Wednesday 16 September 2009

The Conservatives Have It Only Half Right



Tomorrow Iain Duncan Smith will outline plans to transform the welfare system. His report will suggest that more than half a million households could be moved off welfare and into work and this would eventually save the taxpayer £700m a year. IDS will predict that his plan will cost £2.bn a year but will eventually save £3.4bn after one to two years.

It's all well and good to radically change the benefit system but our income tax system needs the same treatment, at the same time. The aim of taxation is to finance government with as little harm as possible to the wealth-creating processes of the economy and in such a way that those paying the tax are those who can afford to do so.

I spent some time yesterday reading Madsen Pirie's 'Zero Based Policy' and so much made sense - particularly the section regarding income tax. It interests me because I am one of those people now on a low income and Labour have doubled my tax from 10p to 20p, therefore not only have I lost out on my private pension, I lose out on taxation.

Dr Pirie suggest that the starting level for income tax should be set above the minimum wage or above half the average income (average income being £25,000). At current earnings this would almost double from £6.035 to at least £12,000. Such a policy would take 7 million low-paid workers out of the income tax net altogether and would transform the lives of low earners by leaving them with more money to spend. Millions currently dependent on welfare support would be lifted out of it to become self-supporting. Not only should the threshold be raised to take low earners out of taxation, but the entire system should be simplified by having a single rate of taxation. The adoption of a single income tax band of 20% would have a dramatic effect on economic growth. Britain would once again become an attractive low-tax country in which talented high earners would wish to stay and to which high achievers from other countries would wish to come. These are groups which generate employment and economic growth and people whose spending power sustains many other jobs.

The Treasury would lose revenue of course, but there would be offsetting effects. In the first place the change would take many people out of welfare dependency. Not only would those in work keep more of their income, avoiding the need for welfare support, but many on welfare support would find the balance tipped in favour of work, motivating them to prefer work to welfare.

He suggests that the government should raise the higher threshold (now £40,835) in line with the personal allowance. This would cost an additional £6bn, taking the total cost of the reform to approximately £25bn. There is a good case for this as, according to Treasury figures, the number of higher-rate taxpayers in the UK has almost doubled since 1997 because the government failed to lift the threshold.

It helps too if a tax can be collected at relatively low cost compared with its yield and it is unlikely that anyone starting a new tax system would wish to achieve anything as cumbersome and complicated as that which presently exists in Britain.

The point of this dynamic model is that tax cuts do bring about behaviour changes. They raise the rewards of work and effort and make idleness less attractive by comparison. They make it more likely that business activity will expand.

Now Mr Iain Duncan Smith, as well as your welfare reforms what about income tax reform? Dr Pirie has already done the work for you so there's no reason this could not be adopted as Conservative policy. What is the point in taxing people with low incomes then spending millions on administering benefits which are glorified refunds?


9 comments:

Nikostratos said...

Stupid computer i linked to subrosa blog and got the conservativehome blog.

try again later.

Trident said...

He he Mr M, who has stolen Subrosa?

subrosa said...

Auch you'll have felt at home then Niko. Ooops, sorry, forgot you were banned from conservativehome. Been allowed back yet? :)

subrosa said...

Nobody sadly Polaris, but I live in hope!

Nikostratos said...

surosa

not been banned they are under instructions from tim not to speak to me..very English middle class way of dealing with an unwelcome guest......

make me laugh when some one replies to my comments... and they are told not to speak to me

subrosa said...

Rather petty really Niko, either you bann someone or you don't.

I do hope you're not going there stirring up trouble.:)

Dramfineday said...

Yes SR same happened to me with the labour tax rise. Interestingly I've held the view for a while that people earning under 15k per annum should be excluded and thereafter it should go up in 5% increments for every 5K of additional salary until they reach a max of 20% next step would be 30% at the £100k mark.

However there is a bigger area to look at the would probably help fund the help required by the lower paid and that is tax avoidance . Now I've always paid my whack - even from my pitiful apprentice wages all those years ago and I continue to pay it now that I'm drawing down my pension - I saw it as a duty(to be tholed admittedly) as (and this is the realy worrying bit for the next generation) the workers must pay for the non workers - that's the social contract I signed up to. Regretfully the dodgers (tax avoiders AND benefit cheats) don't see it this way. It appears to be a right for them. So tackle the tax dogers first and then the benefit cheats and maybe then we'll have some dough to help the people really in need.

The easiest touch in the world is the responsible person, the govt have no issues with us. But if they would just put as much energy into solving tax and benefit issues as they do dreaming up ways of making our lives difficult with daft laws - a lot of people's lives would be vastly improved ( mind you a lot of dodging so and so's would probably disagree)

J. R. Tomlin said...

Ugh! Someone RUINED Me and Bobby MacGee! That rendition is a CRIME!

subrosa said...

Dram, will they ever control the tax shirkers? Governments encourage businesses to avoid tax so they seldom look towards them.

Then they have the problem of tax shirkers, an example of these being those who claim benefits and work on the black market. There are thousands and thousands. I used to have a friend work in that area and she said when you caught one another two replaced them. They even write books about how to claim benefits and not be found out.

You're right, we're the easiest type of person for them to continually haunt. Bit like the VAT people with small businesses, but that's another story.

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