From the TUC

Conservative tax plans help the wealthiest most – but there is a fairer way

17 Apr 2015, by in Economics

At the Conservative party conference last year David Cameron announced that a future Conservative government would seek to introduce two separate income tax cuts: an above inflation increase in the personal allowance and a rise in the higher rate threshold (the amount of income that can be earned before paying the 40 per cent rate of income tax). The policies were also reiterated during this week’s manifesto launch, when they were sold as a means to take anyone earning the National Minimum Wage out of income tax.

At face value, this may sound like a progressive ambition. But the actual impacts are somewhat less impressive, as new analysis undertaken for the TUC shows.

The following chart, which looks at the average change in annual income for families across the income distribution (in 2020/21 prices) as a result of the policies, sets out just who gains.

The lowest income families earn too little to afford them further gains from a higher personal allowance, and are also more likely to depend on in-work benefits (some of which are tapered off as their earnings rise). As a result the average gain for a household in the lowest income decile is nil, and for those in the second tenth of household incomes the average annual gain is £2 a year.

In contrast, those households with the highest incomes are set to see significant gains from the Conservatives’ plans. More likely to see the benefit of two earners, and to gain from both the personal allowance rise and the increased higher rate threshold, these households see, on average, an overall income gain of £875.

Of course household averages hide far wider differences in the experiences of individual families – and in fact the maximum gains for the highest earners are even greater than the distributional analysis suggests, at around £2,000 a year.

As well as being very unfair this tax policy is also very costly, running up a bill for the Exchequer of around £8.9bn a year. So our analysis also considers how this cash could be better spent on supporting those on low and middle incomes, rather than the wealthiest.

One way in which these workers, and the lowest-paid in particular, could be better served would be through strengthening Universal Credit. The chart below shows our alternative proposals for improving this in-work benefit – through options including higher ‘work allowances’ (the level of earnings that can be kept before the benefit starts to taper off), higher child elements and higher allowances for second earners.

The results are striking in their difference to the existing Conservatives’ plans.

Under these Universal Credit reform proposals (which are of a comparable cost to the Conservative tax plans) middle income families find themselves far better off.

The Conservatives have been keen to sell their tax policies as a way to help ‘working people’. This analysis shows that they absolutely do – it’s just that the workers who gain are those who are already among the very wealthiest. A government that really cared about improving outcomes for those on low and middle incomes would invest this money into Universal Credit instead (as Tim Montgomerie’s ‘Good Right‘ project has argued).

 

One Response to Conservative tax plans help the wealthiest most – but there is a fairer way

  1. Raisul Bhuiyan
    Apr 23rd 2015, 3:07 pm

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