It’s right to make the poorest pay some tax

Freezing the income tax threshold will open voters’ eyes to the true cost of bigger government

Rishi Sunak’s Budget didn’t just throw money around with cavalier abandon or presage much higher taxes on business that will predominantly hit wealthier taxpayers. There was a sting in the tail that is a lot more serious than it may have looked at first sight, as the Chancellor threw in a significant tax rise for some of the worst-off people in the country.

Crazy? Vindictive? Not really. In truth, Sunak has taken the first step on what will be a long and difficult journey to reminding the British public that there is no such thing as a magic money tree – and that we will all have to pay towards the biggest state seen in peacetime history.

One of the Chancellor’s biggest moves towards restoring the nation’s finances was his announcement that the income tax thresholds will be frozen from next year, both for basicand top-rate taxpayers, until 2026. Normally the point at which each tax rate kicks in goes up every year, at least by the rate of inflation, to reflect the fact that wages generally increase over time. Now, through a process known as fiscal drag, more lowerwage workers will find themselves paying income tax than otherwise would have been the case.

In effect, Sunak is bringing to an end one of the key policies of the Cameronosborne era. Raising the basic rate threshold well ahead of the rate of inflation was imposed on the Coalition government by the Lib Dems – remember them? – as the most efficient way of reducing the tax paid by the poorest. In fairness, it was a perfectly respectable policy that focused resources on cutting the burden on the people at the bottom of the ladder.

There was a snag, however. It was a bit too successful. According to the Institute for Fiscal Studies, of the 54 million adults in Britain, only 31 million, or 56 per cent, pay any income tax at all. The rest – 44 per cent in total – pay nothing, although they will pay VAT and similar levies.

Meanwhile, just 300,000 people pay 27 per cent of the entire amount raised by income tax.

We have created a weird, throughthe-looking-glass tax system where a tiny number of the highest earners have paid most of the bills and a bare majority paid a little bit, but for close on half the population the Government, the welfare state and the health service have all been essentially “free”.

That was a serious mistake. By constantly taking people out of the tax net, successive chancellors removed any link between what the government does and what you have to pay for it. Why not vote for more and more state spending, higher public sector salaries, more generous pensions, lavish infrastructure projects, and endless bail-outs if you won’t be expected to meet any of the bills?

Sure, if we ever have money for tax cuts again, there is nothing wrong with using that to help the worst-off. But we could do that with a lower starting rate – a return to the old 10 per cent rate of income tax, for example, introduced by Gordon Brown in 2000 – rather than constantly raising thresholds. The principle of progressive taxation is a perfectly good one, but it should mean that people contribute according to their income, not that most people don’t contribute anything. That isn’t “progressive”. It is just a free lunch.

That matters right now more than ever. We have been through a tumultuous year, with the Government supporting millions of people and businesses through lockdown. There are fears that furlough and all the other support programmes will lead to a long-term and unsustainable dependency on the state among large parts of the public.

We have also been spraying money around on an unprecedented scale, and paying for most of it by simply printing cash. After the Budget takes effect the state will be collecting 35 per cent of GDP in taxes, the highest level since Roy Jenkins was chancellor, way back in 1968.

You can argue about whether that is right or wrong. But it is surely important that everyone pays for it, and that they don’t simply pass the bill to someone else. It will take a long time to make our way back to fiscal sanity and to ensure the country lives within its means, but making sure that everyone pays something is the first step on that road – and freezing the tax threshold is a good way of achieving that.