The Chancellor says he “tried to spread the burden as fairly as possible across the income deciles.” How successful was he?
This claim depends largely on the £1,100 increase in the personal tax allowance that will come into effect next year. Personally, if I had £3.3 billion to spend, I’d prefer to reverse the increase in the working hours requirement for couples with children to 24 hours, the time-limiting of Employment and Support Allowance, replacing DLA with Personal Independence Payment and the freeze in Child Benefit and tax credits. These changes would directly help some of the poorest families.
The difficulty with raising the personal tax allowance to cut poverty and inequality is that the rich gain far more from this reform than the poor. That is partly because the poorest people – those with no earnings or earning below the original allowance – gain nothing from the increase.
It’s even less progressive if there are no compensating changes to the threshold for higher rate tax, which means that rich individuals gain the same as lower-paid people over the threshold. You can compensate for this by lowering the higher rate threshold, so rich individuals are no better off overall, but this has the effect of drastically increasing the number of people paying higher rate income tax.
In the end, Mr Osborne compromised with a partial reduction in the upper rate threshold. But even if he had fully reduced it the basic rate limit still tends to benefit better-off groups more than poorer groups because pay accounts for a smaller fraction of poorer groups’ income.
The Resolution Foundation showed the results of this in their Budget Submission a few days before the Budget. They divided the country into deciles (tenths) from richest to poorest and looked at who would benefit from a £500 increase in the threshold that was limited to basic rate taxpayers. The result was clearly regressive:
Finally, the government’s Budget Report shows that, over most of the income distribution, the cumulative effect of the tax, tax credit and benefit measures the government has introduced since 2010 has been regressive: As the Child Poverty Action Group put it, by 2013/14, “every household in the bottom half of the income distribution will lose a larger proportion of their income … than 4 out of 5 households in the top half.”