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The Conservative Plan to Hike Taxes without You Noticing

Ryan Bourne

Jean-Baptiste Colbert, a seventeenth-century French finance
minister, once said “the art of taxation consists in so
plucking the goose as to obtain the largest possible amount of
feathers with the smallest possible amount of hissing”.

He might have been describing rumoured Tory plans to raise the
income tax burden for millions by stealth in November’s
Budget.

One might think that, with the overall tax burden at its highest
level in three decades, the government would be focusing on
spending incontinence.

Instead, documents photographed on Downing Street suggest the
Tories plan to raise your income tax without you noticing.

This is exactly the sort
of stealth taxation that the Conservatives criticized Gordon Brown
for.

Once they have achieved their manifesto pledge of raising the
personal allowance to £12,500 and the higher rate (40p)
threshold to £50,000, the document suggests they are
considering “freezing” these thresholds, leading to
more and more people being dragged into higher tax bands as nominal
earnings rise from then on.

This is exactly the sort of stealth taxation that the
Conservatives criticised Gordon Brown for. No wonder the idea drew
purring delight from former Labour Treasury official Torsten Bell.
Ending increases to the thresholds was, according to his tweets,
“a sensible budget proposal… to get some cash in the
door.”

On the contrary, this would be terrible economics and politics
for the Conservative party.

It should not be normal for tax bands to be set arbitrarily by
government year on year. Other countries, such as the US,
automatically uprate them in line with inflation.

The current higher rate threshold is £45,000, but this has
increased by only 2.6 per cent from its £43,875 level in
2010. During that time the price level has risen by 15 per cent and
nominal GDP by 29 per cent. Even to just maintain its real value
since 2010, the threshold should already be above
£50,000.

Increasing the 40p threshold to £50,000 is not some big
giveaway or “tax cut” for higher rate earners. Rather,
raising it so slowly has been — properly judged — a tax
rise. The consequence of the starting threshold rising so little is
growing numbers of people paying higher marginal rates.

In 1990, one in fifteen taxpayers found themselves in what was
then the highest 40p tax bracket. This increased to one in 10
paying the higher or additional rates when the coalition government
came to power in 2010.

Since then, the number has exploded from 3.3m to 4.5m, meaning
one in every seven taxpayers now finds themselves in the 40p or 45p
bands.

This is economically damaging. More people facing higher
marginal rates reduces their return to work, and disincentivises
them from making investments in their own human capital.

But reinstituting this type of taxation by stealth is
politically daft too.

Many in the middle classes facing these tax hikes would be
natural Tory voters. Rather than taking a greater proportion of
their earnings, Conservatives should be trying to trim government
and lower their taxes, allowing these individuals to keep a larger
proportion of their own money to spend on themselves and their
families.

The recent Nobel Prize winner Richard Thaler’s
“nudge” concept is about the importance of framing
choices to avoid human biases which lead to bad decision-making.
Politicians try to tax us stealthily in a non-transparent way, to
hide the true burden of their decisions.

To avoid this bias and ensure they are honest, we need to
“nudge” them by making it the default that all tax
thresholds rise by either the inflation rate or nominal GDP each
year. That way, if politicians want to tax us more, they would have
to do so transparently, facing any political cost head-on.

Ryan Bourne
occupies the R Evan Scharf Chair in the Public Understanding of
Economics at the Cato Institute in Washington DC.