax and National Insurance, which would allow people to earn £1,000 a month completely tax free.
This would be significantly more generous than the government’s current plan – to raise the personal allowance to £12,500 next year, while only lifting the National Insurance threshold in line with inflation. Compared with the current tax system, the universal working income would give anyone earning more than £12,000 an extra £459 a year of spending power. But it would also cut taxes for the 2.4 million people who currently only pay National Insurance – helping to make work pay for those on the lowest incomes.
I realise that my second point – that people should never lose more than 49p of the next pound they earn in tax – might not sound like much. After all, even if you factor in National Insurance, the headline top rate of tax in the UK is “only” 47 percent.
Yet in reality, this principle – which I call “the work guarantee” – is violated at numerous pinch points in the tax system. The effective marginal tax rate on earnings between £100,000 and £123,700 is 62 per cent, thanks to the withdrawal of the personal allowance. Someone with three children and £50,000 of income will face an effective rate of 67 per cent on the next pound they earn, as a result of the high income child benefit charge. And a couple claiming the marriage allowance face losing hundreds of pounds if one of them becomes a higher rate taxpayer – as things stand, there’s a 23,800 per cent effective marginal tax rate on the penny that pushes them over the threshold.
Fortunately, there are simple – and relatively inexpensive – solutions to all these problems: the marriage allowance could be replaced by a more generous “family responsibility allowance” aimed at married couples with young children or other care responsibilities; the high-income child benefit charge could be levied at a much lower rate; and the withdrawal of the personal allowance could simply be abolished, with the 45p threshold lowered from £150,000 to £100,000 (and then linked to inflation) to minimise any revenue loss.
But we can’t talk about making work pay without also thinking about those trying to make the transition from welfare into work. After all, those at the bottom of the income distribution – who may pay tax on their earnings while also having their benefits withdrawn – often see less reward for their labour than anyone else. And while Universal Credit certainly represents a big improvement on the legacy benefits system, it doesn’t fully solve this problem: someone subject to income tax, National Insurance, and the Universal Credit taper will still face an effective marginal tax rate of 75 percent. That can hardly be described as making work pay.
To ensure that the benefits system does not take away what the tax system gives, my report therefore also advocates bold action on Universal Credit, suggesting that the taper – the rate at which benefits are withdrawn against each pound of post-tax earnings over any work allowance – should be cut from 63p to 50p. This would give a huge boost to the lowest earners, while also giving them a strong incentive to increase their hours and make progress in the workplace.
This may, I suppose, sound a bit like a policy wish list – and an expensive one at that. All told, the reforms outlined in my report would cost up to £13.5 billion, with the lion’s share going to raise the National Insurance threshold and cut the Universal Credit taper rate. (The cost could be covered by a move to ISA-style pension tax relief, reforms to National Insurance, and a range of other savings that will be detailed in full in a forthcoming CPS report.)
But while it’s true that each of the proposals I’ve outlined here would be a good thing in its own right, taken together they add up to something much bigger – to a new approach to tax and welfare reform organised around a single, universal principle: that government should do everything in its power to ensure that work always pays.
The polling we carried out as part of my research makes clear that this agenda would be popular: 76 per cent of those polled supported the idea of the universal working income (against 9 percent opposed), while 61 percent backed the work guarantee (against 18 percent who disagreed).
Ultimately, though, making work pay is about much more than political popularity: it’s about a fairer deal for middle-class families; it’s about people being able to work harder and longer without the taxman punishing them for it; and it’s about letting the poorest workers keep more of their hard-earned cash. It is – as Lord Saatchi wrote in the foreword to my report – about giving people more control over their finances and over their lives. And that is surely an appropriate goal for any Conservative Government to pursue.