Taxation and political reality

Liberal Democrat leaders are working hard at persuading the Chancellor of the Exchequer to accelerate the pace at which the threshold for paying income tax is raised to £10 000. I have never been over-enthusiastic about this policy,which was successfully mauled by critics during the election campaign on two counts. Firstly it is of no help to the very poorest who either don't pay income tax because they can't find work, or work for such low wages that they never even reach the present threshold. Secondly, the policy is wasteful because raising the threshold gives extra tax-free income to all existing income-tax payers, including those in the 40% and 50% bands, who need it like a hole in the head.

The best policy to adopt in the current recession is to increase welfare benefits. This would both help the poorest and give an important boost to the economy, since the poorest are most likely to spend any extra income at home rather then save it or indulge in an extra foreign holiday. However, with a Conservative Chancellor (who, we gather, has no personal experience of poverty) and a climate of selfishness and suspicion of welfare recipients created by the red-top media and virtually unchallenged by the political classes, even of the left, this is a political non-starter.

A second-best policy would be a cut in VAT. Admittedly this wouldn't help the poorest as much as the rest of us since the poorest spend a bigger proportion of their incomes on food and children's clothing, which are VAT-free. However the cut from 17.5% to 15% implemented by the Labour government in the late Noughties is generally acknowledged to have had some success in stimulating the economy then. Once again this is a political non-starter since the Shadow Chancellor Ed balls advocates it and George Osborne (whom David Laws described in the Guardian last Wednesday, 23rd February, as "proving to be a very strong chancellor who gets the big decisions right" - does the party have a suicide wish?) has already done the opposite, and raised the level to 20%.

So, since the Tory heart resonates to tax cuts, raising of the threshold is probably he best available option. What would make the policy more palatable would be to lower the starting point to the 40% and 50% bands by the amount that liability to the initial band is raised. That would avoid giving an unnecessary bonus for the rich and comfortably off. I'll keep my fingers crossed by shan't hold my breath.

Nick Clegg has however argued that any tax cut at the lower end should be matched by greater payments at the top. My own favourite would be to discontinue tax relief at the higher rates for pension contributions. I would go even further and discontinue all tax relief on pension pots once they had reached a size sufficient to provide retirement income equal to the median wage. No-one actually needs retirement incomes of umpteen thousands in old age, and many will be unable even to enjoy them. The main usage must therefore be to entrench further privilege for children and grandchildren, which should be unacceptable in a fair society, or even in that jewel of Tory rhetoric, a meritocracy.