Osborne’s tax cut is not as big or fair as you think

Today's newspapers seem certain that George Osborne will cut personal taxes by £320 per person. But the move is not as big or fair as you think.

Today’s newspapers have been well briefed on the Budget and seem certain that George Osborne will raise the tax threshold by a further £600. The policy sounds good but, in reality, has several problems.

1. It’s not as big as you think

The Daily Mail claims today that:

“Twenty-five million workers will be promised tax cuts of up to £320 a year in today’s Budget…

“That means two million paying 40 per cent income tax will be £45 a year better off. Those on the basic 20 per cent rate will gain the £320 benefit.”

The Telegraph have also bought the Tory spin claiming “in cash terms the savings is £320“. The Sun who clearly missed Nick Clegg’s January op ed on their own pages trailing the policy write:

“in a surprise move, he will hand a £205 income tax cut to the 23million Brits who do not pay the higher rate. Once other financial calculations are taken into account, it will actually be worth £320.”

But as Channel 4 News’ Faisal Islam has pointed out on Twitter, “Not £320. Its £120. Basic maths. 20 per cent of £600 equals…..”

The £320 figure presumably comes from combining the new £600 tax threshold rise worth £120 with the £200 that was announced in the June Budget. In other words, double counting.

2. It’s not as fair as you think

As Left Foot Forward has repeatedly pointed out, raising the tax threshold – a key plank of the Liberal Democrats’ manifesto – is a badly targeted, regressive approach to tax reform. As the Observer reported at the weekend:

James Browne, senior research economist at the Institute for Fiscal Studies, said the measure was an inefficient way of helping the poorest households. “You’re giving a fixed cash amount to all basic rate taxpayers, so relatively little money is going to the people who you’re taking out of tax altogether,” he said, pointing out that more than 90% of the beneficiaries would be likely to earn more than £10,000 a year. “If you really wanted to target low-earners, perhaps you would be better off to increase the working tax credit.”

Indeed, while top-rate tax payers did not benefit from the earlier tax threshold rise, on this occasion “everyone on less than £115,000 will benefit“. Hardly a good use of scarce public resources

3. You’ll probably end up paying for it

The Daily Mail’s piece goes on to ask “Where will he find the cash?” Given that Osborne is unwilling to consider a slower ‘Plan B‘ to reduce the deficit it’s a good question. The initial raising of the tax threshold by £1,000 cost £3.9 billion so a further rise of £600 is likely to cost £2.34 billion and probably more given the decision to allow people earning between £37,400 and £115,000 to benefit from the move. The Financial Times reports that, “Mr Osborne will help to fund the measures through a £1bn crackdown on tax avoidance and a previously announced extra £800m tax on banks.” But that still leaves a £600 million shortfall and that’s before the expected cuts to fuel duty have been paid for.

In June, the Chancellor raised VAT to 20% to pay for his income tax cuts and corporation tax cuts. Families were hit by an average £170 bill for the VAT rise. As Gavin Kelly of the Resolution Foundation told the Observer:

“For many working families, any gains from allowances are likely to be greatly outweighed by cuts to tax credits and the rise in VAT.”

Don’t be fooled when George Osborne claims he’s cutting your taxes today.

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