Earlier this month Shadow Chancellor John McDonnell welcomed a report by the left-wing New Economics Foundation think-tank which proposed an average £2,571 Income Tax increase for workers earning over £28,080. Quoted in The Guardian, Mr McDonnell said it was an ‘ambitious plan for economic transformation, of the kind Labour proposes’. While providing some degree of clarity on how his party intends to pay for some of its spending promises is welcome, I was surprised to learn that this might be one of them. Firstly, £28,080 is lower than the salary of the average secondary school teacher or police officer, so the threshold at which this tax hike would kick in would mean that around twelve million workers, including many in the public sector, would be paying it. Secondly, reducing the amount of money that middle-income earners take home each month would hit our economy very hard. If consumers have less money in their pockets, it is inevitable that they spend less and while large corporations might be able to handle a small reduction in turnover, small and medium sizes businesses (which make up around 98% of businesses in constituencies like Central Devon) would suffer. As someone who started and grew a business from scratch, I know there is often a small margin between success and failure.
So, in terms of Income Tax what should we be looking to do as a country? One of the most significant achievements of the past nine years has been improving the income of the lowest paid. Doubling the threshold at which the lowest paid workers begin to pay Income Tax has been an important part of this. If we look at the figures, in 2010 a worker aged 25 or over on the National Minimum Wage earned £5.80/hour, which for a 40-hour work week meant a salary of £12,064 a year. The introduction of the National Living Wage (which was increased to £8.21/hour this year) means that the same person would now earn £17,076.80. Over the same period the Personal Tax Allowance has increased from £6,475 to £12,500. What impact has this had? According to The Resolution Foundation (an independent think-tank focused on improving the living standards for those on low to middle incomes) in 2016 the proportion of employees on low pay fell below 20% for the first time since 1986 and has fallen further since then. Secondly, when inflation and the rising cost of living are factored in, the poorest fifth of households still have nearly £2,000 more disposable income than they had a decade ago. Rather than attempting a radical new approach, I hope we will see more of what has already proven to work – further rises in the National Living Wage to increase the wages of the lowest paid whilst cutting taxes rather than putting them up.
