TaxPersonal TaxView from the House – Malcolm Bruce

View from the House - Malcolm Bruce

Can it be right that, at the end of the last war, a married man could earn almost half average earnings before paying tax, where now he starts paying at just over a quarter?

Of course, wages have risen substantially in real terms, but there really is an issue not just of fairness but also of efficiency about the way the tax system hits people on lower incomes.

Margaret Thatcher, as leader of the opposition, made powerful speeches about the heavy tax burden on what she liked to call ‘ordinary people’.

She was right but, in office, concentrated on reducing the standard rate of income tax rather than the tax hit on the lower paid.

Indeed, many people can work full time and still qualify for benefit – and tens of thousands more will join them soon. That is what the working families tax credit is for.

The tax threshold is part of the poverty trap, reducing the incentive of people on benefit to move into work. The combination of tax liability and reduced benefit is a major disincentive to take up employment.

It would be possible to raise the tax threshold from its present level of just over #4,000 to around #10,000 in two parliaments, without changing the overall tax take or seriously hitting middle-income groups. The total cost is around #28bn.

If nobody paid tax below #10,000, then a number of allowances could be phased out. It is not unreasonable to expect a contribution from high earners of 50p tax on earnings over #100,000 and the end of tapering in capital gains taxes.

A significant contribution – about 25% – could come from taxes on pollution.

These are needed if we are to change our behaviour, but may be more acceptable if it is seen they give everyone a benefit and represent a genuine tax switch.

These proposals are radical and workable, and have already been given a welcome. Liberal Democrats are polishing them up at our conference and will produce costed details in the coming months.

Malcolm Bruce is Liberal Democrat MP for Gordon and the party’s spokesman for Treasury affairs

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