When Bob Piper and the Adam Smith Institute agree on something it is time to sit up and take notice. Over the weekend the ASI released a policy paper calling for personal income tax allowances to be raised to £12,000. Due to the budget leaks, it didn't get much traction. So now that all the excitement is dying down, let's look at what Tom Clougherty and his colleagues were proposing. This is an extract from the ASI blog...
* Raising the personal allowance to £12,000 would take 7 million low-paid workers out of the income tax net altogether. People earning the minimum wage or less would pay no income tax at all.Interesting stuff. I agree with Tom that a measure such as this would have a far bigger effect in providing a real fiscal stimulus, rather than a small cut in VAT. But as Tom points out today...
* To the average worker, this would be like getting an extra £1,730 a year in gross pay, leaving them £100 per month better off and reversing the substantial falls in disposable income that have occurred over the last 12 months.
* If the Chancellor wanted to give this measure retrospective effect for the current tax year, it would mean a one-off £1,800 'Christmas rebate' for the typical dual-earner family, plus £200 per month thereafter.
* This tax cut would put almost £19bn per year back in people's pockets, allowing considerable additional spending and investment in the productive, private sector economy. This is the key to overcoming recession and restoring economic growth.
* As well as stimulating the economy by giving people more disposable income to spend and invest, raising the personal allowance to £12,000 would strengthen incentives to work, help to eliminate the 'benefits trap' and make low-paid jobs more economic – greatly increasing opportunities for the unemployed.
* If the higher rate threshold were kept at its current level, rather than raised in line with the personal allowance, this policy would cost the Exchequer just £18.9bn a year in lost revenue (it would cost £25bn if we raised the higher rate threshhold too). Of course, this calculation is based on a static analysis, and because of the effects outlined above, the actual loss could turn out to be smaller.
* Either way, I argue strongly against the government financing this tax cut with increased borrowing, suggesting they balance it by reducing public sector waste and cutting spending on non-essential programmes instead. The taxpayer already spends more than £30bn a year on servicing government debt, and we shouldn't add to that burden when there is so much fat to be trimmed elsewhere.
For the £12 billion cost of Darling's 2.5 percent VAT cut, he could have raised the personal allowance to £10,000 instead.That would have taken 4.3 million people out of income tax, and saved a typical dual-earner family £133 per month.It would, though, still have to be financed in the short term by massive borrowing unless there was a real willingness to cut government spending. And the ASI naturally have many ideas as to how that can be done.