Budget 2014: taxing debates

Conservative MP Nick de Bois is half right. He’s right that the ‘squeezed middle’ is further squeezed by income tax thresholds that have not kept pace with changes in wages and prices. He’s wrong – like most politicians – to think that any update should not also apply to council tax.

As much as perverse outcomes follow from the threshold for the 40p income tax rate remaining at the same level as when it was first introduced in 1988, it’s also curious and distorting that in England the council tax that we pay is based on how our property was valued in 1993.

De Bois notes that when Nigel Lawson cut the top rate of income tax to 40p, 1.35 million people fell into this bracket, while now 4.4 million people do. ‘This tax rate’, observes de Bois, ‘when conceived years ago, was for the relatively well-off. Yet my constituents who earn that sum of £41,450 are far from well-off.’ Particularly in London, like de Bois’ constituents, this level of income places someone squarely in the squeezed middle.

Tax is an unavoidable necessity if we wish to have public services. The fact that what we tax and at what rate has incentive impacts is another inescapable reality. We need to take these incentives seriously and use tax to encourage the things we want to see more of and discourage the things we want to see less of.

We should want to see hard work over property speculation, and raising the threshold for the 40p rate of income tax would encourage this on the part of the squeezed middle. While de Bois’ constituents might work harder if they didn’t so quickly fall into this higher income tax bracket, their properties are currently being taxed less than if council tax was based on today’s property prices. So we have things entirely the wrong way round: hard work is penalised, while a property bubble is encouraged.

And contrary to Lucy Tobin in the Evening Standard, who wants to cut stamp duty – thereby increasing already high demand for housing – we should move in the other direction: increasing tax on wealth, like property, while reducing it on incomes. This would mean uprating income and council tax to reflect present realities.

It’s worth acknowledging this could also be achieved through Labour and the Lib Dems’ preferred option of some form of mansion tax, and while you can make a strong case for one, we’d go some way toward making this transition simply by ironing out some lingering anomalies in existing taxes.

This would lead to the sharpest council tax increases where property prices have risen most rapidly since 1993, which is to say in London, where the umpteenth property bubble since the Britpop era is now in swing. But those outside London would benefit from relatively lower council tax and the possibility of retaining more of their income if they are successful enough to move up the income ladder. And Londoners would be compensated through a higher 40p income tax threshold – grounding London’s recovery in the virtue of hard work.