One Penny on the Income Tax

From time to time, a strange proposal raises its head in the UK. This is the suggestion to raise taxes to finance some suitable and of course very worthy causes, e.g., the National Health Service or education. This financing is to be done by raising income tax by “one penny”. And why not? The cause is eminently worthy. And one penny doesn’t sound like very much. Except of course, this is another example of politicians using words that don’t quite mean what they sound like, in order to make us part with more of our money.

In fact, “one penny on the income tax” is an almost perfect example of what should be called a stealth tax.

This is for two reasons. First, the strange use of “one penny”. Presumably, this goes back to the days when there were 240 pennies in the pound. Since there is no unit describing 1/240th, it is easier and natural to refer to talk in absolute number of pence. But that was 50 years ago. Since there are now 100 pennies in the pound, why not talk about percentage points? True, some of this may simply be inertia. But it is difficult to abandon the suspicion that it is because one penny somehow sounds very much less than one percent.

The second reason why referring to “one penny on the income tax” is invidious, is because it actually disguises the relative size of the tax increase involved. If you only pay the basic rate of income tax, the tax amount of your taxable income taken from you is 20% (that is to say, one-fifth). If you add “one penny” to the basic rate of tax, this means actually increasing your tax payments by 5% or one-twentieth, since your tax rate is now 21%.

If you are a higher rate payer per year (40 or 45%), the increase is proportionately less, although of course, in absolute terms, your tax rises by more. However, your tax burden will rise by between 2.2% and 2.5%. It could, of course be argued that a 2.2% or even a 5% rise in any person’s tax burden is not particularly onerous. But that is beside the point. Whatever tax burden is, actual and/all proposed, taxpayers should be aware of it. They should not be tricked or cajoled into paying higher taxes by stealth or obfuscation.

So how much is actually “one penny on the income tax”? In 2019, when the Liberal Democrats launched one of the regular proposals along these lines, The Telegraph calculated that the cost for an average taxpayer would amount to £170 per annum. But going out and telling voters, “we intend to take another £170 off you” presumably doesn’t sound very innocuous, or attractive.

But as voters and taxpayers, should we not insist on honesty from our elected representatives?