Fair Taxation

Tweet One of the Lib Dem policies which found its way into the programme for the coalition in London is the idea of raising income tax thresholds, ultimately to £10,000. It was also a Plaid proposal to raise the basic rate tax threshold, so the decision is one which we should welcome, in principle at least.

It's not without its potential downside though, because as well as taking many people out of the income tax bracket completely, it also benefits everyone who pays income tax, including the most well-off. And if we end up with a counter-balancing increase in VAT, then it could actually mean that the least well-off end up paying more tax in total.

During a typical election campaign, candidates get bombarded with material from a wide variety of sources, asking candidates to pledge their support to this, that, and the other. And since candidates seeking election are not overly enthusiastic about alienating potential support, it's an approach which garners a great deal of support for the specific policies being promoted.

One organisation, calling itself the 'Fair Tax Campaign' suggested a different approach to income tax bands. Under their proposals, the tax-free limit of £10,000 would only apply to those earning under £18,000 a year, with the limit reverting to £6475 above that. Now there's an obvious and immediate problem with that specific proposal, in that a sudden reduction in the tax-free limit at a specific salary creates a situation where a very small increase in salary (from say £17,900 to £18,100) leaves people a great deal worse off.

But the underlying principle is something which I think deserves a bit more thought and consideration. Merely adjusting the level at which the basic band of income tax kicks in has the inevitable side-effect of benefiting not just the least well-off, but also the most well-off. Tapering the level at which basic rate tax starts (or even possibly tapering the level at which tax moves from basic to higher rate) depending on total salary might be a way of achieving the intended effect whilst avoiding - or at least reducing - the unintended one.

It sounds complex, but it really doesn't need to be. It's perfectly straightforward to come up with a system of tapering which means that there's no break point at which people suddenly start to lose out, but that the effective tax rate increases with increased income.