There are three main problems tied in with raising tax thresholds. They are all well-known about, but I don’t see them being reported or discussed in the press.
First, it costs a great deal to raise tax thresholds, because it delays the point where rich and poor alike start to pay tax.
Second, the people on the lowest incomes benefit least, because people who pay tax on only a part of their income will not get the full benefit of the increased threshold.
Third, the tax threshold interacts with higher tax rates. Increasing the tax threshold directs more money to rich people than to poor ones, because it delays the points at which rich people become subject to higher tax brackets. It is possible to compensate partly for this effect by lowering the bands for higher tax brackets early. That is what the government has been doing. The threshold for the 40% rate has been applied to progressively lower bands:
|Date||Tax threshold||40% band||Income level at which
40% tax is paid
There is a simpler way around the problems. If people are paid the equivalent of a tax relief in cash, and then all income above that is subject to tax, the second and third problems disappear, and it’s possible to pay for the cost of the first by raising the tax. We did this once when we converted child tax reliefs into a cash payment. The allowance is called “Child Benefit”.