Income Distribution and Taxation

Andrew Smith Excerpts

Wednesday 9th April 2014 Westminster Hall

[Mr Mark Harper (Forest of Dean) (Con)]

I am pleased to serve under your chairmanship, Mr Weir, and to welcome my hon. Friend the Member for Loughborough (Nicky Morgan), who is having a double personality day. She started as Economic Secretary and ended as Financial Secretary. I congratulate her on her well-deserved promotion, and I am very pleased that she is still able to respond to this debate. I wrote to her earlier today to congratulate her on her innovative way of avoiding responding to my debate, but she is stuck with me for the next 29 minutes or so.

I secured the debate because, although I touched on the matter briefly in my short contribution to the Budget debate, it was, as you know, Mr Weir, time limited, and I did not have a chance to make all the points I wanted. In the debate running up to the Budget, there was a lot of discussion about “middle-income taxpayers” and what that meant. I want to set out what I think the Government’s priority should be and congratulate them on landing the income tax cuts in the right place on the income scale.

In the run-up to the Budget, a number of newspaper articles—there was one in The Guardian—referred to middle-income earners being dragged into the 40p tax bracket, but that is not a sensible use of “middle income”. Even the Leader of the Opposition used the phrase, saying that

“if you are in the middle, paying 40p, you should be pleased to pay more”.—[Official Report, 19 March 2014; Vol. 577, c. 797.]

He was referring to what he said was someone else’s argument.

In the Labour party’s list of 24 so-called Tory tax rises, four of them are changes to the higher rate threshold. It seemed slightly odd for the Labour party to complain about ensuring that those on higher incomes paid their fair share in dealing with the deficit. While I am touching on that list, it is interesting to note that the spare room subsidy, which is a housing benefit issue—the Opposition insist on calling it a tax—was not on it. That was a very good demonstration of the fact that even they accept in their heart of hearts that it is not really a tax, even though they keep trying to call it that.

That was an aside, but the point I wanted to make about 40p taxpayers is that I am not saying that they are rich; they are not. Equally, they are not in the middle. Looking at the 2013-14 tax year, someone would pay 40p tax only if they had £32,010 of taxable income, which is on top of a £9,440 personal allowance. They would have to earn a gross income of £41,450 to pay that tax rate. In 2011-12—the most recent year for which the detail is available—the income distribution figures show that a higher rate taxpayer is in the top 14% of income earners. For that year, the median income was £20,300. Some helpful projections have been done using the Office for Budget Responsibility’s economic and fiscal outlook. They show that the median income was £21,000 in 2012-13 and £22,200 in 2013-14. That is only just more than half the income someone would have to earn to pay the 40p tax rate.

If I look at the level of income in my not untypical constituency—these figures are for 2011-12, the latest ones available that are broken down by parliamentary constituency—the mean income of all taxpayers is £24,300, and the median income is only £18,800. If the overall national figures have gone up by some 10% since 2011-12, we can use that assumption with the constituency figures, but that would take the median figure to only a little over £20,000. That figure is for total income. If we look at how that is split between the self-employed, the employed and pensioners, the figures present a different picture. However, it is clear that the median taxpayer is not earning anything like enough to pay the 40% tax rate; they are paying basic rate tax. That is why I thought the Chancellor’s Budget judgment was right.

I even looked at parliamentary constituencies that people would generally accept as having a higher than average number of people earning good incomes. A piece of data that is available from the Office for National Statistics shows that even in constituencies with a high level of mean income—Kensington, Cities of London and Westminster and Chelsea and Fulham—the numbers are clearly driven by a small number of well-remunerated people. The median income in those constituencies is: £37,900 in Cities of London and Westminster; £36,200 in Kensington, and £34,300 in Chelsea and Fulham. Even in those constituencies, the median taxpayer is not paying anything close to 40% tax.

The focus should be on delivering tax cuts for the lower paid and those on more modest incomes and that is what the Chancellor did in his Budget. He made it clear that the personal allowance was going to rise in this current tax year, which has just begun, to £10,000 and next year it rises to £10,500, which will lift more than 3 million of the lowest paid out of income tax altogether. He also confirmed, rightly, that the higher rate threshold will rise a little bit as well, for the first time in this Parliament, which means that everyone on incomes up to £100,000 will benefit from some tax cut, but obviously the main benefit is for those on a lower rate.

