Not so much difference

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With a budget on the horizon, there’s increasing speculation about tax changes, and with the UK Government being a coalition, the differences of opinion between the two partners are increasingly being played out publicly.  The Chancellor is being egged on by some in his own party to reduce the burden on the higher-paid in the interests of job creation, whilst the junior partners in the coalition are keen to be seen to be pushing the interests of lower earners.

The Lib Dems are pushing hard for an increase in the threshold at which income tax kicks in, arguing that it will help some of the lowest earners.  It will, of course; but the biggest benefit in terms of a reduced tax bill from that change alone will go to the highest earners, who will save 50p on every extra pound below any new limit, whilst the lowest earners will only save 20p on every such pound.  I don’t disagree with the Lib Dems’ call in principle, but it makes most sense if backed up by a reduction in the other tax thresholds and/or a tax increase for the higher paid. 

Some Tories, on the other hand, are urging the Chancellor to reduce taxes for the higher paid, gernerally using the non-selfish argument that it will help to promote entrepreneurship and jobs, rather than the selfish one that it will benefit themselves.  The fact that they would just happen to be beneficiaries seems to be largely ignored.  The question as to whether lower taxation on higher earners does or does not generate enterprise and jobs is an interesting one in itself; the causal link is far from proven.  But that’s a subject for another day.

Part of the Tories’ argument is that the highest 1% of earners, they say, pay 27.7% of all income tax, and the highest 5% pay 46% of all income tax.  But Government figures suggest that people with an income over £1million per year actually pay an effective rate of income tax of around 34.8%, even with the top rate of tax set at 50p - that doesn’t look excessive to me.  Those with disproportionately high income pay disproportionately high tax in total, but it's still related to their income; where’s the problem?

For the Chancellor, the problem is this: most of us like government expenditure, whilst few of us like paying tax; but we can’t have one without the other.  What both the parties are suggesting is really little more than tinkering at the fringes; the amount raised by income tax is unlikely to change much.  They’re attempting to appeal to different constituencies with the way that they present what they are advocating – but in reality, both parties’ proposals would give more benefit to the high paid than to the low paid.  There’s not as much difference between them on income tax as at first appears.