Meet the new boss: same as the old
This little snippet makes me rather angry. Irate even:
Grant Thornton, the accountancy firm, says that if wages increase at the rate predicted by government economists there will be a record 5.5 million higher rate taxpayers by 2015.
Even if wages grow at a more conservative 2.5 per cent, more than 700,000 people will become higher or additional rate taxpayers in the same period.
At present, anyone earning more than £42,475 pays higher rate tax at 40 per cent, while those earning more than £150,000 pay additional rate tax at 50 per cent. The Chancellor announced a three-year freeze on tax thresholds last June. Mike Warburton, senior tax adviser at Grant Thornton, said the freeze, coupled with wage growth, would create twice as many higher rate taxpayers by 2015 as there were in 1997.
For governments of all stripes have been playing this little game all along. It's called "fiscal drag" and it's part of the pernicious hidden side of the tax system.
We're all pretty hot on knowing the rate of tax that we pay: it's a fairly easy thing to spot. What's much more difficult is figuring out how much of our income that tax rate is being applied to: more specifically, whether there's been a change over time. We can all see that tax rates have come down but if that rate is being applied to more of our income then it's not so clear cut, is it? And the specific point at issue here is the personal allowance and the tax bands.
Looking at historic tax rates and then feeding them though a prices and average wages calculator, we can see that in 1973 you started paying income tax when you earned £595 for the year. If that number had kept up with wages growth it would now be £8,700 a year: but it isn't, it's £7,475. So the poor are being sucked into the tax net simply by not updating the tax system properly.
It gets worse at the other end of the tax system though. You started paying the higher rate when you were earning £5,000 back then. If that was upgraded properly it would be £73,000 now. As above, it's a shade over £42,000 now. What was a tax band that affected the top 2 or 3% back then is about to become one that affects the top 20% of earners.
This process is terribly attractive to politicians, of course. For they get to tax ever more people ever more money without actually having to put up tax rates and take the political pain for having done so. But if we let it continue on for another generation we're going to get close to the paper round being more than the personal allowance and anyone working full time will be on higher rate tax as they're "rich". Even defenders of progressive taxation would blanch at that, wouldn't they?