Cameron’s tax cuts benefit middle and higher earners, not the poorest
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Version 0 of 1. David Cameron’s address to the Conservative party conference has been almost universally acclaimed as a confident, vote-winning performance – thanks in large part to eye-catching pledges of “tax cuts for 30 million people”. The prime minister’s offer to increase the personal allowance – the point at which you start paying income tax – from £10,500 to £12,500 per year by 2020 would benefit a full-time worker on the minimum wage, if the tax threshold were raised this way overnight, by £500 a year. However, the proposed tax cut is less generous than it initially appears. The personal tax threshold generally increases in line with inflation each year. By 2020 – the year the PM has pledged to hit £12,500 by – inflation alone would increase that limit to around £11,600, according to Paul Johnson of the Institute for Fiscal Studies (IFS). There are also many low-paid workers who’d see no benefit at all: anyone working part-time on low wages is already unlikely to pay income tax. That means this group – which also includes most apprentices and people who are self-employed – miss out entirely on the benefits of this tax change. Those on middle and high incomes get all of the benefit of the tax cut. Shifting the personal tax threshold is a costly endeavour, and the IFS calculates that around 70% of the benefit is felt by people in the upper half of income distribution. This is a bigger problem still for the low-paid given how the coalition intends to fund its deficit-reducing measures. This week the chancellor announced a two-year freeze of working-age benefits – a £3bn-a-year real-terms cut. That is money clawed back from those on lower incomes. So it is with the second measure Cameron announced, targeted more squarely at the party’s core vote: lifting the threshold at which 40% tax is paid to £50,000. Changes to the 40% tax threshold are often painted as benefitting the “middle classes”. But the truth in simple terms is that, relatively speaking, these people are richer than average: only around 15% of earners fall into the 40% tax bracket at present, and today a salary of £50,000 puts you into the top 10% of earners. That’s not a tax cut for those at the bottom, or even in the middle: it’s for those at the top. Meanwhile, on top of all the cuts still to come, which are already considerable, departmental spending would have to be cut by a further 3% in real terms – on top of the expected 30%-plus cuts in real terms it faces between 2010 and 2018. That’s a painful cut, but it’s hard to feel an emotive reaction to a 3% figure. To help put the scale of such cuts into context, it amounts to £7bn – more than the public sector spends each year funding education for under-fives, three times the annual cost of special schools, or more than the BBC’s annual budget. |