Redressing the balance between the generations
“Granny Tax” and “tax cuts for millionaires”. George Osborne will not have woken to the headlines he wanted this morning on his latest Budget. Whatever happened to the Budget based on fairness?
But beneath the headlines there is much to welcome in the Budget. Yes, pensioners will have their personal tax allowances frozen and new pensioners will not receive an extra age allowance. But amidst all the furore about the phasing out of the allowances, nobody has given any explanation as to why they are justified.
In fact, as my CentreForum colleague Tim Leunig has argued, the current tax system substantially favours pensioners over people of working age. Someone of working age who receives £25,000 a year, around the median income, pays £5,500 in income tax and National Insurance currently compared to just £1,900 for someone who is a pensioner on a similar income (after imputing an annual value of the tax free pension lump sum). How can that be justified?
This change makes a small step in redressing the balance. As David Willetts has argued in his book The Pinch: How the Baby Boomers Stole Their Children's Future, the baby boomer generation has benefited disproportionately at the expense of younger generations. Willetts estimates that they have taken out of the welfare state almost 20% more than they will have put in.
With the tax changes, no pensioner will be worse off in cash terms and the rapid increase in the personal tax allowance will mean they only “lose out” in relative rather than absolute terms. The current tax system is unfair in how it treats those of working age compared to pensioners. This small change starts to redress the balance.
So far pensioners have been relatively protected by the government and will be receiving a large state pension increase this year. It is only fair that they bear this relatively small change in their tax treatment.
So what of the “tax cuts for millionaires”? The government has gone to considerable lengths to try to cut back on tax reliefs and loopholes for the wealthy to avoid tax but it is the cut in the top tax rate to 45p that has received the attention.
One has to be rather sceptical about the Chancellor’s figures for how much the 50p tax rate has raised. The Labour government announcing over a year in advance the introduction of the 50p rate and George Osborne announcing a year in advance its reduction to 45p is guaranteed to minimise the tax take from the 50p rate. Taxpayers have been able to bring forward or delay their taxable income to minimise the tax take. It would be difficult to think of a more ineffective way to impose a tax.
While in the medium and long term the cut in the top rate of tax is the right thing to do, the politics of it are dreadful.
In the midst of all the negative headlines the biggest ever increase in the personal tax allowance of over £1,000 next April has tended to get lost. But this has been a huge step forward in the Liberal Democrats' aim to raise the personal tax threshold to £10,000 and beyond by the time of the next election. Taking millions of working people out of tax altogether is a major step towards greater fairness in the tax system.
It is often said that the best Budgets are usually those that get the immediate negative headlines. While the press has focused on the alleged “unfairness” of the Budget, history is likely to be rather kinder in suggesting that the budget has been much fairer than it at first sight appeared.
Chris Nicholson is chief executive of CentreForum, the liberal think tank