The list of tax rises that the Labour party put out referred to the higher rate income tax threshold cuts earlier in this Parliament, which were equitable and made to ensure that those significant rises in the personal allowance did not disproportionately benefit higher rate taxpayers. Of course, if the personal allowance is increased and the higher rate threshold is not changed, someone on 40% tax has income moved out of that band into the basic rate band and gets a bigger benefit than someone on basic rate tax. That would be wrong. The judgments that we made earlier in this Parliament, when we had to make difficult financial decisions, to share the pain and have the burden on those with the broadest shoulders, were right. I am pleased that the Chancellor confirmed that.

By virtue of increasing the allowance, the Chancellor was able to show that, looking at this Government’s tax arrangements, compared with the previous Government’s policy, everybody earning up to £100,000 is better off. They have all had a tax cut, but the tax cuts are more focused and bigger for those on lower earnings.

[Mr Andrew Smith (Oxford East) (Lab)]

I congratulate the hon. Gentleman on securing this debate on an important issue. I resisted intervening on the bedroom tax and so on because I wanted to make this point. Does he share my concern, notwithstanding what he said about raising the allowance, that the impact of the tapers on people in receipt of universal credit will be such that, for somebody just above the tax threshold, the rate of withdrawal on both a first and second earner in a family will be as high as 76%? Is there not a danger that that gives people a perverse incentive to work fewer rather than more hours, because they do not reckon that they are being rewarded for the extra hours, or to do undeclared work?

[Mr Harper]

The right hon. Gentleman is right to drawn attention to the tapers and the withdrawal of benefits as people earn income—of course, they are high—but this issue was raised during the Budget debates. However, the fact is that, under universal credit, the withdrawal rates and the tapering arrangements mean that there is a smaller rate of withdrawal of benefit than under the existing levels of benefit. I am sure the Minister will correct me if I am wrong; this is not an area that I have studied in detail. The issue the right hon. Gentleman raises is important, but it is always a challenge to deal with the withdrawal of income-related benefits and to be careful that the effective marginal rate for people is such that it is always worth their while working. Ideally, we want to get that marginal rate as low as possible, but it is expensive to drive it down to a low level. My understanding is that, under universal credit, those withdrawal rates of benefit are lower and therefore more encouraging of people to work, either more hours or in the first place, than under the existing combinations of income-related benefits.

[Mr Smith]

My understanding is that the rates are higher for people working more hours, for 35 hours or more. The hon. Gentleman is right in that the rates are lower for people working fewer hours. That is my worry—the perverse incentive for people to work less.

[Mr Harper]

If I am picking that up correctly, the right hon. Gentleman is saying that at lower levels of earning, or for people who work fewer hours, the effect of universal credit is—

[Mr Smith]

I should correct that. It is not that the rate is lower; it is that people will be better off working fewer hours, as compared with the position under tax credits, whereas those who are working 35 hours or more will be slightly worse off under universal credit than they would have been under tax credits. The withdrawal rate is 76%, just above the tax threshold, under universal credit.

[Mr Harper]

I cannot answer the right hon. Gentleman’s detailed question, because I have not studied the matter, but the other thing that he needs to do—I am not sure whether he has incorporated this into his judgment—is look at the interaction of the tax changes that we have made with the benefit system. Over this Parliament, there will be a significant increase in the personal allowance from what it was in 2010-11 when we came to power, and what it will be when this Parliament finishes, from something in the order of £6,000 or £6,500 to £10,500. A lot of people on lower incomes, such as those on the minimum wage, are moved out of the taxation system altogether. Previously, people could be on a relatively modest income and paying tax, but at the same time getting various income-related benefits.

I think that I have set that out carefully, but if I have not, the Minister will do so in her response. Otherwise, because the debate is not about universal credit and she might not have all those facts at her fingertips, I am sure she is happy to write and to set it out in detail later. I am, however, grateful for the point made by the right hon. Gentleman.