The Adam Smith Institute's proposals to double the starting threshold at which income tax is levied did not attract much party support at the time. The ASI's case was that it should start at over £12,000, which is about what someone on minimum wage would earn in a full working week, or about half the average wage. Two recent developments show signs of progress.
Firstly the Daily Mirror ran a story that the Conservatives are ready to propose that married couples can pool their tax-free allowance, even when one spouse is not in work. This would give the working spouse a threshold of £12,100. Although this would only benefit 41 percent of couples, it is a start. Once in place, it could lead to pressure for it to be extended to others in work.
The Liberal Democrats have announced their plans to raise the threshold to £10,000. Once again, while not enough, it is a move in the right direction. The same cannot be said of their plans to 'finance' it by tackling Stamp Duty Land Tax avoidance and Corporation Tax avoidance, and by applying National Insurance to benefits in kind. These are all bad taxes, and they should be looking at ways to reduce, rather than increase, their burden. Their proposal to switch aviation taxes away from people and onto planes instead is, however, a sensible move that the ASI has also put forward.
On the Treasury static model this kind of accounting has to be done, whereas on a dynamic model one can factor in the likely gains that would result from a doubling of the income tax threshold. The need for welfare payments (including tax credits) would diminish as low-paid people were left with more of their own money. The relative attractiveness of employment would rise as working brought more reward, reducing the unemployment rolls. There would be other supply-side effects, too, making it worthwhile to do even if it initially increased the deficit. We are not there yet, but we do seem to be inching our way towards it.
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