The real point about the rise in personal allowances

The increase in the tax-free personal allowance is the biggest single item of expenditure in the Budget.

Under the Coalition deal, the allowance had been due to rise from £6,475 in 2010 to £10,000 by 2015. It previously only rose in line with inflation or rises in wages.

No, no, not at all. And it\’s that the personal allowance did not rise in lockstep with even inflation, let alone wage growth, which has us in this insane position that we are in.

I mean seriously, someone working part time on minimum wage pays income tax? How did we ever end up with something as lunatic as that?

Fiscal drag, that\’s how.

As a basic truth, one that isn\’t true of each succeeding year but is of each such decade, wages rise faster than inflation. This is the same statement as productivity is rising, the country is getting richer, real GDP is growing.

So, things like tax bands and allowances should in fact rise with wage growth in order to make sure that such taxation doesn\’t slide ever further down the income scale.

And the thing is, they absolutely never have done. It\’s simply too tempting or a Chancellor to not upgrade the allowances and bands in line with wage growth. No one ever really thinks of it as a tax rise, even though it inreases taxes, so it\’s just where the incentives politicians face is going to take them.

It actually gets worse: G Brown didn\’t even raise the allowance by inflation, let alone wages, in one or two years.

And that\’s how we\’ve ended up moving from a system where income tax, a generation or more ago, was something that only those on average or above earnings had to think about, to the one we have now where people on minimum wage part fucking time find the taxman in their pockets.

The current raising of the allowance is thus, if we look at it properly, just a partial reversal of the fucks ups that everyone (yes, Tories too) have been inflicting on the tax system for the past 40\\60 odd years.

Personally, as a moral issue, I\’d argue that income tax should only kick in at average earnings. £22k or thereabouts. If that means a smaller State then so be it. I\’m entirely happy with the idea that the rich pay for government but I would then insist that we only have as much government as the rich can actually pay for.

Which is, as you might have noticed, markedly less government than we have now.

10 thoughts on “The real point about the rise in personal allowances”

  1. As I understand it, average earnings are about 10% higher than median earnings This would make a tremendous difference to the Chancellors’ sums. Do you mean average or median earnings?

  2. Not comfortable with the idea that not collecting tax is an “expenditure”.

    I mean seriously, someone working part time on minimum wage pays for bread, electricity, household goods? How did we ever end up with something as lunatic as that?

    As for the “moral” idea that only those on more than average earnings should pay income tax, that is an expressway to the tyranny of the majority, very fertile ground for the raise taxes / increase welfare brigade. You might just as well make a law compelling those above average earnings to leave their front doors open when out working hard during the day.

    Quite frankly, if only us rich bastards get to pay for government then only us rich bastards should vote for it.

  3. There’s a good argument that income tax should reach quite a long way down the income scale so as many people as possible feel some of the pain and realise you can’t get something for nothing.

    One of the prime arguments against the old Rates was that, as a majority of the electorate didn’t pay them personally, they could blithely vote for continued increases without being affected.

  4. Surely it should also be a principle that the State should not tax anyone to the extent that they don’t have enough to live on. This is what the personal allowance is supposed to represent – the amount it is sufficient to live on.

    Every now and then it is thought to be amusing to make a tv documentary about a wealthy Tory attempting to live on Jobseekers’ Allowance for a week. I would love to see a documentary about various tax enthusiasts living on the personal allowance.

  5. DocBud

    I think the problem of making tax something that ‘only other people pay’ is a valid one – and it’s what would deter me from moving rates and allowances to a place where they didn’t impact the people they shouldn’t impact.

    I like the idea of a simple and flat ‘citizen’ tax rate which applies to all PAYE income, pensions and benefits. Say 10%.. and even where it’s purely a presentational thing (i.e. when applied to benefits) it’s displayed so that people are constantly reminded that the system costs money, and we all have to chip in. Traditional income tax can then kick in wherever we want.. and National Insurance is scrapped, obviously (‘Citizen Tax’ can be denoted as its replacement).

  6. I agree with Jude and should cheerfully agree to disagree with Tim on just where tax should start but is plain daft that people should be paying income tax and receiving working tax credit and family tax credit at the same time. The lunatics took over the asylum and then the Treasury.
    I think (and it is only my view) that tax should only be paid on income in excess of that needed for a decent but frugal existence. Those idiots who believe in the minimum wage claim that is £12k pre-tax but then subtract tax and NI and add on Working Tax Credits.
    Moving the Personal Allowance to £15,000 would still mean over 75% of households paying income tax and moving it to median earnings as Tim suggests would still leave a majority of *households* paying tax, so they are less likely to vote for unlimited taxes.

  7. I’m am confident, John77, that the UK median income is less than the UK mean income. Tim refers to average income, i.e. mean income. By definition, the median income, which you refer to, would have 50% taxpayers above and 50% taxpayers below.

    The definition of a “decent but frugal” existence will vary according to who is assessing it.

  8. You’re right, Doc Bud.
    If you want to vote, pay tax. The alternative is to vote for other people to pay tax. The candidate Melenchon is running on exactly that platform in France (10% of voting intention according to the polls).
    Tim’s wrong. Everyone should see the tax take, even in child benefit.

  9. @ DocBud
    Except that Tim uses £22k which is approximately median income and rather below mean – Wiki says “In 2011, average individual earnings in Britain were £26,000” “In 2010, the median wage in the UK for all jobs was £20,801” so two years and nearly 10% of RPI inflation later, with a small fall in real wages £22k looks like median earnings to me.

  10. @ DocBud
    “average” can be used either to mean “median” or “mean” or “geometric average” which is different again. I was being “pendantic” by referring to “median” to avoid confusion

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