Tax move 'benefits better-off'


Better-off families will benefit most from a rise in income tax allowances, a respected economic thinktank said today - questioning claims the policy was progressive.

The Institute for Fiscal Studies (IFS) said the second-richest tenth of families would gain most in cash terms - and that the top half would do best as a proportion of income.

Liberal Democrat leader Nick Clegg is pressing for faster progress towards an allowance of £10,000 - which the coalition agreement said would be achieved by 2015.

"It's an extremely effective way of making the tax system more progressive," he told MPs last month as he pressed the case for the key Lib Dem policy.

The IFS concluded that the policy was the most effective way of focusing tax cuts on the lowest pay and would boost incentives to work by taking some out of income tax altogether.

But it said: "It is important not to claim too much for a policy which, especially in the current fiscal climate, is expensive.

"The common assertion that increasing the personal allowance is progressive is true if one considers the gains across individual income taxpayers.

"It is not true if one considers the gains across all families as relatively few of the poorest families contain a taxpayer and two-earner couples gain twice as much in cash terms as one-earner families."

In a short report, it went on: "By definition it will not help those on the lowest incomes, who do not pay income tax anyway.

"And in the current context it is clearly not the best way of delivering a short term fiscal stimulus - and it should not be pursued for that reason."

The first increase in the allowance, from £6,475 to £7,475, was announced in the 2010 Budget. It is set to rise again, to £8,105, in April.

In its report, the IFS found the highest average cash gain of a £10,000 threshold would come in the second-richest tenth of the income distribution.

The very wealthiest do not do as well as the allowance is not applied to six-figure salaries.

As a percentage of income, the IFS found, "the gain is roughly the same from just below the middle to just below the top of the income distribution" with the bottom and top gaining less.

Dismissing suggestions the change could help kick start the economy, the report said it fitted none of its criteria for a fiscal stimulus: that it should be timely, targeted and temporary.

The effects would not be felt until the autumn, would have less effect than investment spending or tax cuts such as Labour's proposed VAT rate and would be a long-term policy, it said.

Shadow chief secretary to the Treasury Rachel Reeves said: "This IFS analysis undermines many of the claims ministers have made about how progressive it is to increase the personal allowance.

"At a time when families are being squeezed hard and the economy has stalled an increase in the personal allowance is better than doing nothing.

"But a temporary VAT cut would help pensioners and others on low incomes who don't pay income tax and, as the IFS notes, it would be a more effective boost to the economy.

"Ministers talk about lifting the low paid out of tax and helping work pay, but their actions are doing the opposite.

"Unfair and perverse changes to tax credits next month will mean a couple with children on the minimum wage working 16 hours per week will be better off quitting work.

"Changes to the personal allowance will do nothing to help these families.

"David Cameron and George Osborne seem to be more focused on wrangling about whether to cut the 50p top rate of tax for the richest 1%, than helping people on low and middle incomes or coming up with a plan for jobs and growth."