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The Spotlight Falls On 40p Britain

Last Updated: Friday, March 9th, 2012

Conservatives want to scrap the 50p tax rate.  Liberal Democrats want to raise thresholds.  For months, debate about the budget and income tax has focused on these aspirations, and the two groups involved: poorer workers who earn enough to pay tax, and some of the richest people in Britain.

This week has seen a sudden change, and a reminder of a group in between.  If George Osborne is to act on thresholds or the 50p rate, he must either find the money by cutting the rise in spending further or raising the revenue from other taxes (borrowing is out, for obvious reasons).

Hence the floating of ideas about a mansion tax or new council tax bands for more expensive properties or – especially over the last few days – reducing the amount that can be paid into pension funds which gains tax relief.  The Chancellor already proposes to pay child benefit to standard rate taxpayers only.

That commitment, announced during the 2010 Conservative conference, created a furore.  The Daily Telegraph and Daily Mail expostulated.  Conservative MPs protested.    Osborne may now raise the threshold at which child benefit is cut, although such a move would not correct the anomalies contained in his scheme.

As the budget has come nearer, the campaigning against the Chancellor’s original plan has been revived, with Tory MPs staging Commons debates and the Mail/Telegraph stable weighing in again.  It has also done so this week over property taxes, with supporting fire from the Times and Daily Express.

What is going in?  In very crude terms, money to pay for raising thresholds or reducing the 50p rate can be found by raiding the incomes of another group – what could be called 40p Britain.  It is 40p Britain that stands to lose its child benefit, may see its pension savings squeezed, and would be hit by an extensive revenue-raising property tax.

40p Britain is not, repeat not, the fabled “squeezed middle”.  John Healey, the Labour politician who has propagated the phrase, uses it to describe the middle fifth of the population – namely, those who earn between £18,000 and £30,000 a year.  This is too low an income level to be caught by the 40p rate.

40p Britain is, rather, the well-off – not the relatively small number of very high earners caught by the 50p rate, but the well-remunerated who are in the highest percentages of earners (though they are sometimes surprised when this information is vouchsafed to them).

40p Britain does not usually include the IT workers, HGV drivers, joiners, and shop staff who are part of the squeezed middle.  But among it are to be found doctors, head and senior teachers, accountants, army officers, some nurses: the people often described as “middle Britain” (however inaccurate this label may be in purely monetary terms).

The Telegraph and especially the Mail prize this group as readers – or potential ones.  It is a growing demographic.  The Institute for Fiscal Studies has predicted that by the time of the next election one in four people could be paying tax at 40p – some 7.5 million people.

The ISF’s Paul Johnson has pointed out that “it’s not so long ago that only about one in 20 taxpayers were paying he higher rate”.  What’s happening?  To find an answer one has to go all the way back to Nigel Lawson, the Conservative Chancellor who first introduced the 40p rate.

Lawson inherited a top rate of 60p.  He cut it to 40p believing that the move would make Britain more attractive to wealth creators and thus, paradoxically, raise revenue rather than lose it.  Much later, Gordon Brown introduced a new 50p top rate and the Liberal Democrats begun their interest in taking poorer people out of tax.

In the meantime, Lawson’s successors – in search of easy revenue for one reason or another – raised the threshold at which the 40p rate is paid relatively slowly, thus dragging more people into that tax band: “bracket creep”, as it is known.  750,000 people will become 40p rate taxpayers in April.

In essence, the papers that claim to speak for 40p Britain are fighting back.  This leaves Osborne facing an awkward question: who is the Coalition for?  Is it for the richest taxpayers – the 50p rate payers – such as those ever-popular bankers?  Is it for the poorest ones and it therefore, in effect, have a tax policy that is led by the Liberal Democrats?

Or is it for the 40p rate payers who are the Conservative Party’s traditional constituency?  But if so, where is extra money to come from to fund scrapping the 50 rate and raising thresholds?  The Chancellor may have been hoping that 40p Britain could quietly be tapped up to help those at either extremity of the income tax scale.

