Another set piece from the chancellor last week, and another rise in the personal allowance. The Conservatives now push this policy with the same zeal as Nick Clegg – and on the same basis. It would, George Osborne said, “support people of all ages in work”, and then give a special boost to the low-paid by “taking them out of tax altogether”. What a pity that this is a monstrously wasteful way of achieving both these things.
It is not only the coalition that imagines that cutting Britain’s main progressive tax is the best way to help the poor. A neurotic impulse drives Labour to propose bringing back a 10p tax band that Gordon Brown introduced and then abolished. This does virtually the same as a higher allowance, but would apply to a pathetic slice of income – perhaps just £300 – and complicate the system in the process. Ukip would hike the allowance further still, and – like the Tories – would chuck in extra tax cuts further up the scale.
So, what’s not to like? First, with Mr Osborne proposing to roll back the state to the 1930s, this is no time for any giveaways. Taxes are bound to rise after the election; cutting them beforehand is fraudulent. Second, as the Resolution Foundation points out, the money overwhelmingly misses the proclaimed “low earners” target. The bottom half of families would divvy up just a quarter of the Labour and Lib Dem largesse, which falls to a fifth under the Ukip and Tory plans. Higher income brackets walk away with most under every party’s plan, and indeed the chancellor last week took care to ensure that higher-rate taxpayers would gain the most. As for his line about “people in work”, recall that personal allowances apply to unearned income too. Cutting national insurance provides a ready alternative means of backing those who toil. But, as income tax is reduced on investment returns and buy-to-let rents, this levy is entirely neglected.
The cost to the exchequer of raising allowances since 2010 is now £11bn and counting. This cavalier squandering of scarce public funds has done next to nothing for the pretended aim of easing the poverty trap. For many low earners there is a serious problem. It really can be a tough call as to whether or not it’s worth working. But this is, overwhelmingly, because of the withdrawal of benefits and tax credits – not income tax.
The big idea here is supposed to be Iain Duncan Smith’s universal credit. This was never a complete answer, even in theory, and in practice it is proving shambolic. The Office for Budget Responsibility noted last week that it was now assuming “further delays” in the reform, “reflecting the optimism bias in past rollout plans”. Even if the thing was working as intended, it would automatically gobble up 65% of any income tax cut handed to many claimants on modest pay. One answer to that is to boost the so-called “work allowance”, so that claimants can earn more than now before this claw-back starts. But what did Mr Osborne do last week? He froze this allowance, allowing inflation to eat it up.
Where rewarding work is concerned, Westminster has now lost all interest in, well, what works. The obsession with income tax cuts is cynical, costly and stupid.
