The Lib Dems have made raising the personal tax allowance (what you can get paid without paying income tax) one of their flagship policies. So when George Osborne says at the Budget in two days’ time that he will raise that allowance beyond inflation, it should be a major victory for the junior coalition party.
It is interesting therefore, to take note of a piece of research published today by CentreForum, a think tank with close ties to the Lib Dems, showing that raising the tax threshold* to £10,000 (the eventual aim), would not be especially progressive. It fares especially badly when compared to an alternative proposal, to lift tax credits instead, which would cost the same amount of money.
The think tank produced the following table detailing who benefits from either move, which paints the difference in stark terms:
This calculation, by the way, is what happens even when the upper rate threshold is lowered to make sure that upper rate taxpayers do not benefit too much from the move. But even with that proviso, it shows the biggest winners in cash terms from raising tax thresholds are high earners, and the people who benefit least are the very poorest – those dependent on benefits.
Raising credits, on the other hand, is impressively redistributive (presuming that’s what you’re aiming for of course). So why don’t the Lib Dems pick that route? CentreForum’s research gives a couple of reasons:
- Because of the child elements of tax credits, they unfairly benefit those with children
- People’s income can end up depending more on the state than the job they do
I would add another, even more important on: raising the tax threshold is easily communicated and understood. It wins an important media battle for the Lib Dems whereas tax credits are so badly understood, the party would not be likely to get the same credit for putting money into them instead.
But interestingly, for a think tank so connected with the Lib Dems, CentreForum admits:
Which is the most appropriate option is as much a political as an economic judgement.
*This includes both income tax and national insurance – the coalition’s policy only includes income tax.