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Income Distribution and Taxation

Volume 579: debated on Wednesday 9 April 2014

I am pleased to serve under your chairmanship, Mr Weir, and to welcome my hon. Friend the Member for Loughborough (Nicky Morgan), who is having a double personality day. She started as Economic Secretary and ended as Financial Secretary. I congratulate her on her well-deserved promotion, and I am very pleased that she is still able to respond to this debate. I wrote to her earlier today to congratulate her on her innovative way of avoiding responding to my debate, but she is stuck with me for the next 29 minutes or so.

I secured the debate because, although I touched on the matter briefly in my short contribution to the Budget debate, it was, as you know, Mr Weir, time limited, and I did not have a chance to make all the points I wanted. In the debate running up to the Budget, there was a lot of discussion about “middle-income taxpayers” and what that meant. I want to set out what I think the Government’s priority should be and congratulate them on landing the income tax cuts in the right place on the income scale.

In the run-up to the Budget, a number of newspaper articles—there was one in The Guardian—referred to middle-income earners being dragged into the 40p tax bracket, but that is not a sensible use of “middle income”. Even the Leader of the Opposition used the phrase, saying that

“if you are in the middle, paying 40p, you should be pleased to pay more”.—[Official Report, 19 March 2014; Vol. 577, c. 797.]

He was referring to what he said was someone else’s argument.

In the Labour party’s list of 24 so-called Tory tax rises, four of them are changes to the higher rate threshold. It seemed slightly odd for the Labour party to complain about ensuring that those on higher incomes paid their fair share in dealing with the deficit. While I am touching on that list, it is interesting to note that the spare room subsidy, which is a housing benefit issue—the Opposition insist on calling it a tax—was not on it. That was a very good demonstration of the fact that even they accept in their heart of hearts that it is not really a tax, even though they keep trying to call it that.

That was an aside, but the point I wanted to make about 40p taxpayers is that I am not saying that they are rich; they are not. Equally, they are not in the middle. Looking at the 2013-14 tax year, someone would pay 40p tax only if they had £32,010 of taxable income, which is on top of a £9,440 personal allowance. They would have to earn a gross income of £41,450 to pay that tax rate. In 2011-12—the most recent year for which the detail is available—the income distribution figures show that a higher rate taxpayer is in the top 14% of income earners. For that year, the median income was £20,300. Some helpful projections have been done using the Office for Budget Responsibility’s economic and fiscal outlook. They show that the median income was £21,000 in 2012-13 and £22,200 in 2013-14. That is only just more than half the income someone would have to earn to pay the 40p tax rate.

If I look at the level of income in my not untypical constituency—these figures are for 2011-12, the latest ones available that are broken down by parliamentary constituency—the mean income of all taxpayers is £24,300, and the median income is only £18,800. If the overall national figures have gone up by some 10% since 2011-12, we can use that assumption with the constituency figures, but that would take the median figure to only a little over £20,000. That figure is for total income. If we look at how that is split between the self-employed, the employed and pensioners, the figures present a different picture. However, it is clear that the median taxpayer is not earning anything like enough to pay the 40% tax rate; they are paying basic rate tax. That is why I thought the Chancellor’s Budget judgment was right.

I even looked at parliamentary constituencies that people would generally accept as having a higher than average number of people earning good incomes. A piece of data that is available from the Office for National Statistics shows that even in constituencies with a high level of mean income—Kensington, Cities of London and Westminster and Chelsea and Fulham—the numbers are clearly driven by a small number of well-remunerated people. The median income in those constituencies is: £37,900 in Cities of London and Westminster; £36,200 in Kensington, and £34,300 in Chelsea and Fulham. Even in those constituencies, the median taxpayer is not paying anything close to 40% tax.

