Peter Jones: Taxing the poor is the Tory option

Many low-paid workers effectively pay George Osborne 100% of any additional income they earn. Picture: Getty

Did you know that, in this society where hard work is supposed to be rewarded, some people get effectively taxed at 100 per cent on every extra pound they earn? That’s right, every pound earned results in no increase in take-home income. Will George Osborne abolish this abomination in his Budget tomorrow?

This does not afflict the wealthy or high income earners. They, of course have been shouting for the 45 per cent rate on incomes of more than £150,000 to be cut back to 40 per cent where it was before, ahem, super-high-earning types in banking blew up their banks and wrecked the economy, forcing taxes to go up to pay for the clean-up.

Well, the mood music coming from the Treasury is that the 45 per cent rate will stay, meantime. So it should. The tragic Greek drama is a lurid reminder that these are still times of austerity and the wobbling financial markets say loudly that economic growth, even at the modest levels of the last year or so, cannot be assumed to be here to stay.

That should surely mean that tax cuts which reduce Treasury revenue and therefore slow deficit reduction should still be a long way off, unless they are cuts which have the effect of stimulating growth and increasing revenue.

That cannot remotely be claimed for the cuts to inheritance tax which Mr Osborne is said to be about to produce.The allowance for the main family home which he is apparently scheming is a direct poke in the eye to those poor people who were judged to be living in social housing too big for their needs and were thus levied the so-called bedroom tax. All Mr Osborne’s apparently planned move will achieve is to encourage elderly homeowners to keep the house, which will probably be too big for their needs. Why is that right for wealthier homeowners, but wrong for renters of social housing?

But let’s get back to what ought to be the focus of the Budget – stimulating growth. More than 160 Conservative MPs are reckoned to be keen supporters of cutting the 45 per cent income tax rate right now. One of them, Liam Fox, justified this move in a newspaper interview as follows: “If, like me, you believe that reducing tax rates ultimately produces more economic activity and therefore more tax revenue, then the sooner you get on with it the better.”

I see. So these folk earning more than £150,000 a year must be slacking off. Cut their taxes, and they will work much harder to earn even more.

Actually, I should not be too dismissive of the argument. Because if Conservatives believe that to be true of high earners, they should also believe it to be far, far, truer for the unfortunate folk facing a 100 per cent tax rate. The rub is that they are low-paid, so low-paid indeed, that they also get benefits.

And of course, this is the Budget that should reveal the answer to the general election question the Tories refused to answer.

Where are they going to make the £12 billion in welfare spending cuts they promised/threatened?

It is a massive cut of just under 10 per cent from a welfare budget that, excluding the £95bn spent on pensions and age-related benefits, totals £125bn. The three largest elements are disability and incapacity benefits (£37bn), child tax credits and working tax credits (£30bn), and housing benefit (£26bn).

David Cameron gave a slight clue to Mr Osborne’s intentions in a recent speech when he criticised what he called the “merry-go-round” operation of tax and benefits for the low-paid as “people working on the minimum wage having that money taxed by the government and then the government giving them that money back – and more – in welfare.”

This is where people face effective tax rates of 100 per cent, not something Mr Cameron mentioned. Many folk may think it entirely reasonable that as a low-paid person’s income from work rises, then their entitlement to a welfare benefit should reduce. That however creates the problem that, despite working more, a person might see no change in their total income. If the well-paid slack off because of 45 per cent tax rates, why would the low-paid work harder when hit by much higher effective tax rates?

A report published in February by the Low Pay Commission examined how this issue affects people on the national minimum wage and in different circumstances – single adults, lone parents, couples with children, whether they rent their home, and so on.

Here’s a typical example: “Under the current system, single adult renters initially face marginal effective tax rates of 100 per cent – that is, for every additional pound they earn, they lose a pound in jobseekers allowance (JSA). This leads to a flat rate of net income – their income is the same at two hours at the minimum wage as it is at 13 hours.

“After 13 hours, they earn too much to receive JSA. From 13 hours, the marginal deduction rate is 85 per cent, with housing benefit and council tax benefit being withdrawn.

“[A large income boost] at 30 hours is due to becoming eligible for working tax credits. By 42 hours at the minimum wage, a single adult renter with these characteristics is no longer eligible for any benefits, and the taper rate is simply income tax and National Insurance contributions.”

For some people, particularly (poor) owner-occupiers, the marginal effective tax rate at some income levels can be more than 100 per cent i.e. the more they work, the less money they take home. True, the replacement of some benefits by universal credit has smoothed out some absurdities but much disincentive to work harder remains.

The report says that about half of employers report staff unwilling to work more, particularly at 16 and 30 hours, because of benefits loss. If Mr Osborne removes these disincentives in his welfare reforms, he’ll boost the economy and the condition of the low-paid. But cutting inheritance tax, that has no economic effect at all.