Everyone wins by cutting taxes for the low earners
AMID last year’s constant political drama, something went missing – 2019 was the first year in modern political history when we didn’t have a Budget. But in six weeks’ time, on March 11, Sajid Javid will open the Chancellor’s famous red briefcase for the first time.
A promised sharp rise in funding for the NHS and the police is a given. But in a question-and-answer session Boris Johnson hinted that another priority will be tax cuts for the low-paid – perhaps going beyond a proposed rise in the threshold at which earners become liable to make National Insurance contributions.
Tax cuts as well as public spending? The Prime Minister’s critics will be quick to assert that this is one more example of him trying to have his political cake and eat it. Yet the two things are not mutually exclusive and neither do they necessarily imply huge amounts of extra borrowing.
If, through judicious tax cuts, the Government can encourage more people into work and make those on low incomes less reliant on state benefits, then everyone wins. Moreover, if you put more money into the pockets of the less well off, there is a high chance they are going to spend it – which in turn boosts the economy and leads to higher corporate tax revenues.
YOU would think only the state is capable of stimulating the economy if you listen to many Labour politicians. When they speak of austerity, they always mean cuts to public spending.
It doesn’t occur to them that if you tax people too heavily, it leads them to stop spending – which in turn causes sales to fall and businesses to shed jobs. That is austerity just as much as when jobs are lost in the public sector.
What Mr Johnson and Mr Javid are proposing has, in fact, been Conservative policy for the past decade – with huge success. When the Tories came to power, in coalition with the Lib Dems, we only had to earn £6,475 before the taxman would start helping himself to some of our money. This year, the personal tax allowance is nearly double, at £12,500.
It means millions of Britons have escaped income tax altogether. And the result? The employment rate has climbed from 70 to just over 76 per cent.
Tax cuts for the low-paid are not the only reason for this remarkable figure. The retirement age has been raised and in some cases, sadly, people have been forced to remain in work longer because company pension schemes have collapsed.
But the rise in the tax threshold deserves far more credit than it is given. For decades, we had people caught in a welfare trap.They might have wanted to get a job but they knew that if they did so they would be worse off because their wages would be taxed and their benefits would be cut.
Raising the income tax threshold has sent a strong message that work pays. Lower taxes for the low-paid make for greater efficiency in the public finances. What is the point in the state taxing people with the one hand only to give the money back in benefits with the other? It is money going round in circles, with a fair slice of it eaten up in administrative costs.
The Government’s taxation policy has provided a boost to employment but there is still further to go. While the threshold for income tax has been raised sharply the threshold for paying National Insurance contributions has remained stubbornly low. Earners still have to pay NI on any earnings above £166 per week – £8,632 a year. The NI threshold needs to be raised or, better still, phased out altogether. It is nothing more than an income tax by another name and, perversely, one only paid by people who work for a living.
People who derive their income from investments don’t have to pay it.
THE past decade has been tough for many on low incomes. After the economic crash, many employers had to hold down their wage bill in order to survive. While people on the lowest incomes were protected by rises in the minimum wage, those a little higher up the chain suffered.
The years of personal austerity, thankfully, are at an end. Real wages are growing again, the National Living Wage will rise to £8.72 an hour in April and it seems tax cuts for the low-paid are on their way.
No matter what a Conservative government does, Labour will always condemn it for helping the rich and punishing the poor. It is simply untrue. It has never been easy supporting yourself, still less raising a family, on a low income. But tax cuts and low unemployment are at least making it a little easier.
‘If you tax people too heavily, it leads them to stop spending’