No, this ain\’t fiscal drag

The increase in higher-rate taxpayers is due to reductions in the threshold for paying 40pc tax, in combination with so-called \”fiscal drag\”, where tax bands do not move up in line with inflation, meaning inflation-linked wage increases push more people into higher rate tax bands.

Fiscal drag
is more subtle than just not moving the bands up with inflation. It\’s that (outside recessions of course) wage inflation, or perhaps wage growth, is higher than general inflation. It must be, that\’s how everyone gets richer over time.

So, even if you move the bands up with inflation you still get fiscal drag as wages rising faster than inflation push ever more people either into the tax band or into the higher ones.

Which is how we end up with the current situation. Wasn\’t all that long ago, within my parents\’ life time if not my own, that you didn\’t pay income tax until you were on average or above wages. Now you do if you\’re part time on the minimum wage.

The Coalition\’s much vaunted \”huge rises\” in the personal allowance are merely undoing a couple of decade\’s worth of fiscal drag, nothing more.

Of course, it\’s also true that that bastard Brown didn\’t even raise allowances in line with CPI inflation. But no one at all has raised them in line with wage growth.

3 thoughts on “No, this ain\’t fiscal drag”

  1. “much vaunted “huge rises” in the personal allowance are merely undoing a couple of decade’s worth of fiscal drag, nothing more.”

    ANY move 20 years back in tax is to be welcomed. So I accept them as “huge rises”.

    Our glass is less half-empty than in 2009.

    Alan Douglas

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