This week’s wave of newspaper protests has been a reminder that this won’t happen.  And as the number of 40p payers rises the pressure on the Government to relieve them will grow. If it is not to be found from other taxpayers, that relief can only be obtained by measures that Osborne is unwilling to consider – namely, a further reduction in the rate of public spending.

by Paul Goodman

 

HIGHLIGHTS OF THE WEEK FROM CONSERVATIVEHOME

Tim Montgomerie: Tory strategists want voters to think of two words when they think of David Cameron: Strong and Fair.  “Voters already think Cameron is making the tough decisions. I don’t have the exact figures to hand but a recent YouGov survey found that more than FIVE times as many voters think the Conservatives and Cameron are capable of tough decisions than think the same of Labour and Ed Miliband. That’s a huge advantage. Where more work needs to be done is in persuading people that the Conservatives are building a fairer Britain.” Read more: http://is.gd/J6ZLK9

Nadine Dorries MP: I’d rather have a Labour government than give a Lords, elected by PR, to the Liberal Democrats.  “A deal between Cameron and Clegg which will result in the destruction of the House of Lords in order to keep Cameron and Osborne in Downing Street for just a little longer and the Lib Dems in power forever forces us to think the unthinkable. I and others would rather call the Liberal Democrats bluff. We would prefer to lose the boundary changes and have a term of Labour Government before we would watch the House of Lords, with all its wondrous ability, traditions, expertise and standards wiped out on the back of a shoddy, short term, self-interested deal.” Read more: http://is.gd/0uD1NZ

Andrew Lilico: Half a dozen thoughts in advance of the Budget.  “The key ways the Government could raise the sustainable growth rate are as follows: Cut Government spending relative to GDP.  The Government is already committed to cutting spending below 40% of GDP.  If it succeeds, that could add 0.5% to annual GDP growth. Raise the efficiency of government spending.  If public sector productivity grew as fast as private sector productivity, that could add 0.5% to annual GDP growth.  Matching private sector productivity growth should be a modest target, since there is considerable scope for catch-up, with public sector productivity growth having dropped one third behind over the decade to 2007.” Read more: http://is.gd/Cfrv9f

Paul Goodman: David Cameron is 16 points more popular than his party. “Seeming born to rule hasn’t done Cameron much harm to date.  Ruling is what he does: less sparkily but more naturally than Tony Blair and therefore, perhaps, more durably too.  The voters appear, at some deep level, to accept this – or to have done so far. Essentially, the wisdom of crowds gets Cameron.  It reads him correctly as a bright, tough, smart, traditional member of Britain’s governing class – with a splinter of ice at the heart.  The Conservative Party might be better off with someone else.  But the polling evidence doesn’t suggest so.  Very much the reverse.” Read more: http://is.gd/6ltuzX

Jill Kirby: The Treasury’s child benefit game with couples: heads we win, tails you lose.  “The only possible circumstances in which it would be “fair” for the Treasury to tax a husband on his wife’s child benefit would be if it also permitted her to transfer her unused tax allowance to him. But the Chancellor has slapped down suggestions that transferable allowances will be introduced any time soon. By ending the universality of child benefit in this fashion, the Treasury wants to have it both ways: treating couples as a single unit when taking money from them, but deny them that option where it would increase their tax-free income” Read more: http://is.gd/P7cKuf

Councillor Philippa Roe, the new leader of Westminster City Council: Managing a city at a time of Jubilee and Olympics.  “The fundamental challenge facing all councils is how they can encourage enterprise and support job creation. We will also work with business to create the conditions where they grow. Next week we will unveil our 2012 employment pledge with businesses to offer over 2,000 job and training opportunities to young people across Westminster. Employers doing their bit for the good of the city, creating ladders of opportunity. Times are difficult, but I am taking on the leadership of a Conservative Council because I think that our party is best placed to support business, devolve power and make the best use of public money. And in doing so we will change lives for the better.” Read more: http://is.gd/YrpbVg

Neil O’Brien: If we want smaller government, we will have to think big. “Public spending in Britain rocketed from consuming just over a third of our national income in 2000 to just under half in 2010 – from 36% to 48%. In other words, we are right back to where we were before Mrs Thatcher. The coalition aims to get the state share of spending back down to 40% by 2016. But that means it will still be higher after the cuts than it was during most of the Blair years (1997-2004). So we are not heading for some small-state paradise once this is over. Could the government go further?  Over the long term I think it can, and must.” Read more: http://is.gd/a4e7PL

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