The focus should be on delivering tax cuts for the lower paid and those on more modest incomes and that is what the Chancellor did in his Budget. He made it clear that the personal allowance was going to rise in this current tax year, which has just begun, to £10,000 and next year it rises to £10,500, which will lift more than 3 million of the lowest paid out of income tax altogether. He also confirmed, rightly, that the higher rate threshold will rise a little bit as well, for the first time in this Parliament, which means that everyone on incomes up to £100,000 will benefit from some tax cut, but obviously the main benefit is for those on a lower rate.

The list of tax rises that the Labour party put out referred to the higher rate income tax threshold cuts earlier in this Parliament, which were equitable and made to ensure that those significant rises in the personal allowance did not disproportionately benefit higher rate taxpayers. Of course, if the personal allowance is increased and the higher rate threshold is not changed, someone on 40% tax has income moved out of that band into the basic rate band and gets a bigger benefit than someone on basic rate tax. That would be wrong. The judgments that we made earlier in this Parliament, when we had to make difficult financial decisions, to share the pain and have the burden on those with the broadest shoulders, were right. I am pleased that the Chancellor confirmed that.

By virtue of increasing the allowance, the Chancellor was able to show that, looking at this Government’s tax arrangements, compared with the previous Government’s policy, everybody earning up to £100,000 is better off. They have all had a tax cut, but the tax cuts are more focused and bigger for those on lower earnings.

I congratulate the hon. Gentleman on securing this debate on an important issue. I resisted intervening on the bedroom tax and so on because I wanted to make this point. Does he share my concern, notwithstanding what he said about raising the allowance, that the impact of the tapers on people in receipt of universal credit will be such that, for somebody just above the tax threshold, the rate of withdrawal on both a first and second earner in a family will be as high as 76%? Is there not a danger that that gives people a perverse incentive to work fewer rather than more hours, because they do not reckon that they are being rewarded for the extra hours, or to do undeclared work?

The right hon. Gentleman is right to drawn attention to the tapers and the withdrawal of benefits as people earn income—of course, they are high—but this issue was raised during the Budget debates. However, the fact is that, under universal credit, the withdrawal rates and the tapering arrangements mean that there is a smaller rate of withdrawal of benefit than under the existing levels of benefit. I am sure the Minister will correct me if I am wrong; this is not an area that I have studied in detail. The issue the right hon. Gentleman raises is important, but it is always a challenge to deal with the withdrawal of income-related benefits and to be careful that the effective marginal rate for people is such that it is always worth their while working. Ideally, we want to get that marginal rate as low as possible, but it is expensive to drive it down to a low level. My understanding is that, under universal credit, those withdrawal rates of benefit are lower and therefore more encouraging of people to work, either more hours or in the first place, than under the existing combinations of income-related benefits.

My understanding is that the rates are higher for people working more hours, for 35 hours or more. The hon. Gentleman is right in that the rates are lower for people working fewer hours. That is my worry—the perverse incentive for people to work less.

If I am picking that up correctly, the right hon. Gentleman is saying that at lower levels of earning, or for people who work fewer hours, the effect of universal credit is—

I should correct that. It is not that the rate is lower; it is that people will be better off working fewer hours, as compared with the position under tax credits, whereas those who are working 35 hours or more will be slightly worse off under universal credit than they would have been under tax credits. The withdrawal rate is 76%, just above the tax threshold, under universal credit.

I cannot answer the right hon. Gentleman’s detailed question, because I have not studied the matter, but the other thing that he needs to do—I am not sure whether he has incorporated this into his judgment—is look at the interaction of the tax changes that we have made with the benefit system. Over this Parliament, there will be a significant increase in the personal allowance from what it was in 2010-11 when we came to power, and what it will be when this Parliament finishes, from something in the order of £6,000 or £6,500 to £10,500. A lot of people on lower incomes, such as those on the minimum wage, are moved out of the taxation system altogether. Previously, people could be on a relatively modest income and paying tax, but at the same time getting various income-related benefits.

