If the Conservatives want to win the next election, then they are going to need a story to tell voters that will appeal not only to their minds but also to their hearts. There is no point making the case for a slimmer state, lower taxes, or education reform with nothing more than a cost-benefit analysis. The argument needs a moral dimension too.
The reason that Margaret Thatcher won three terms (and two landslides) is not just that her government made reforms which markedly improved people’s lives, but also because she made the moral case for her policies. She went out and convinced the British people that her reforms would not only make them better off, but also that they were the right thing to do. Reducing sky-high income tax rates was right because it would lead to a more dynamic and prosperous economy. But it was also morally right because no one should have to pay 83 per cent of their income to the government (which was the top rate of tax when she won in 1979).
Thankfully, no one today pays a rate of tax as high as 83 per cent. However, as Tom Clougherty, Head of Tax at the Centre for Policy Studies, explains in his new paper “Make Work Pay“, some people do still pay a far higher rate than you might expect. The top rate of income in the UK is 45 per cent, with National Insurance on top this rises to 47 per cent. However, thanks to various perversities in the UK tax system, a lot of people are effectively paying far higher rates of tax on their earnings. For example, people facing the universal credit taper who are paying NI and income tax face an effective marginal tax rate of 75 per cent.
It isn’t just the less well-off who are affected: for those earning between £100,000 and £123,700, £1 of their personal allowance is withdrawn for every extra £2 they earn. This means that they have an effective marginal tax rate of 62 per cent. It cannot be right that someone on just over £100,000 is paying a higher marginal tax rate than someone earning millions. Meanwhile a parent with four children who earns £50,000, will be hit by the high-income child benefit charge, and will have to start paying back any child benefit they claim; an effective marginal tax rate of 74 per cent.
These distort the incentives ordinary people face every day. Fortunately, Tom also explains how we can change the system and ensure that people are always rewarded for working and doing the right thing.
His paper contains three core proposals. First, there should be a “Work Guarantee” – that is, the tax system should be structured so that you will always keep at least 51p of each extra pound that you earn. This means abolishing the withdrawal of the personal allowance for people earning above £100,000. And it also means changing the high-income child benefit charge so that the effective marginal tax rate never goes above 49 per cent.
Secondly, the universal credit taper rate, which currently stands at 63p, should be cut to 50p, so that those most in need of extra earnings aren’t penalised when they do the right thing and increase their hours in work.
Thirdly, while it should be recognised that the Conservatives have done a good job of lifting several million people out of paying income tax by raising the personal allowance, they have failed to raise the NIC threshold at the same rate, and there are now an estimated 2.4 million people who don’t pay income tax but who do pay National Insurance. This should be rectified and the thresholds should be equalised at £12,000. This would allow every single worker to earn a “universal working income” of £1,000 every month which the government will not tax.
Polling carried out for the CPS in conjunction with the report shows that the British public instinctively agree with these policies: 61 per cent of those polled supported the “work guarantee”. Additionally, 76 per cent backed the “universal working income”, and much preferred it to the very fashionable idea of a universal basic income.