Vince Cable valiantly continues to argue that the £1,000 increase in the income tax threshold is part of the Lib Dem “progressive” strand of this week’s Budget – evidence that George Osborne listened closely to the Lib Dems’ determination to protect the poor when framing his austerity package.
Before he pushes the case too far, Cable would do well to have a quiet word with his departmental (Tory) colleague David Willetts.
Politicians (and the media) have short memories. Increases in the income tax threshold used to be a favourite policy of the Conservative right: people would keep more of their own money and would be less dependent on state benefits, the argument ran. And, the poor would benefit.
Willetts, though, has always been too intelligent and honest a politician for his own good. A few years ago he demolished the case that higher thresholds were an efficient way to help the less well-off. Instead he showed they provided an expensive tax cut for those higher up the income scale.
Using figures supplied by the Treasury (I wonder if the Knights of Great George Street concealed them from Messrs Clegg and Cable before this year’s Budget?), Willetts pointed out that:
1) The tax that poor people pay isn’t income tax. The poorest 20 per cent lose nearly 30 per cent of their incomes in indirect tax – and the biggest component of that is the soon-to-be-increased VAT
2) Direct taxes take less than 10 per cent from this income group and the largest single component of that is council tax. Income tax is responsible for less than one tenth of the total taxes paid by the poorest fifth of households
3) Only a small fraction (about one-fifteenth) of the cost of raising the income tax threshold is spent on taking people out of tax altogether. The principal beneficiaries of the threshold increase are those on average or above average earnings.
Willetts concluded that raising thresholds was worth least to those on low incomes. He could have added that even the small gains they receive are eroded by the withdrawal of benefit entitlements. Progressive?
Jim Pickard
Kiran Stacey