I think that I have set that out carefully, but if I have not, the Minister will do so in her response. Otherwise, because the debate is not about universal credit and she might not have all those facts at her fingertips, I am sure she is happy to write and to set it out in detail later. I am, however, grateful for the point made by the right hon. Gentleman.

I will be quick, as the hon. Gentleman does not have much time. I thank him for giving way, but when the present Government came to power basically someone did not start paying tax until just over £6,000. I do not have the exact figures with me, but if we take into account, for example, 6% inflation over the past four years, the value of the £10,000 threshold that has been introduced drops by £1,200. In other words, had the £6,000 been pushed up for inflation over the past four years, we might arrive at a different value for the benefits to be got out of £10,000 before paying tax.

The hon. Gentleman makes half a sensible point. He is right that the personal allowance would have gone up because of indexation in line with inflation—the statutory provision, unless the Chancellor decides not, in which case he has to set out why—but by only a relatively modest amount. The difference between what it would have gone up to had we simply indexed it and the great increase to £10,500 next year is a significant policy change and has made a real difference to people on lower incomes, many of whom will have been taken out of tax completely.

Finally, to look at the impact in my own constituency, under the tax changes this April a further 381 people are taken out of tax altogether, but 37,223 people benefit from the rise in the personal allowance. If we take the figures for the whole of the Parliament, 4,334 of my constituents will have been taken out of paying income tax entirely by the significant changes in the personal allowance. That significant benefit incentivises people, particularly at the lower end of the income spectrum, to work, and it is why there are several thousand more people in my constituency in work now than there were in 2010, when this Government were elected.

In the environment we are in, where we have a limited amount of money and we cannot cut taxes for everybody, we should focus our help on those who are lower paid and who are genuinely on middle incomes, which, as I said, are incomes of about £20,000, and not numbers beginning with threes or fours. In my constituency, I can see that that is where the benefit should be focused. It should be a priority both for this Government and for our party to make sure that we are delivering benefit to as many people as possible. I am pleased to say that the message I took from the Budget, after listening to the Chancellor’s speech very carefully, was that that was where he has aimed our tax changes.

I agree with the right hon. Member for Oxford East (Mr Smith) about the focus. The welfare changes that we are making, with the benefit cap and the changes to universal credit, which I think, overall, have increased the incentives for people to work, are the right messages. The very simple one is that work should always pay and that we are trying to use our changes to the tax system to benefit the many hard-working families who are trying to do the right thing, but who are finding things difficult—although with the improving economic news, they will see rises in their incomes above the rate of inflation, therefore making them better off in real terms. Those are the people we should focus on and I am pleased that, in my judgment, that is exactly where the Chancellor aimed his Budget. That is why I was very pleased, in my short speech in the Budget debate, to commend it to the House, and why I am very pleased to support the Finance Bill.

It is an honour to serve under your chairmanship, Mr Weir. May I congratulate my hon. Friend the Member for Forest of Dean (Mr Harper) both on securing the debate and on presenting his case so eloquently? I was also in the House when he spoke in the Budget debate, which I think was his first debate as a Back Bencher for a while. He spoke incredibly eloquently then and it is a pleasure to hear him again today on the same subject. I am delighted to be answering the debate, regardless of the title that I happen to hold in the Treasury. I have to get used to a new one as of this afternoon, and it is a pleasure to be here speaking on this important topic.

As my hon. Friend said, the message that the Government wanted to go out from the Budget was that we are on the side of hard-working people and that work should always pay. As I shall come on to show, the other message is that this Government very firmly believe that people should keep as much of their own money as possible, so that they spend it in the best way for themselves and for their families in order to provide security for their families—rather than the Government telling them how they should spend it.

In the time available to me this afternoon, I would like to speak about the impact that the Government have made on getting more people into work, and then about the impact of the personal allowance and the other steps we have taken and how they help those at the bottom of the income scale. Finally, I want to speak about the percentage of the tax burden taken on by those at the top of the income scale, which I think my hon. Friend also mentioned.

