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IPPR report claims that party's plan to lift the threshold to £12,500 is misguided and will help rich more than poor
The Liberal Democrats' flagship idea of raising the tax threshold to £12,500 would benefit the wealthy more than the poor, according to a respected leftwing thinktank.
The government is already committed to slowly increasing the threshold to £10,000, but Danny Alexander, the Lib Dem chief secretary to the Treasury, says the further move would take millions out of tax and provide an incentive for low earners.
But a new report from the Institute of Public Policy Research claims that the policy, while ensuring that people who work 40 hours a week on a minimum wage will no longer pay tax, actually benefits the richest half of the country more than the worst off.
It is claimed millions of pensioners and people in part-time work would not feel any benefit because their income is so low. Overall, around a quarter of adults live in households where nobody earns enough to pay tax. It is further claimed the poorest 10% of the country would benefit on average by just £1 a week.
In contrast, the IPPR claims that better-off households are more likely to have two people in work, both of whom could benefit from the allowance increase. The report will be seized upon by the right wing of the Conservative party, which was angered when David Cameron ceded reforms to inheritance tax in the coalition agreement to allow the Liberal Democrats to pursue their policy on tax threshold.
The IPPR says the Lib Dem policy is regressive and would in effect be a tax cut for the wealthy. Kayte Lawton, from the IPPR, said the increase in personal allowance was "untargeted and expensive". She said: "Raising the personal allowance is a relatively inefficient way to achieve the policy's stated goals of taking low earners out of income tax, improving their work incentives and increasing the take-home pay of low- to middle-income households. Households in the bottom half of the income distribution would see their incomes increase by a relatively small amount on average because fewer households in this part of the income distribution pay enough tax to fully benefit from a bigger personal allowance."
While the government hopes to increase the threshold to £12,500, it has only committed to increase it to £10,000 by 2015, at a cost of £17bn. However, Lawton said this policy was similarly flawed for the same reasons as the larger increase on the personal allowance threshold. "If the personal allowance was raised to £10,000, a full-time worker earning the minimum wage will receive a maximum benefit of £505 a year," she said.
"Anyone working less than 32 hours a week at the minimum wage will only receive a proportion of this income boost and anyone working less than 24 hours a week will see no benefit at all, although the change does improve work incentives for people earning less than £10,000.
"This means that low-earning families where one adult works full-time will be better off than families where two adults work part-time, even if both families are working the same hours in total."
The IPPR said the government should reconsider its plans to gradually increase the personal allowance to £10,000 and beyond. "Although these plans stem from a well-founded concern to improve living standards and work incentives for low- to middle-income families, our analysis shows that using income tax to do this is inefficient and costly, with most of the benefits accruing to the wealthiest half of families. The coalition should consider alternative mechanisms for helping low- to middle-income families."
Raising the threshold at which tax has been paid has been a long-term Liberal Democrat aspiration. Before last year's election, Vince Cable, who is now the business secretary, said the move would rebalance the tax system and "make it fair once and for all".
Top earners would pay their "fair share" to put money in the pockets of those who needed it most, he claimed.
Daniel Boffey
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