As James argues, Nick Clegg’s income tax threshold is a brilliant policy. It should benefit lower to middle income earners and the working poor. That’s the theory to which Daniel Finkelstein objetcs.
‘The vast bulk of the money goes to those earning more than £10,000. It is a very expensive tax cut, very poorly targeted on the working poor.
Second, there is an interlocking relationship between income tax and working families’ tax credit.
Many of the working poor would find the money they gained from the tax cut clawed back because their increased income attracted less tax credit.’ The thinking should be to reward the working poor by increasing their non-taxable income whilst protecting their tax credits, and also give middle income families a break. This would be funded through borrowing, which is, of course, impossible currently.
The alternative is tax hikes elsewhere. The Liberal Democrats are convinced that a Mansion tax and capital gains increases are the answer. But a Mansion tax is fraught with difficulty and may prove expensive to levy, and significant capital gains rises would discourage investment, not just from George Soros but from minor shareholders – the very people likely to invest as a way of spreading risk for having extra cash in their pockets. Starving companies and business ventures of shareholder capital during a recovery is suicidal. Further uncompetitive top rate income tax rises aside, VAT seems the logical answer in the short term; but from Clegg’s point of view there is little point in giving with one hand and taking with the other. And so we return to the fanciful borrowing option. Thanks to Brown, it is neither the time nor the place for this laudable and fair policy