Before I do so, it is worth making hon. Members aware that the latest available statistics show that in 2011-12, UK income inequality was the lowest since 1986. As the Office for National Statistics noted, that was partly due to earnings falling more for those at the top of the income distribution than for those at the bottom, but it was also magnified by the changes that this Government have overseen, particularly in the tax and benefit system.

Of course, one of the best ways in which a Government can reduce inequality is by tackling unemployment, which will increase incomes for those at the bottom end of the scale. We have seen clear evidence that the labour market has continued to strengthen this year. Record numbers of people are in work. Employment increased by 396,000 over 2013 and was 574,000 above its pre-recession peak in the final quarter of last year.

Wage inequality for all employees is also reducing. In 2013, the 90:10 ratio, a common measure of inequality, showed that wages at the top were 3.9 times higher than wages at the bottom, a smaller difference than in any year of the previous Government.

This Government are by no means complacent and we continue to introduce reforms that will support employment and wages. From last Sunday, both businesses and charities have been able to claim the employment allowance to reduce employer national insurance contributions by up to £2,000 a year. From next April, national insurance contributions will be abolished for all under 21-year-olds who earn up to £813 a week. Those measures will make it easier to take on new employees, particularly young employees, and will therefore help get even more people into work. When we have got people into work, it is important that they keep as much of their money as possible, and the Government believe that raising the personal allowance is the most effective way to support those on low and middle incomes and to reduce inequality.

As all hon. Members will be aware, last month’s Budget announced that the personal allowance will increase to £10,500 in 12 months. This month, it increased to £10,000. That means that by next April, a person on median earnings will pay more than £800 less income tax per year than in 2010-11, and will be more than £570 better off than under the previous Government’s plans. It will also lift another 288,000 low earners out of income tax altogether, increasing the total number taken out of tax by our personal allowance increases to over 3.2 million.

It is worth noting that in addition to the personal allowance, those earning the October 2014 national minimum wage and working full time will have seen their income tax bill fall by more than two thirds since 2010-11, and someone working 31 hours a week on the national minimum wage will not pay income tax at all.

The Budget also helped people to save. As well as getting more people into work and allowing them to keep more of their income, we want to provide further support for the lowest earners by abolishing the 10% starting rate of tax on savings and extending the 0% rate to the first £5,000 above the personal allowance. That measure is expected to help 1.5 million people with low earnings and some savings, meaning that everyone with a total income of less than £15,500 will not have to pay any tax at all on their savings income.

I turn to the share of taxes and benefits within income distribution. As well as lowering the tax contribution of the poorest, it is worth noting that the Government have increased the percentage of tax paid by the wealthy. My hon. Friend mentioned that in his speech. This year, the top 1% of income tax payers will pay more than 28% of income tax revenue, so overall the wealthiest will pay more in tax in this Parliament than under the previous Government’s plans. If any hon. Members dispute that, I point them to the Treasury’s distributional analysis, which is published alongside the Budget, and was praised by no less than the Treasury Committee as an outstanding document, which clearly shows that the richest 20% of households continue to make the greatest contribution towards reducing the deficit. Before this Government took action to reduce the deficit, the richest 20% contributed around three and a half times as much in tax as they received from public spending. That has now increased to around four times as much.

I am conscious of time, and the following debate, which has been delayed because of Divisions, so I will conclude by saying that while repairing the broken economy we inherited, this Government have managed to oversee the development of a fairer tax and benefits system in which everyone contributes to reducing the deficit, and those with the most make the largest contribution.

In 2015-16, the net contribution from the richest 20% of households towards reducing the deficit will be larger than the contribution of the remaining 80% of households. Employment is increasing, taxes for the lowest-paid are decreasing and, as the International Monetary Fund forecasts confirmed yesterday, our economy is recovering. That is good news on all fronts, and I am sure it will be welcomed by all hon. Members present.

I thank my hon. Friend for organising such an important debate and for allowing me to make these points this afternoon.